<PAGE> 1
As filed with the Securities and Exchange Commission on November 16, 1995
Registration No. 33-26305
- ----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. __ / /
POST-EFFECTIVE AMENDMENT NO. 19 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 21 /X/
---------------------------
THE PNC(R) FUND
(Formerly, NCP Funds)
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
Bellevue Corporate Center Edward J. Roach
400 Bellevue Parkway Bellevue Corporate Center
Suite 100 400 Bellevue Parkway
Wilmington, Delaware 19809 Suite 100
(Address of Principal Executive Wilmington, Delaware 19809
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 792-2555
</TABLE>
Copies to:
Morgan R. Jones, Esq.
DRINKER BIDDLE & REATH
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
---------------------------
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/x/ 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
initial 24f-2 Notice for its fiscal year ended September 30, 1995 was filed on
November 14, 1995.
<PAGE> 2
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
INSTITUTIONAL SHARES OF THE MONEY MARKET PORTFOLIO,
U.S. TREASURY MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO,
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO, OHIO MUNICIPAL
MONEY MARKET PORTFOLIO, PENNSYLVANIA MUNICIPAL MONEY MARKET
PORTFOLIO, AND VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 3
THE MONEY MARKET PORTFOLIOS
INSTITUTIONAL SHARES
The Compass Capital Funds(R) (the "Fund") consist of [twenty-eight]
investment portfolios. This Prospectus describes the Institutional Shares of
eight of those portfolios (the "Portfolios"):
- MONEY MARKET PORTFOLIO -
- U.S. TREASURY MONEY MARKET PORTFOLIO -
- MUNICIPAL MONEY MARKET PORTFOLIO -
- NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO -
- NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO -
- OHIO MUNICIPAL MONEY MARKET PORTFOLIO -
- PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO -
- VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO -
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January __, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained upon request free of charge from the Fund by
calling (800) ________. The Statement of Additional Information, as
supplemented from time to time, is incorporated by reference into this
Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. THERE
CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL
PORTFOLIOS LISTED ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE
STATES INDICATED.
PROSPECTUS January __, 1996
<PAGE> 4
INTRODUCING THE MONEY MARKET PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Money Market Portfolios of the COMPASS CAPITAL FUNDS consist of nine short
term investment alternatives. Two of these Portfolios invest solely in taxable
instruments, and seven of these Portfolios invest in tax-exempt instruments. A
detailed description of each Portfolio appears on pages ____.
COMPASS CAPITAL FUND LIPPER PEER GROUP
-------------------- -----------------
Money Market Money Market Instrument
U.S. Treasury Money Market U.S. Treasury Money Market
Tax Free Money Market Tax Exempt Money Market
NJ Money Market Single State Tax Exempt Money Market
NC Money Market Single State Tax Exempt Money Market
PA Money Market Single State Tax Exempt Money Market
OH Money Market Single State Tax Exempt Money Market
VA Money Market Single State Tax Exempt Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's investment
adviser. PNC Institutional Management Corporation ("PIMC") serves as the
sub-adviser to the Portfolios as described in this Prospectus.
UNDERSTANDING THE COMPASS CAPITAL MONEY MARKET FUNDS
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in money
market investing.
CONSIDERING THE RISKS IN MONEY MARKET INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective, or that any Portfolio will be able to maintain a stable
net asset value of $1.00 per share. Certain Portfolios may invest in U.S.
dollar-denominated instruments of foreign issuers or municipal securities
backed by the credit of foreign banks, which may be subject to risks in
addition to those inherent in U.S. investments. Each state-specific municipal
Portfolio will concentrate in the securities of issuers located in a particular
state, and is non-diversified, which means that its performance may be
dependent upon the performance of a smaller number of securities than the other
Portfolios, which are considered diversified. See "What Additional Investment
Policies Apply?"
ASKING THE KEY QUESTIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Investment Limitations? . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Purchased and Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
2
<PAGE> 5
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be incurred by
Institutional Shares of the Portfolios for the current fiscal year ending
September 30, 1996 as a percentage of average daily net assets. An example
based on the summary is also shown.
<TABLE>
<CAPTION>
NEW
JERSEY
U.S. TREASURY MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Advisory fees(1) .06% .06% .06% .05
Other operating expenses .22 .22 .22 .23
--- --- ---
Administration fees(1) .13 .12 .11 .02
Other expenses(1) .09 .10 .11 .21
--- --- --- ---
Total Portfolio operating expenses(1) .28% .28% .28% .28%
=== === === ===
<CAPTION>
NORTH
CAROLINA OHIO PENNSYLVANIA VIRGINIA
MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Advisory fees(1) .06% .06% .06% .05%
Other operating expenses .22 .22 .22 .23
--- --- --- ---
Administration fees(1) .05 .10 .12 .02
Other expenses(1) .17 .12 .10 .21
--- --- --- ---
Total Portfolio operating expenses(1) .28% .28% .28% .28%
=== === === ===
</TABLE>
(1) Without waivers, advisory fees would be .44%, .45%, .45%, .45% .45%,
.45%, .45% and .45% and administration fees would be .14%, .15%, .15%,
.15%, .15%, .15%, .15% and .15%, respectively. PAMG and the
Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers by a Portfolio for the fiscal year ended September 30,
1995, as restated to reflect revised fee waivers. Without waivers,
total operating expenses would be .67%, .70%, .71%, .81%, .77%, .72%,
.70% and .81%, respectively.
3
<PAGE> 6
EXAMPLE
An investor in Institutional Shares would pay the following expenses
on a $1,000 investment, assuming (1) a 5% annual return and (2) redemption at
the end of each time period.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Money Market $3 $9 $16 $36
U.S. Treasury Money Market 3 9 16 36
Municipal Money Market 3 9 16 36
New Jersey Municipal Money Market 3 9 N/A N/A
North Carolina Municipal Money Market 3 9 16 36
Ohio Municipal Money Market 3 9 16 36
Pennsylvania Municipal Money Market 3 9 16 36
Virginia Municipal Money Market 3 9 16 36
</TABLE>
The foregoing Table and Example are intended to assist investors in
understanding the expenses the Portfolios pay. Investors bear these expenses
since they reduce the income paid by the Portfolios as dividends. The tables
do not reflect any charges that may be imposed by affiliates of the Portfolios'
investment adviser or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference into the Statement of Additional
Information and has been audited by [_______________], the Fund's independent
accountants. This financial information should be read together with those
financial statements. For the periods shown, the New Jersey Municipal Money
Market Portfolio offered only one class of shares to both institutional and
retail investors. Further information about the performance of the Portfolios
is available in their annual shareholder reports. Both the Statement of
Additional Information and the annual reports may be obtained from the Fund
free of charge by calling the number on the front cover of this Prospectus.
4
<PAGE> 7
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 8/2/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment
operations
Net investment income 0.0359 0.0054
Net realized gain
(loss) on investments -- -- --
-------- -------- --------
Total from
investment
operations 0.0359 0.0054
-------- --------
Less distributions
Distributions from net
investment income (0.0359) (0.0054)
Distributions from net
realized capital gains -- -- --
-------- -------- --------
Total distributions (0.0359) (0.0054)
-------- --------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.64% 0.54%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $502,972 $435,586
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.25% 0.27%(2)
Before advisory/
administration fee
waivers 0.66% 0.38%(2)
Ratios of net investment
income to average
net assets
After advisory/
administration fee
waivers 3.64% 3.01%(2)
Before advisory/
administration fee
waivers 3.23% 2.90%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
5
<PAGE> 8
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET PORTFOLIO
FOR THE
PERIOD
YEAR YEAR 8/2/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment
operations
Net investment income 0.0357 0.0049
Net realized gain (loss)
on investments -- -- --
-------- -------- --------
Total from investment
operations 0.0357 0.0049
-------- --------
Less distributions
Distributions from net
investment income (0.0357) (0.0049)
Distributions from net
realized capital gains -- -- --
-------- -------- --------
Total distributions (0.0357) (0.0049)
-------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.63% 0.49%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $ 37,519 $ 13,513
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.25% 0.25%(2)
Before advisory/
administration fee
waivers 0.70% 0.38%(2)
Ratios of net investment
income to average
net assets
After advisory/
administration fee
waivers 3.69% 3.01%(2)
Before advisory/
administration fee
waivers 3.24% 2.88%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
6
<PAGE> 9
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET PORTFOLIO
--------------------------------
FOR THE
PERIOD
YEAR YEAR 8/2/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment
operations
Net investment income 0.0246 0.0040
Net realized gain (loss)
on investments -- -- --
-------- -------- --------
Total from
investment
operations 0.0246 0.0040
-------- --------
Less distributions
Distributions from net
investment income (0.0246) (0.0040)
Distributions from net
realized capital gains -- -- --
-------- -------- --------
Total distributions (0.0246) (0.0040)
-------- --------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 2.48% 0.40%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $ 30,608 $ 39,148
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.25% 0.25%(2)
Before advisory/
administration fee
waivers 0.73% 0.36%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers 2.48% 2.45%(2)
Before advisory/
administration fee
waivers 2.01% 2.34%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 8/2/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment
operations
Net investment income 0.0252 0.0073
Net realized gain (loss)
on investments -- -- --
-------- -------- --------
Total from investment
operations 0.0252 0.0073
-------- --------
Less distributions
Distributions from net
investment income (0.0252) (0.0073)
Distributions from net
realized capital gains -- -- --
-------- -------- --------
Total distributions (0.0252) (0.0073)
-------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 2.55% 0.73%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $ 10,521 $ 12,026
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.13% 0.10%(2)
Before advisory/
administration fee
waivers 0.77% 0.83%(2)
Ratios of net investment
income to average
net assets
After advisory/
administration fee
waivers 2.56% 2.45%(2)
Before advisory/
administration fee
waivers 1.93% 1.72%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 8/2/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment
operations
Net investment income 0.0247 0.0078
Net realized gain (loss)
on investments -- -- --
-------- -------- --------
Total from investment
operations 0.0247 0.0078
-------- --------
Less distributions
Distributions from net
investment income (0.0247) (0.0078)
Distributions from net
realized capital gains -- -- --
-------- -------- --------
Total distributions (0.0247) (0.0078)
-------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 2.49% 0.78%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $158,102 $ 2,242
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.16% 0.09%(2)
Before advisory/
administration fee
waivers 0.73% 0.97%(2)
Ratios of net investment
income to average
net assets
After advisory/
administration fee
waivers 2.64% 2.15%(2)
Before advisory/
administration fee
waivers 2.07% 1.27%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
9
<PAGE> 12
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA MUNICIPAL VIRGINIA MUNICIPAL
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
---------------------- -----------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 5/4/931 YEAR 7/25/94(1)
ENDED ENDED THROUGH ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/95 9/30/94
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $1.00 $ 1.00 $ 1.00 $1.00 $ 1.00
----- ------- ------- ----- -------
Income from investment operations
Net investment income 0.0249 0.0097 0.0053
Net realized gain (loss) on
investments -- -- -- -- --
----- ------- ------- ----- -------
Total from investment
operations 0.0249 0.0097 0.0053
Less distributions
Distributions from net
investment income (0.0249) (0.0097) (0.0053)
Distributions from net realized
capital gains -- -- -- -- --
----- ------- ------- ----- -------
Total distributions (0.0249) (0.0097) (0.0053)
Net asset value at end of period $1.00 $ 1.00 $ 1.00 $1.00 $ 1.00
===== ======= ======= ===== =======
Total return 2.52% 0.97% 0.53%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $69,673 $34,135 $13,831
Ratios of expenses to average
net assets
After advisory/
administration fee waivers 0.10% 0.10%2 0.10%(2)
Before advisory/
administration fee waivers 0.76% 0.81%2 1.02%(2)
Ratios of net investment income
to average net assets
After advisory/
administration fee waivers 2.53% 2.35%2 2.89%(2)
Before advisory/
administration fee waivers 1.87% 1.64%2 1.97%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD PERIOD
ENDED FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91(1)
8/31/95 ENDED ENDED ENDED TO
(UNAUDITED) 02/28/95 02/28/94 02/28/93 02/28/92
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.02 0.02 0.02 0.02
Net realized gain (loss) on
investments -- -- -- --
-------- -------- -------- --------
Total from investment
operations 0.02 0.02 0.02 0.02
-------- -------- -------- --------
Less distributions
Distributions from net
investment income (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Distributions from net realized
capital gains -- -- -- --
-------- -------- -------- --------
Total distributions (0.02) (0.02) (0.02) (0.02)
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 2.46% 1.79% 2.19% 3.53%(2)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 43,610 $ 39,408 $ 38,836 $ 35,005
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.63% 0.65% 0.73% 0.47%(2)
Before advisory/administration
fee waivers 0.70% 0.72% 0.76% 0.62%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.46% 1.77% 2.17% 3.44%(2)
Before advisory/administration
fee waivers 2.39% 1.70% 2.14% 3.29%
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor Portfolio") of The Compass Capital Group, which was
organized as a Massachusetts business trust. On January __, 1996, the
assets and liabilities of the Predecessor Portfolio were transferred
to the Portfolio, which had no prior operating history.
(1) Commencement of operations.
(2) Annualized.
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<PAGE> 14
WHAT ARE THE PORTFOLIOS?
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide
as high a level of current interest income as is consistent with maintaining
liquidity and stability of principal. The Portfolio may invest in a broad
range of short-term, high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are available in the
money markets. In particular, the Portfolio may invest in:
(A) U.S. dollar-denominated obligations issued or supported by the
credit of U.S. or foreign banks or savings institutions with
total assets in excess of $1 billion (including obligations of
foreign branches of such banks);
(B) high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers
rated (at the time of purchase) A-2 or higher by Standard &
Poor's Ratings Group ("S&P"), Prime-2 or higher by Moody's
Investors Service, Inc. ("Moody's"), Duff 2 or higher by Duff
& Phelps Credit Co. ("Duff"), F-2 or higher by Fitch Investors
Service, Inc. ("Fitch") or TBW-2 or higher by Thomson
BankWatch, Inc. ("TBW"), as well as high quality corporate
bonds rated (at the time of purchase) AA or higher by S&P,
D&P, Fitch or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's
sub-adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations and
credit card receivables);
(E) securities issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentalities
and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by foreign
governments or their political subdivisions, agencies or
instrumentalities;
(G) guaranteed investment contracts issued by highly-rated U.S.
insurance companies;
(H) securities issued or guaranteed by state or local governmental
bodies; and
(I) repurchase agreements relating to the above instruments.
U.S. TREASURY MONEY MARKET PORTFOLIO
The investment objective of the U.S. Treasury Money Market Portfolio
is to provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It pursues this objective by
investing exclusively in short-term U.S. Treasury bills, notes and other
obligations issued or guaranteed by the U.S. Treasury and repurchase agreements
relating to such obligations.
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<PAGE> 15
MUNICIPAL PORTFOLIOS
The investment objective of the Municipal Money Market Portfolio is to
provide as high a level of current interest income exempt from Federal income
taxes as is consistent with maintaining liquidity and stability of principal.
It pursues this objective by investing substantially all of its assets in
short-term obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia, and their political
subdivisions, agencies, instrumentalities and authorities ("Municipal
Obligations").
The investment objective of the Ohio Municipal Money Market Portfolio,
Pennsylvania Municipal Money Market Portfolio, North Carolina Municipal Money
Market Portfolio, Virginia Municipal Money Market Portfolio and New Jersey
Municipal Money Market Portfolio (the "State-Specific Municipal Portfolios")
is, for each Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the specified state in
which a Portfolio concentrates, as is consistent with maintaining liquidity and
stability of principal.
The Municipal Money Market Portfolio and the State-Specific Municipal
Portfolios (together, the "Municipal Portfolios") seek to achieve their
investment objectives by primarily investing in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher by
Fitch;
(B) tax-exempt commercial paper and similar debt instruments rated
Prime-2 or higher by Moody's, A-2 or higher by S&P, Duff 2 or
higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or higher
by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of
comparable quality as determined by the Portfolios'
sub-adviser under guidelines established by the Fund's Board
of Trustees; and
(E) municipal bonds and notes which are guaranteed as to principal
and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are Municipal
Obligations. In addition, under normal conditions, the Municipal Money Market
Portfolio intends to invest less than 25% of its total assets in Municipal
Obligations of issuers located in the same state. Each State-Specific
Municipal Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name ("State-Specific Obligations"). During temporary defensive periods,
however, each Municipal Portfolio may invest without limitation in obligations
that are not Municipal Obligations and may hold without limitation uninvested
cash reserves.
Each State-Specific Portfolio may invest without limitation in private
activity bonds the interest on which is an item of tax preference for purposes
of the Federal alternative minimum tax ("AMT Paper"). The Municipal Money
Market Portfolio may invest up to 20% of its total assets in AMT Paper when
added together with any taxable investments held by the Portfolio. Interest on
AMT
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<PAGE> 16
Paper that is received by taxpayers subject to the Federal alternative minimum
tax is taxable.
Each Municipal Portfolio may invest 25% or more of its net assets in
Municipal Obligations the interest on which is paid solely from revenues of
similar projects. To the extent a Portfolio's assets are invested in Municipal
Obligations payable from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
QUALITY, MATURITY AND DIVERSIFICATION
All securities acquired by the Portfolios will be determined at the
time of purchase by the Portfolios' sub-adviser, under guidelines established
by the Fund's Board of Trustees, to present minimal credit risks and will be
"Eligible Securities" as defined by the SEC. Eligible Securities are (a)
securities that either (i) have short-term debt ratings at the time of purchase
in the two highest rating categories by at least two unaffiliated nationally
recognized statistical rating organizations ("NRSROs") (or one NRSRO if the
security is rated by only one NRSRO), or (ii) are comparable in priority and
security with an instrument issued by an issuer which has such ratings, and (b)
securities that are unrated (including securities of issuers that have
long-term but not short-term ratings) but are of comparable quality as
determined in accordance with guidelines approved by the Board of Trustees.
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not exceed 90 days.
In no event will a Portfolio purchase securities which mature more than 397
days from the date of purchase (except for certain variable and floating rate
instruments and securities collateralizing repurchase agreements). Securities
in which the Portfolios invest may not earn as high a level of income as longer
term or lower quality securities, which generally have greater market risk and
more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal Money
Market Portfolios are classified as diversified portfolios, and the State
Specific Municipal Portfolios are classified as non-diversified portfolios,
under the Investment Company Act of 1940 (the "1940 Act"). Investment returns
on a non-diversified portfolio typically are dependent upon the performance of
a smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than it would a
diversified portfolio.
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios may invest in debt obligations
of domestic or foreign corporations and banks, and may acquire commercial
obligations issued by Canadian corporations and Canadian counterparts of U.S.
corporations, as well as Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer. Bank obligations may include certificates of
deposit, notes, bankers' acceptances and fixed time deposits. These
obligations may be general obligations of the parent bank or may be limited to
the issuing branch or subsidiary by the terms of specific obligation or by
government regulation. The Money Market Portfolio may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.
14
<PAGE> 17
Commercial paper issues include securities issued by corporations
without registration under the Securities Act of 1933 (the "1933 Act") in
reliance on the exemption in Section 3(a)(3), and commercial paper issued in
reliance on the so-called "private placement" exemption in Section 4(2)
("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
which make a market in Section 4(2) paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios may also purchase obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are backed by the full faith and credit of the United
States. Others are backed by the right of the issuer to borrow from the U.S.
Treasury or are backed only by the credit of the agency or instrumentality
issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the state or governmental body has no obligation to
make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that is not yet as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase at the Portfolio's option specific Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligation to
which such commitment relates. Each Municipal Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
15
<PAGE> 18
The amount of information regarding the financial condition of issuers
of Municipal Obligations may not be as extensive as that which is made
available by public corporations, and the secondary market for Municipal
Obligations may be less liquid than that for taxable obligations. Accordingly,
the ability of a Municipal Portfolio to buy and sell tax-exempt securities may,
at any particular time and with respect to any particular securities, be
limited.
The Municipal Portfolios may invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participation, beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal or state income tax are rendered by
counsel to the respective issuers or sponsors at the time of issuance. The
Fund and its investment adviser will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Each Portfolio may invest in
mortgage-related securities issued by the U.S. Government or its agencies or
instrumentalities or issued by private companies. Mortgage-related securities
may include collateralized mortgage obligations ("CMOs") issued by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or
other U.S. Government agencies or instrumentalities or issued by private
companies. The average life of mortgage-related securities is likely to be
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, a
mortgage-related security's stated maturity may be shortened and, therefore, it
may be difficult to predict precisely the security's total return to the
particular Portfolio. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by the particular Portfolio will generally
be at lower rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase
rated and unrated variable and floating rate instruments, which may have a
stated maturity in excess of 13 months but will, in any event, permit a
Portfolio to demand payment of the principal of the instrument at least once
every 13 months upon not more than thirty days' notice (unless the instrument
is guaranteed by the U.S. Government or an agency or instrumentality thereof).
These instruments may include variable amount master demand notes that permit
the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. Issuers of unrated variable and floating
rate instruments must satisfy the same criteria as set forth above for the
particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase
securities from broker-dealers and 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, so long as the
repurchase agreement itself matures in less than 13 months. Default by or
bankruptcy of the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delays in connection with the disposition
of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make
limited investments in guaranteed investment contracts ("GICs") issued by
highly rated U.S. insurance companies. Under these contracts, the Portfolio
makes cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits interest to the Portfolio on a
monthly basis, which is based on an index (such as the Salomon Brothers CD
Index), but is guaranteed not to be less than a certain minimum rate. The
Money Market
16
<PAGE> 19
Portfolio does not expect to invest more than 5% of its net asset in GICs at
any time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements for temporary purposes (such as to obtain cash to meet
redemption requests when the liquidation of portfolio securities is deemed
disadvantageous or inconvenient). A reverse repurchase agreement involves a
sale by a Portfolio of securities that it holds concurrently with an agreement
by the Portfolio to repurchase the same securities at an agreed-upon price and
date. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities the Portfolio is obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their
daily cash positions, each Portfolio may invest in securities issued by other
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. Securities of other investment
companies will be acquired by a Portfolio within the limits prescribed by the
1940 Act. As a shareholder of another investment company, a Portfolio 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 fees and other expenses the Portfolio bears
directly in connection with its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Portfolios' sub-adviser, suitable obligations are unavailable.
During normal market periods, no more than 20% of a Portfolio's assets will be
held uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10%
of the value of its net assets in securities that are illiquid. Variable and
floating rate instruments that cannot be disposed of within seven days, GICs,
and repurchase agreements and time deposits that do not provide for payment
within seven days after notice, without taking a reduced price, are subject to
this 10% limit. Each Portfolio may purchase securities which are not
registered under the 1933 Act but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the sub-adviser,
acting under guidelines
17
<PAGE> 20
approved and monitored by the Board, that an adequate trading market exists for
that particular security. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS - ADDITIONAL RISK CONSIDERATIONS.
The concentration of investments by the State-Specific Municipal Portfolios in
State-Specific Obligations raises special investment considerations. Changes
in the economic condition and governmental policies of a state and its
political subdivisions could adversely affect the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific
Municipal Portfolios invest are described below. For further information, see
"Special Consideration Regarding State Specific Obligations" in the Statement
of Additional Information.
Ohio. While diversifying more into the service and other
non-manufacturing areas, the economy of Ohio continues to rely in part on
durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result,
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Agriculture is an important segment of the Ohio economy with over
half the State's area devoted to farming and approximately 15% of total
employment in agribusiness. In prior years, the State's overall unemployment
rate was commonly somewhat higher than the national figure. For example, the
reported 1990 average monthly State rate was 5.7%, compared to the national
figure of 5.5%. However, for the last four years the State rates were below
the national rates (5.5% versus 6.1% in 1994). The unemployment rate and its
effects vary among particular geographic areas of the State. There can be no
assurance that future national, regional or state-wide economic difficulties
and the resulting impact on State or local government finances generally will
not adversely affect the market value of Ohio Municipal Obligations held in the
Portfolio or the ability of particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the
principal operating fund of the Commonwealth) experienced deficits in fiscal
1990 and 1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30,
1993 of $698.9 million. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to a surplus of
$64.4 million as of June 30, 1993. Rising unemployment, a relatively high
proportion of persons 65 and older in the Commonwealth and court ordered
increases in healthcare reimbursement rates place increased pressures on the
tax resources of the Commonwealth and its municipalities.
North Carolina. Growth of North Carolina tax revenues slowed
considerably during fiscal 1990-92 requiring tax increases and budget
adjustments, including hiring freezes and restrictions, spending constraints,
changes in the timing of certain collections and payments, and other short-term
budget adjustments, that were needed to comply with North Carolina's
constitutional mandate for a balanced budget. Fiscal years 1993 and 1994,
however, ended with a positive General Fund balance of approximately $500
million each year on a budgetary basis. By law, 25% of such positive fund
balance was required to be reserved in the General Fund of North Carolina as
part of a "Savings Reserve" (subject to a maximum reserve of 5% of the
preceding fiscal year's operating appropriation). An additional portion of
such positive fund balance was reserved in the General Fund as part of a
"Reserve for Repair and Renovation of State Facilities," leaving the remaining
unrestricted fund balance at the end of each such year available for future
appropriations.
18
<PAGE> 21
Virginia. Because of Virginia's proximity to Washington, D.C. and
the concentration of military installations in Northern Virginia and the
Tidewater area, Federal government spending is an important factor in
Virginia's economy. The Federal government has a greater impact on Virginia
relative to its size than any other state except Alaska and Hawaii. While
Federal employment in 1992 accounted for 10.0% of Virginia's personal income
(compared with a national average of 3.3% in that year), it ranked behind
services (19.7%), wholesale and retail trade (10.6%) and manufacturing (10.5%).
The Commonwealth experienced a decrease in its General Fund balances from
fiscal 1989 to fiscal 1990 and again from fiscal 1990 to fiscal 1991,
reflecting the effects of a nationwide recession and increasing expenditures.
General Fund balances have increased since fiscal 1991. In fiscal 1994,
revenues increased 6.0% from the previous year, while total expenditures
increased by 4.5%. Revenues exceeded expenditures by $731.2 million, an
increase of 20% over fiscal 1993.
New Jersey. The State of New Jersey generally has a diversified
economic base consisting of, among others, commerce and service industries,
selective commercial agriculture, insurance, tourism, petroleum refining and
manufacturing, although New Jersey's manufacturing industry has experienced a
downward trend in the last few years. New Jersey is a major recipient of
Federal assistance and, of all the states, is among the highest in the amount
of Federal aid received. Therefore, a decrease in Federal financial assistance
may adversely affect the financial condition of New Jersey and its political
subdivisions and instrumentalities. While New Jersey's economic base has
become more diversified over time and thus its economy appears to be less
vulnerable during recessionary periods, a recurrence of high levels of
unemployment could adversely affect New Jersey's overall economy and the
ability of New Jersey and its political subdivisions and instrumentalities to
meet their financial obligations. In addition, New Jersey maintains a balanced
budget which restricts total appropriation increases to only 5% annually with
respect to any municipality or county, the balanced budget plan may actually
adversely affect a particular municipality's or county's ability to repay its
obligations.
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
A Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval. However, shareholders
will be notified of any such change. No assurance can be provided that a
Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). Several of the Portfolios' fundamental investment policies,
which are set forth in full in the Statement of Additional Information, are
summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and
related repurchase agreements) if more than 5% of its total
assets will be invested in the securities of any one issuer,
except that up to 25% of a Portfolio's total assets may be
invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry, except that the Money Market Portfolio will invest
at least 25% of its total assets in obligations of issuers in
the banking industry or instruments secured by such
obligations except during temporary defensive periods;
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<PAGE> 22
(3) borrow money except for temporary purposes in amounts up to
one-third of the value of its total assets at the time of such
borrowing. Whenever borrowings exceed 5% of a Portfolio's
total assets, the Portfolio will not make any additional
investments; and
(4) in the case of each Municipal Portfolio, invest less than 80%
of its net assets in instruments the interest on which is
exempt from regular Federal income tax or, for each
State-Specific Municipal Portfolio, in AMT Paper, except
during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal
Portfolios. Instead, as a non-fundamental investment restriction, each
State-Specific Municipal Portfolio will not hold any securities (except U.S.
Government securities and related repurchase agreements) that would cause, at
the end of any tax quarter, more than 5% of its total assets to be invested in
securities of any one issuer, except that up to 50% of a Portfolio's total
assets may be invested without regard to this limitation so long as no more
than 25% of the Portfolio's total assets are invested in any one issuer (except
U.S. Government securities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio
intends, as a non-fundamental policy, to limit its investments in the
securities of any single issuer (other than U.S. Government securities and
related repurchase agreement) to not more than 5% of the value of its total
assets at the time of purchase, except that 25% of the value of its total
assets may be invested in any one issuer for a period of up to three business
days. The Money Market Portfolio will also limit its investments in Eligible
Securities that are not in the highest rating category as determined by two
NRSROs (or one NRSRO if the security is rated by only one NRSRO) or, if
unrated, are not of comparable quality, to 5% of its total assets, with
investments in any one such issuer being limited to no more than 1% of its
total assets or $1 million, whichever is greater, measured at the time of
purchase.
The investment limitations stated above are applied at the time
investment securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. Should the Fund determine that any
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the names of the trustees and certain background information.
INVESTMENT ADVISER AND SUB-ADVISER
PNC Asset Management Group, Inc. ("PAMG"), an indirect wholly-owned
subsidiary of PNC Bank Corp., serves as the investment adviser for the
Portfolios. PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1835 Market Street,
Philadelphia, Pennsylvania 19103. PNC Institutional Management Corporation
("PIMC"), a wholly-owned subsidiary of PAMG, serves as each Portfolio's sub-
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<PAGE> 23
adviser. PIMC's principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809. PNC Bank Corp. is a multi-bank holding company.
As adviser, PAMG is responsible for the overall investment management
of the Portfolios. As sub-adviser, PIMC is responsible for the day-to-day
management of the Portfolios, and generally makes all purchase and sale
investment decisions for the Portfolios. PIMC also provides research and
credit analysis. Portfolio transactions for a Portfolio may be directed
through broker/dealers who sell Fund shares, subject to the requirements of
best execution.
For their investment advisory and sub-advisory services service, PAMG
and PIMC are entitled to fees, computed daily on a Portfolio-by-Portfolio basis
and payable monthly, at the annual rates set forth below. All sub-advisory
fees payable to PIMC are paid by PAMG, and do not represent an extra charge to
the Portfolios.
<TABLE>
<CAPTION>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
-------------------------------------------------------
INVESTMENT SUB-ADVISORY
ADVISORY FEE FEE
------------ -------------
<S> <C> <C>
AVERAGE DAILY NET ASSETS
- ------------------------
first $1 billion .45 % .40 %
$1 billion--$2 billion .40 .35
$2 billion--$3 billion .375 .325
greater than $3 billion .35 .30
</TABLE>
For more information about the advisory fees the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolios?"
For the fiscal year ended September 30, 1995, the Portfolios paid
investment advisory fees at the following annual rates after voluntary fee
waivers: Money Market Portfolio ____; U.S. Treasury Money Market Portfolio
____; Municipal Money Market Portfolio ____; Ohio Municipal Money Market
Portfolio ____; Pennsylvania Municipal Money Market Portfolio ____; North
Carolina Municipal Money Market Portfolio ____; and Virginia Municipal Money
Market Portfolio ____. For the fiscal year ended February 28, 1995, the
Predecessor New Jersey Municipal Money Market Portfolio paid investment
advisory fees, after voluntary fee waivers, to Midlantic Bank, N.A., its former
adviser, pursuant to the advisory agreement then in effect, at the annual rate
of _____ of average daily net assets (such fee would have been .40% of average
daily net assets without voluntary fee waivers).
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCo is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of each Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .15% of the first $500 million of each Portfolio's average
daily net assets, .13% of the next $500 million of each Portfolio's average
daily net assets, .11% of the next $1 billion of each Portfolio's average daily
net assets and .10% of each Portfolio's average daily net assets in excess of
$2 billion.
For information about the operating expenses the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolio?"
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<PAGE> 24
From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Portfolios' custodian and PFPC serves as their
transfer agent and dividend disbursing agent.
HOW ARE SHARES PURCHASED AND REDEEMED?
DISTRIBUTOR
Shares of the Portfolios are offered on a continuous basis by PDI as
distributor (the "Distributor"). PDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits PDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution or sales support activities out of any portion of the fees paid by
the Fund, past profits or other sources. The Fund is not required or permitted
under the plan to make distribution payments with respect to Institutional
Shares over and above the investment advisory and other fees it pays for
non-distribution services. The Plan merely permits the reallocation of a
portion of these fees to pay for distribution related and shareholder servicing
activities.
PURCHASE OF SHARES
Institutional Shares are offered to institutional investors, including
registered investment advisers with a minimum investment of $500,000 and
individuals with a minumum investment of $2,000,000.
Institutional Shares are sold at their net asset value per share next
determined after an order is received by PFPC. Shares may be purchased on any
Business Day. A "Business Day" is any weekday that the New York Stock Exchange
(the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open
for business.
Purchase orders for each Portfolio except the U.S. Treasury Money
Market Portfolio may be placed by telephoning PFPC at (800) 441-7379 not later
than 12:00 noon (Eastern Time) on a Business Day. Orders received before 12:00
noon (Eastern Time) will be executed at 12:00 noon (Eastern Time). If payment
for an order is not received by 4:00 p.m. (Eastern Time), the order will be
cancelled and notice thereof will be given to the investor placing the order.
Orders received after 12:00 noon (Eastern Time) will not be accepted.
Purchase orders for the U.S. Treasury Money Market Portfolio may be
placed by telephoning PFPC at (800) 441-7379 no later than 4:00 p.m. (Eastern
Time) on a Business Day. [Orders received before 12:00 noon (Eastern Time)
will be executed at 12:00 noon (Eastern Time); orders received after 12:00 noon
(Eastern Time) but before 4:00 p.m. (Eastern Time) will be executed at 4:00
p.m. (Eastern Time).] If payment for an order is not received by 4:00 p.m.
(Eastern Time), the order will be cancelled and notice thereof will be given to
the investor placing the order. Orders will not be accepted after 4:00 p.m.
(Eastern Time). Under certain circumstances, the Fund may reject large
individual purchase orders received after 12:00 noon (Eastern Time).
Payment for Institutional Shares must normally be made in Federal
funds or other funds immediately available to the Fund's custodian. Payment
may also, in the discretion of the Fund, be made in the form of securities that
are permissible investment for the respective Portfolios. For further
information,
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<PAGE> 25
see the Statement of Additional Information. The minimum initial investment is
[$_____]. There is no minimum subsequent investment requirement.
The Fund may in its discretion waive the minimum investment amount and
may reject any order for Institutional Shares.
REDEMPTION OF SHARES
Redemption orders for Institutional Shares may be placed by
telephoning PFPC at (800) 441-7379. Institutional Shares are redeemed at their
net asset value per share next determined after PFPC's receipt of the
redemption order. The Fund and its service providers will not be liable for
any loss, liability, cost or expense for acting upon telephone instructions
that are reasonably believed to be genuine. In attempting to confirm that
telephone instructions are genuine, the Fund may use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number, recent transactions in the account, and the
account holder's Social Security number, address and/or bank). While the Fund
intends to use its best efforts to maintain each Portfolio's net asset value
per share at $1.00, the proceeds paid upon redemption may be more or less than
the amount invested depending upon the net asset value of an Institutional
Share at the time of redemption.
Payment for redeemed Shares for which a redemption order is received
by PFPC before 12:00 noon (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the same Business Day,
[provided that the Fund's custodian is also open for business]. Payment for
redemption orders received between 12:00 noon (Eastern Time) and 4:00 p.m.
(Eastern Time) [or on a day when the Fund's custodian is closed] is normally
wired in Federal funds on the next Business Day following redemption [on which
the Fund's custodian is open for business]. The Fund reserves the right to
wire redemption proceeds within seven days after receiving a redemption order
if, in the judgment of PAMG, an earlier payment could adversely affect a
Portfolio. No charge for wiring redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [P.O. Box 8907, Wilmington, DE 19899-8907].
The Fund may redeem Institutional Shares in any Portfolio account if
the account balance drops below [$5,000] as the result of redemption requests
and the shareholder does not increase the balance to at least [$5,000] on
thirty days' written notice.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
HOW IS NET ASSET VALUE CALCULATED?
The net asset value of the Portfolios' Institutional Shares is
determined as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on
each Business Day. An Institutional Share's net asset value is calculated by
dividing the value of all securities and other assets owned by a Portfolio that
are allocated
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<PAGE> 26
to its Institutional Shares, less the liabilities charged to the Institutional
Shares, by the number of the Portfolio's outstanding Institutional Shares.
Each Portfolio seeks to maintain a net asset value of $1.00 per share
for purposes of purchases and redemptions, and values its portfolio securities
based on the amortized cost method of valuation described in the Statement of
Additional Information under "Valuation of Shares." A Portfolio may use a
pricing service, bank or broker/dealer to value its securities.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Shareholders are entitled to dividends and distributions arising from
the net income and capital gains, if any, earned on investments held by the
Portfolio in which they invest. Each Portfolio's net income is declared daily
as a dividend (i) to shareholders of record immediately prior to the
determination of net asset value made as of the close of regular trading hours
on the NYSE on days on which net asset value is determined, or (ii) to
shareholders of record immediately prior to 4:00 p.m. (Eastern Time) on days
on which there is no determination of net asset value. Consequently,
shareholders whose purchase orders are executed at 12:00 noon (Eastern Time)
receive dividends for that day. On the other hand, shareholders whose
redemption orders have been received by 12:00 noon (Eastern Time) do not
receive dividends for that day, while shareholders of each Portfolio whose
redemption orders are received after 12:00 noon (Eastern Time) do receive
dividends for that day. Because purchase orders for the U.S. Treasury Money
Market Portfolio are executed at 12:00 noon and at 4:00 p.m., shareholders
whose purchase orders are executed at 4:00 p.m. will receive a dividend for
that day.
Dividends are paid monthly by check, or by wire transfer if requested
in writing by the shareholder, within five business days after the end of the
month. Net short-term capital gains, if any, will be distributed at least
annually. The period for which dividends are payable and the time for payment
are subject to change by the Fund's Board of Trustees. The Portfolios do not
expect to realize net long-term capital gains.
Dividends are reinvested in additional full and fractional
Institutional Shares of the same Portfolio which pays the dividends, unless a
shareholder elects to receive dividends in cash. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after receipt by PFPC.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If a Portfolio qualifies, it generally will be relieved of Federal
income tax on amounts distributed to shareholders, but shareholders, unless
otherwise exempt, will pay income or capital gains taxes on distributions
(except distributions that are "exempt interest dividends" or are treated as a
return of capital), whether the distributions are paid in cash or reinvested in
additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain regardless of the length of
time a shareholder holds Institutional Shares. All other distributions, to the
extent taxable, are taxed to shareholders as ordinary income.
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<PAGE> 27
Each Municipal Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns for informational purposes and in two circumstances such amounts, while
exempt from regular Federal income tax, are taxable to persons subject to
alternative minimum and environmental taxes. First, "exempt interest
dividends" derived from certain private activity bonds generally will
constitute an item of tax preference for taxpayers in determining alternative
minimum tax liability. Second, all "exempt interest dividends" must be taken
into account by corporate taxpayers in determining certain adjustments for
alternative minimum and environmental tax purposes. In addition, investors
should be aware of the possibility of state and local alternative minimum or
minimum income tax liability on interest from private activity bonds.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.
Each Municipal Portfolio will determine annually the percentages of
its net investment income which are exempt from the regular Federal income tax,
which constitute an item of tax preference for Federal alternative minimum tax
purposes, and which are fully taxable. These percentages will apply uniformly
to all distributions from net investment income during that year, and may
differ significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record as
of a specified date in those months will be deemed to have been received by the
shareholders on December 31, if the dividends are paid during the following
January.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. Except as discussed below, dividends paid by each Portfolio
may be taxable to investors under state or local law as dividend income even
though all or a portion of such dividends may be derived from interest on
obligations which, if realized directly, would be exempt from such income
taxes. In addition, shareholders who are non-resident alien individuals,
foreign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or
administrative changes or court decisions may materially affect the tax
consequences of investing in the Portfolios.
OHIO TAXES. Individuals and estates that are subject to Ohio personal
income tax or municipal or school district income taxes in Ohio will not be
subject to such taxes on distributions from the Ohio Municipal Money Market
Portfolio to the extent that such distributions consist of interest on Ohio
State-Specific Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their
subdivisions. Corporations that are subject to the Ohio corporation franchise
tax will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions
either constitute exempt-interest dividends or consist of interest on Ohio
Municipal Obligations or U.S. Obligations. However, shares of the Ohio
Municipal Money Market Portfolio will be included in a corporation's net worth
base for purposes of calculating
25
<PAGE> 28
the Ohio corporation franchise tax. Distributions consisting of gain on the
sale, exchange or other disposition of Ohio Municipal Obligations will not be
subject to the Ohio personal income tax, or municipal or school district income
taxes in Ohio and will not be included in the net income base of the Ohio
corporation franchise tax. Distributions attributable to other sources will be
subject to the Ohio personal income tax and the Ohio corporation franchise tax.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to
interest realized by the Pennsylvania Municipal Money Market Portfolio from
Pennsylvania State-Specific Obligations or attributable to insurance proceeds
on account of such interest is not taxable to individuals, estates or trusts
under the Personal Income Tax (in the case of insurance proceeds, to the extent
they are exempt for Federal income tax purposes); to corporations under the
Corporate Net Income Tax (in the case of insurance proceeds, to the extent they
are exempt for Federal income tax purposes); nor to individuals under the
Philadelphia School District New Income Tax ("School District Tax"). Income
received by a shareholder attributable to gain on the sale or other disposition
by the Portfolio of Pennsylvania State-Specific Obligations is taxable under
the Personal Income Tax, the Corporate Net Income Tax, and, unless these assets
were held by the Portfolio for more than six months, the School District Tax.
This discussion does not address the extent, if any, to which shares
of the Pennsylvania Municipal Money Market Portfolio, and interest and gain
earned by the Portfolio, is subject to, or included in the measure of, special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed herein (including the Corporate
Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are
not subject to any of the personal property taxes currently in effect in
Pennsylvania to the extent that the Portfolio is comprised of Pennsylvania
State- Specific Obligations. The taxes referred to include the County Personal
Property Tax.
NORTH CAROLINA TAXES. Interest received in the form of dividends from
the North Carolina Municipal Money Market Portfolio is exempt from North
Carolina state income tax to the extent the distributions represent interest on
direct obligations of the U.S. Government or North Carolina State-Specific
Obligations. Distributions derived from interest earned on obligations of
political subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands,
including the governments thereof and their agencies, instrumentalities and
authorities, are also exempt from North Carolina state income tax.
Distributions paid out of interest earned on obligations that are merely backed
or guaranteed by the U.S. Government (e.g., GNMAs, FNMAs), on repurchase
agreements collateralized by U.S. Government securities or on obligations of
other states (which the Portfolio may acquire and hold for temporary or
defensive purposes) are not exempt from North Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina
Municipal Money Market Portfolio on the sale or exchange of certain obligations
of the State of North Carolina or its subdivisions that were issued before July
1, 1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
VIRGINIA TAXES. Subject to the provisions discussed below, dividends
paid to shareholders by the Virginia Municipal Money Market Portfolio and
derived from interest on obligations of the Commonwealth of Virginia or of any
political subdivision or instrumentality of the Commonwealth or derived from
interest or dividends on obligations of the United States excludable from
Virginia taxable
26
<PAGE> 29
income under the laws of the United States, which obligations are issued in the
exercise of the borrowing power of the Commonwealth or the United States and
are backed by the full faith and credit of the Commonwealth or the United
States, will be exempt from the Virginia income tax. Dividends paid to
shareholders by the Portfolio and derived from interest on debt obligations of
certain territories and possessions of the United States (those issued by
Puerto Rico, the Virgin Islands and Guam) will be exempt from the Virginia
income tax. To the extent a portion of the dividends are derived from interest
on debt obligations other than those described above, such portion will be
subject to the Virginia income tax even though it may be excludable from gross
income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and
derived from capital gains will be taxable to the shareholders. To the extent
any portion of the dividends are derived from taxable interest for Virginia
purposes or from net short-term capital gains, such portion will be taxable to
the shareholders as ordinary income. The character of long-term capital gains
realized and distributed by the Portfolio will flow through to its shareholders
regardless of how long the shareholders have held their shares. Capital gains
distributed to shareholders derived from Virginia obligations issued pursuant
to special Virginia enabling legislation which provides a specific exemption
for such gains will be exempt from Virginia income tax. Generally, interest on
indebtedness incurred by shareholders to purchase or carry shares of the
Portfolio will not be deductible for Virginia income tax purposes.
As a regulated investment company, the Portfolio may distribute
dividends that are exempt from the Virginia income tax to its shareholders if
the Portfolio satisfies all requirements for conduit treatment under Federal
law and, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets consists of obligations the interest on which is
exempt from taxation under Federal law. If the Portfolio fails to qualify, no
part of its dividends will be exempt from the Virginia income tax.
When taxable income of a regulated investment company is commingled
with exempt income, all distributions of the income are presumed taxable to the
shareholders unless the portion of income that is exempt from Virginia income
tax can be determined with reasonable certainty and substantiated. Generally,
this determination must be made for each distribution to each shareholder. The
Virginia Department of Taxation has adopted a policy, however, of allowing
shareholders to exclude from their Virginia taxable income the exempt portion
of distributions from a regulated investment company even though the
shareholders receive distributions monthly but receive reports substantiating
the exempt portion of such distributions at less frequent intervals.
Accordingly, if the Portfolio receives taxable income, the Portfolio must
determine the portion of income that is exempt from Virginia income tax and
provide such information to the shareholders in accordance with the foregoing
so that the shareholders may exclude from Virginia taxable income the exempt
portion of the distribution from the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends
paid by the New Jersey Municipal Money Market Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New
Jersey law as currently in effect, distributions paid by a "qualified
investment fund" will not be subject to the New Jersey personal income tax to
the extent that the distributions are attributable to income received as
interest or gain from New Jersey State-Specific Obligations, or as interest or
gain from direct U.S. Government obligations. Distributions by a qualified
investment fund that are attributable to most other sources will be subject to
the New Jersey personal income tax. If the New Jersey Municipal Money Market
Portfolio qualifies as a qualified investment fund under New Jersey law, any
gain on the redemption or sale of the Portfolio's shares will not be subject to
the New Jersey personal
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<PAGE> 30
income tax. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific
Obligations or direct U.S. Government obligations; it must have no investments
other than interest-bearing obligations, obligations issued at a discount, and
cash and cash items (including receivables); and it must satisfy certain
reporting obligations and provide certain information to its shareholders.
Shares of the Portfolio are not subject to property taxation by New Jersey or
its political subdivisions.
The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of Trust authorizes the Board
of Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Trustees have authorized
the issuance of an unlimited number of shares in twenty-eight investment
portfolios. Each portfolio offers [five] separate classes of shares --
Institutional Shares, Service Shares, Series A Investor Shares, Series B
Investor Shares and Series C Investor Shares. This prospectus relates only to
Institutional Shares of the eight money market funds described herein.
Shares of each class bear their pro rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. Because of these "class
expenses", the performance of a Portfolio's Institutional Shares is expected to
be higher than the performance of the Portfolio's Service Shares, and the
performance of both the Institutional Shares and Service Shares of a Portfolio
is expected to be higher than the performance of the Portfolio's three classes
of Investor Shares. The Fund offers various services and privileges in
connection with its Investor Shares that are not offered in connection with its
Institutional Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Service and Investor share classes, contact [name and number].
Each share of a Portfolio has a par value of $.001, represents an
equal proportionate interest in that Portfolio and is entitled to the dividends
and distributions earned on that Portfolio's assets as are declared in the
discretion of the Board of Trustees. The Fund's shareholders are entitled to
one vote for each full share held and proportionate fractional votes for
fractional shares held, and will vote in the aggregate and not by class, except
where otherwise required by law or as determined by the Board of Trustees. The
Fund does not currently intend to hold annual meetings of shareholders for the
election of trustees (except as required under the 1940 Act). For a further
discussion of the voting rights of shareholders, see "Additional Information
Concerning Shares" in the Statement of Additional Information.
On January __, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp.
28
<PAGE> 31
HOW IS PERFORMANCE CALCULATED?
From time to time each Portfolio may advertise its "yield" and
"effective yield" for Institutional Shares. Both yield figures are based on
historical earnings and are not intended to indicate future performance.
"Yield" refers to the income generated by an investment in a Portfolio's
Institutional Shares over a seven-day period. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. "Effective yield" is calculated
similarly but, when annualized, the income earned by an investment in a
Portfolio's Institutional Shares is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. A Municipal Portfolio's "tax equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to the Portfolio's tax-free yield for
Institutional Shares.
The performance of Institutional Shares of a Portfolio may be compared
to the performance of mutual funds with similar investment objectives and to
relevant indexes, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the yield of Institutional Shares of
a Portfolio may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service. Performance information may also include evaluations of the
Portfolios published by nationally recognized ranking services, and information
as reported by financial publications such as Business Week, Fortune,
Institutional Investor, Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional
nature, may also be used in comparing the performance of Institutional Shares
of a Portfolio.
Performance quotations for Shares of a Portfolio represent past
performance and should not be considered as representative of future results.
The yield of any investment is generally a function of portfolio quality and
maturity, type of investment and operating expenses. Yields will fluctuate and
are not necessarily representative of future results. Any fees charged by
affiliates of the Portfolios' investment adviser or other institutions directly
to their customer accounts in connection with investments in the Portfolios
will not be included in the Portfolios' calculations of yield and performance.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to
information regarding their investment 24 hours a day, 7 days a week. The
COMPASS CAPITAL FUNDS have an investor information line that can provide such
access.
In addition to account information, COMPASS CAPITAL FUNDS have other
sources of information regarding each Fund and its portfolio holdings, strategy
and current dividend and yield levels.
By selecting the appropriate source of information as listed below,
investors can receive additional information on the COMPASS CAPITAL FUNDS by
either using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) compass
For Information Related to Share Purchase and Redemptions call your
investment adviser or Compass Capital Funds at (800) xxx-xxxx.
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<PAGE> 32
For Questions about Shareholder Accounts and Balances held directly at
the Fund, call (800) xxx-xxxx.
Information is also available on the World Wide Web through the
Internet.
Shareholders and investment professionals may access portfolio
information, portfolio manager updates and market data by accessing
COMPASSFUNDS.COM.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
30
<PAGE> 33
THE MONEY
MARKET
PORTFOLIOS
INSTITUTIONAL
SHARES
PROSPECTUS
MONEY
MARKET PORTFOLIO
U.S. TREASURY
MONEY MARKET PORTFOLIO
MUNICIPAL
MONEY MARKET PORTFOLIO
NEW JERSEY MUNICIPAL
MONEY MARKET PORTFOLIO
NORTH CAROLINA MUNICIPAL
MONEY MARKET PORTFOLIO
OHIO MUNICIPAL
MONEY MARKET PORTFOLIO
PENNSYLVANIA MUNICIPAL
MONEY MARKET PORTFOLIO
VIRGINIA MUNICIPAL
MONEY MARKET PORTFOLIO
January __, 1996
31
<PAGE> 34
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(SERVICE SHARES OF THE MONEY MARKET PORTFOLIO,
U.S. TREASURY MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO,
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO, OHIO MUNICIPAL
MONEY MARKET PORTFOLIO, PENNSYLVANIA MUNICIPAL MONEY MARKET
PORTFOLIO, AND VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 35
THE MONEY MARKET PORTFOLIOS
SERVICE SHARES
The Compass Capital Funds(R) (the "Fund") consist of [twenty-eight]
investment portfolios. This Prospectus describes the Service Shares of eight
of those portfolios (the "Portfolios").
- MONEY MARKET PORTFOLIO -
- U.S. TREASURY MONEY MARKET PORTFOLIO -
- MUNICIPAL MONEY MARKET PORTFOLIO -
- NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO -
- NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO -
- OHIO MUNICIPAL MONEY MARKET PORTFOLIO -
- PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO -
- VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO -
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January __, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained upon request free of charge from the Fund by
calling (800) ________. The Statement of Additional Information, as
supplemented from time to time, is incorporated by reference into this
Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. THERE
CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL
PORTFOLIOS LISTED ABOVE ARE INTENDED FOR RESIDENTS OF THE RESPECTIVE STATES
INDICATED.
PROSPECTUS January __, 1996
1
<PAGE> 36
INTRODUCING THE MONEY MARKET PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Money Market Portfolios of the COMPASS CAPITAL FUNDS consist of nine short
term investment alternatives. Two of these portfolios invest solely in taxable
instruments, and seven of these portfolios invest in tax-exempt instruments. A
detailed description of each portfolio appears on pages ___.
COMPASS CAPITAL FUND LIPPER PEER GROUP
-------------------- -----------------
Money Market Money Market Instrument
U.S. Treasury Money Market U.S. Treasury Money Market
Tax Free Money Market Tax Exempt Money Market
NJ Money Market Single State Tax Exempt Money Market
NC Money Market Single State Tax Exempt Money Market
PA Money Market Single State Tax Exempt Money Market
OH Money Market Single State Tax Exempt Money Market
VA Money Market Single State Tax Exempt Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's investment
adviser. PNC Institutional Management Corporation ("PIMC") serves as the
sub-adviser to the Portfolios as described in this Prospectus.
UNDERSTANDING THE COMPASS CAPITAL MONEY MARKET FUNDS
This prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in money
market investing.
CONSIDERING THE RISKS IN MONEY MARKET INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective, or that any Portfolio will be able to maintain a stable
net asset value of $1.00 per share. Certain Portfolios may invest in U.S.
dollar-denominated instruments of foreign issuers or municipal securities
backed by the credit of foreign banks, which may be subject to certain risks in
addition to those inherent in U.S. investments. Each state-specific municipal
Portfolio will concentrate in the securities of issues located in a particular
state, and is non-diversified, which means that its performance may be
dependent upon the performance of a smaller number of securities than the other
Portfolios, which are considered diversified. See "What Additional Investment
Policies Apply?"
ASKING THE KEY QUESTIONS:
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Investment Limitations? . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Purchased and Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Special Purchase and Redemption Procedures May Apply? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
2
<PAGE> 37
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses to be incurred by Service
Shares of the Portfolios for the current fiscal year ending September 30, 1996
as a percentage of average daily net assets. An example based on the summary
is also shown.
<TABLE>
<CAPTION>
New
U.S. Jersey
Treasury Municipal Municipal
Money Money Money Money
Market Market Market Market
Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Advisory fees(1) .06% .06% .06% .05%
Other operating expenses .52 .52 .52 .53
--- --- --- ---
Administration fees(1) .13 .12 .11 .02
Service fees .15 .15 .15 .15
Other expenses(1) .24 .25 .26 .36
--- --- --- ---
Total Portfolio operating expenses(1) .58% .58% .58% .58%
=== === === ===
<CAPTION>
North
Carolina Ohio Pennsylvania Virginia
Municipal Municipal Municipal Municipal
Money Money Money Money
Market Market Market Market
Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Advisory fees(1) .06% .06% .06% .05%
Other operating expenses .52 .52 .52 .53
--- --- --- ---
Administration fees(1) .05 .10 .12 .02
Service fees .15 .15 .15 .15
Other expenses(1) .32 .27 .25 .36
--- --- --- ---
Total Portfolio operating expenses(1) .58% .58% .58% .58%
=== === === ===
</TABLE>
(1) Without waivers, advisory fees would be .44%, .45%, .45%, .45%, .45%,
.45%, .45%, and .45% and administration fees would be .14%, .15%,
.15%, .15%, .15%, .15%, .15% and .15%, respectively. PAMG and the
Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers by a Portfolio for the fiscal year ended September 30,
1995, as restated to reflect revised fee waivers. Without waivers,
total operating expenses would be .97%, 1.00%, 1.01%, 1.11%, 1.01%,
1.02%, 1.00% and 1.11%, respectively.
3
<PAGE> 38
EXAMPLE
An investor in Service Shares would pay the following expenses on a
$1,000 investment, assuming (1) a 5% annual return and (2) redemption at the
end of each time period.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Money Market $6 $19 $32 $73
U.S. Treasury Money Market 6 19 32 73
Municipal Money Market 6 19 32 73
New Jersey Municipal Money Market 6 19 N/A N/A
North Carolina Municipal Money 6 19 32 73
Market
Ohio Municipal Money Market 6 19 32 73
Pennsylvania Municipal Money Market 6 19 32 73
Virginia Municipal Money Market 6 19 32 73
</TABLE>
The foregoing Table and Example are intended to assist investors in
understanding the expenses the Portfolios pay. Investors bear these expenses
since they reduce the income paid by the Portfolios as dividends. The tables
do not reflect any charges that may be imposed by affiliates of the Portfolios'
investment adviser or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference into the Statement of Additional
Information and has been audited by [ ], the Fund's
independent accountants. This financial information should be read together
with those financial statements. For the periods shown, the New Jersey
Municipal Money Market Portfolio offered only one class of shares to both
institutional and retail investors. Further information about the performance
of the Portfolios is available in their annual shareholder reports. Both the
Statement of Additional Information and the annual reports may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus.
4
<PAGE> 39
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
----------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 10/4/89(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0333 0.0274 0.0391 0.0645 0.0778
Net realized gain (loss)
on investments -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.0333 0.0274 0.0391 0.0645 0.0778
-------- -------- -------- -------- -------- --------
Less distributions
Distributions from net
investment income (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
Distributions from net
realized capital gains -- -- -- -- --
Total distributions (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
-------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total return % 3.37% 2.77% 4.05% 6.64% 8.07%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $ $575,948 $415,328 $838,012 $637,076 $628,075
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers % 0.51% 0.59% 0.61% 0.62% 0.62%(2)
Before advisory/
administration fee
waivers % 0.92% 0.70% 0.66% 0.67% 0.70%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers % 3.35% 2.73% 3.86% 6.45% 7.83%(2)
Before advisory/
administration fee
waivers % 2.95% 2.62% 3.81% 6.40% 7.75%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
5
<PAGE> 40
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 11/1/89(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0331 0.0269 0.0394 0.0627 0.0697
Net realized gain (loss)
on investments -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total from
investment
operations 0.0331 0.0269 0.0394 0.0627 0.0697
-------- -------- -------- -------- -------- --------
Less distributions
Distributions from net
investment income (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
Distributions from net
realized capital gains -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
-------- -------- -------- -------- -------- --------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total return % 3.36% 2.72% 4.01% 6.46% 7.29%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $ $372,883 $185,400 $160,269 $180,776 $146,148
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers % 0.52% 0.60% 0.62% 0.65% 0.65%(2)
Before advisory/
administration fee
waivers % 0.97% 0.73% 0.67% 0.70% 0.70%(2)
Ratios of net investment
income to average
net assets
After advisory/
administration fee
waivers % 3.42% 2.68% 3.91% 6.27% 7.62%(2)
Before advisory/
administration fee
waivers % 2.97% 2.55% 3.86% 6.22% 7.57%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
6
<PAGE> 41
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
--------------------------------
<TABLE>
<CAPTION>
FOR THE
YEAR YEAR YEAR YEAR YEAR 11/1/89(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0219 0.0205 0.0281 0.0438 0.0486
Net realized gain (loss)
on investments -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.0219 0.0205 0.0281 0.0438 0.0486
-------- -------- -------- -------- -------- --------
Less distributions
Distributions from net
investment income (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
Distributions from net
realized capital gains -- -- -- -- --
Total distributions (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
-------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total return % 2.20% 2.10% 2.85% 4.47 % 4.97%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $ $133,358 $ 93,937 $125,152 $ 89,312 $112,108
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers % 0.51% 0.61% 0.63% 0.65% 0.65%(2)
Before advisory/
administration fee
waivers % 0.99% 0.72% 0.68% 0.70% 0.70%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers % 2.18% 2.02% 2.78% 4.40% 5.31%(2)
Before advisory/
administration fee
waivers % 1.71% 1.91% 2.73% 4.35% 5.26%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
7
<PAGE> 42
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/1/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0225 0.0074
Net realized gain (loss) on
investments -- -- --
-------- -------- --------
Total from investment
operations 0.0159 0.0225
-------- -------- --------
Less distributions
Distributions from net
investment income (0.0225) (0.0074)
Distributions from net realized
capital gains -- -- --
-------- -------- --------
Total distributions (0.0225) (0.0074)
-------- -------- --------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return % 2.27% 0.75%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 44,066 $ 15,239
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.40% 0.23%(2)
Before advisory/administration
fee waivers % 1.04% 0.96%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers % 2.29% 2.23%(2)
Before advisory/administration
fee waivers % 1.65% 1.50%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
8
<PAGE> 43
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/1/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0221 0.0074
Net realized gain (loss) on
investments -- -- --
-------- -------- --------
Total from investment
operations 0.0221 0.0074
-------- -------- --------
Less distributions
Distributions from net
investment income (0.0221) (0.0074)
Distributions from net realized
capital gains -- -- --
-------- -------- --------
Total distributions (0.0221) (0.0074)
-------- -------- --------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return % 2.24% 0.74%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 60,560 $ 8,919
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.42% 0.32%(2)
Before advisory/administration
fee waivers % 1.99% 1.20%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers % 2.31% 2.42%(2)
Before advisory/administration
fee waivers % 1.75% 1.54%(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
9
<PAGE> 44
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA VIRGINIA
MUNICIPAL MONEY MUNICIPAL MONEY
MARKET PORTFOLIO MARKET PORTFOLIO
----------------------------- ----------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
11/01/94(4) 4/29/94(1) 10/11/94(1)
THROUGH THROUGH THROUGH
9/30/95 9/30/94 9/30/95
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0099
Net realized gain (loss) on
investments --
-------- -------- --------
Total from investment
operations 0.0099
-------- --------
Less distributions
Distributions from net
investment income (0.0099)
Distributions from net realized
capital gains --
-------- -------- --------
Total distributions (0.0099)
-------- -------- --------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return % 0.99% %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ -- (3) $
Ratios of expenses to average
net assets
After advisory/administration
fee waivers %(2) 0.36%(2) %(2)
Before advisory/administration
fee waivers %(2) 1.02%(2) %(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers %(2) 2.54%(2) %(2)
Before advisory/administration
fee waivers %(2) 1.87%(2) %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) There were no Service Shares outstanding as of September 30, 1994.
(4) Reissuance of shares.
10
<PAGE> 45
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD PERIOD
ENDED FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91(1)
8/31/95 ENDED ENDED ENDED TO
(UNAUDITED) 02/28/95 02/28/94 02/28/93 02/28/92
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.02 0.02 0.02 0.02
Net realized gain (loss) on
investments -- -- -- --
-------- -------- -------- --------
Total from investment
operations 0.02 0.02 0.02 0.02
-------- -------- -------- --------
Less distributions
Distributions from net
investment income (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Distributions from net realized
capital gains -- -- -- --
-------- -------- -------- --------
Total distributions (0.02) (0.02) (0.02) (0.02)
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 2.46% 1.79% 2.19% 3.53%(2)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 43,610 $ 39,408 $ 38,836 $ 35,005
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.63% 0.65% 0.73% 0.47%(2)
Before advisory/administration
fee waivers 0.70% 0.72% 0.76% 0.62%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.46% 1.77% 2.17% 3.44%(2)
Before advisory/administration
fee waivers 2.39% 1.70% 2.14% 3.29%
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor Portfolio") of The Compass Capital Group, which was
organized as a Massachusetts business trust. On January __, 1996, the
assets and liabilities of the Predecessor Portfolio were transferred
to the Portfolio, which had no prior operating history.
(1) Commencement of operations.
(2) Annualized.
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<PAGE> 46
WHAT ARE THE PORTFOLIOS?
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide
as high a level of current interest income as is consistent with maintaining
liquidity and stability of principal. The Portfolio may invest in a broad
range of short-term, high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are available in the
money markets. In particular, the Portfolio may invest in:
(A) U.S. dollar-denominated obligations issued or supported by the
credit of U.S. or foreign banks or savings institutions with
total assets in excess of $1 billion (including obligations of
foreign branches of such banks);
(B) high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers
rated (at the time of purchase) A-2 or higher by Standard &
Poor's Ratings Group ("S&P"), Prime-2 or higher by Moody's
Investors Service, Inc. ("Moody's"), Duff 2 or higher by Duff
& Phelps Credit Co. ("Duff"), F-2 or higher by Fitch Investors
Service, Inc. ("Fitch") or TBW-2 or higher by Thomson
BankWatch, Inc. ("TBW"), as well as high quality corporate
bonds rated (at the time of purchase) AA or higher by S&P,
D&P, Fitch or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's
sub-adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations and
credit card receivables);
(E) securities issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentalities
and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by foreign
governments or their political subdivisions, agencies or
instrumentalities;
(G) guaranteed investment contracts issued by highly-rated U.S.
insurance companies;
(H) securities issued or guaranteed by state or local
governmental bodies; and
(I) repurchase agreements relating to the above instruments.
U.S. TREASURY MONEY MARKET PORTFOLIO
The investment objective of the U.S. Treasury Money Market Portfolio
is to provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It pursues this objective by
investing exclusively in short-term U.S. Treasury bills, notes and other
obligations issued or guaranteed by the U.S. Treasury and repurchase agreements
relating to such obligations.
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<PAGE> 47
MUNICIPAL PORTFOLIOS
The investment objective of the Municipal Money Market Portfolio is to
provide as high a level of current interest income exempt from Federal income
taxes as is consistent with maintaining liquidity and stability of principal.
It pursues this objective by investing substantially all of its assets in
short-term obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia, and their political
subdivisions, agencies, instrumentalities and authorities ("Municipal
Obligations").
The investment objective of the Ohio Municipal Money Market Portfolio,
Pennsylvania Municipal Money Market Portfolio, North Carolina Municipal Money
Market Portfolio, Virginia Municipal Money Market Portfolio and New Jersey
Municipal Money Market Portfolio (the "State-Specific Municipal Portfolios")
is, for each Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the specified state in
which a Portfolio concentrates, as is consistent with maintaining liquidity and
stability of principal.
The Municipal Money Market Portfolio and the State-Specific Municipal
Portfolios (together, the "Municipal Portfolios") seek to achieve their
investment objectives by primarily investing in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher by
Fitch;
(B) tax-exempt commercial paper and similar debt instruments rated
Prime-2 or higher by Moody's, A-2 or higher by S&P, Duff 2 or
higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or higher
by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of
comparable quality as determined by the Portfolios'
sub-adviser under guidelines established by the Fund's Board
of Trustees; and
(E) municipal bonds and notes which are guaranteed as to principal
and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are Municipal
Obligations. In addition, under normal conditions, the Municipal Money Market
Portfolio intends to invest less than 25% of its total assets in Municipal
Obligations of issuers located in the same state. Each State-Specific
Municipal Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name ("State-Specific Obligations"). During temporary defensive periods,
however, each Municipal Portfolio may invest without limitation in obligations
that are not Municipal Obligations and may hold without limitation uninvested
cash reserves.
Each State-Specific Portfolio may invest without limitation in private
activity bonds the interest on which is an item of tax preference for purposes
of the Federal alternative minimum tax ("AMT Paper"). The Municipal Money
Market Portfolio may invest up to 20% of its total assets in AMT Paper when
added together with any taxable investments held by the Portfolio. Interest on
AMT
13
<PAGE> 48
Paper that is received by taxpayers subject to the Federal alternative minimum
tax is taxable.
Each Municipal Portfolio may invest 25% or more of its net assets in
Municipal Obligations the interest on which is paid solely from revenues of
similar projects. To the extent a Portfolio's assets are invested in Municipal
Obligations payable from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
QUALITY, MATURITY AND DIVERSIFICATION
All securities acquired by the Portfolios will be determined at the
time of purchase by the Portfolios' sub-adviser, under guidelines established
by the Fund's Board of Trustees, to present minimal credit risks and will be
"Eligible Securities" as defined by the SEC. Eligible Securities are (a)
securities that either (i) have short-term debt ratings at the time of purchase
in the two highest rating categories by at least two unaffiliated nationally
recognized statistical rating organizations ("NRSROs") (or one NRSRO if the
security is rated by only one NRSRO), or (ii) are comparable in priority and
security with an instrument issued by an issuer which has such ratings, and (b)
securities that are unrated (including securities of issuers that have
long-term but not short-term ratings) but are of comparable quality as
determined in accordance with guidelines approved by the Board of Trustees.
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not exceed 90 days.
In no event will a Portfolio purchase securities which mature more than 397
days from the date of purchase (except for certain variable and floating rate
instruments and securities collateralizing repurchase agreements). Securities
in which the Portfolios invest may not earn as high a level of income as longer
term or lower quality securities, which generally have greater market risk and
more fluctuation in market value.
The Money Market, Government Money Market and Municipal Money Market
Portfolios are classified as diversified portfolios, and the State Specific
Municipal Portfolios are classified as non-diversified portfolios, under the
Investment Company Act of 1940 (the "1940 Act"). Investment returns on a
non-diversified portfolio typically are dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than it would a
diversified portfolio.
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios may invest in debt obligations
of domestic or foreign corporations and banks, and may acquire commercial
obligations issued by Canadian corporations and Canadian counterparts of U.S.
corporations, as well as Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer. Bank obligations may include certificates of
deposit, notes, bankers' acceptances and fixed time deposits. These
obligations may be general obligations of the parent bank or may be limited to
the issuing branch or subsidiary by the terms of specific obligation or by
government regulation. The Money Market Portfolio may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.
14
<PAGE> 49
Commercial paper issues include securities issued by corporations
without registration under the Securities Act of 1933 (the "1933 Act") in
reliance on the exemption in Section 3(a)(3), and commercial paper issued in
reliance on the so-called "private placement" exemption in Section 4(2)
("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
which make a market in Section 4(2) paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios may also purchase obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are backed by the full faith and credit of the United
States. Others are backed by the right of the issuer to borrow from the U.S.
Treasury or are backed only by the credit of the agency or instrumentality
issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the state or governmental body has no obligation to
make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that is not yet as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase at the Portfolio's option specific Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligation to
which such commitment relates. Each Municipal Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
15
<PAGE> 50
The amount of information regarding the financial condition of issuers
of Municipal Obligations may not be as extensive as that which is made
available by public corporations, and the secondary market for Municipal
Obligations may be less liquid than that for taxable obligations. Accordingly,
the ability of a Municipal Portfolio to buy and sell tax-exempt securities may,
at any particular time and with respect to any particular securities, be
limited.
The Municipal Portfolios may invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participation, beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal or state income tax are rendered by
counsel to the respective issuers or sponsors at the time of issuance. The
Fund and its investment adviser will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Each Portfolio may invest in
mortgage-related securities issued by the U.S. Government or its agencies or
instrumentalities or issued by private companies. Mortgage-related securities
may include collateralized mortgage obligations ("CMOs") issued by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or
other U.S. Government agencies or instrumentalities or issued by private
companies. The average life of mortgage-related securities is likely to be
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, a
mortgage-related security's stated maturity may be shortened and, therefore, it
may be difficult to predict precisely the security's total return to the
particular Portfolio. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by the particular Portfolio will generally
be at lower rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase
rated and unrated variable and floating rate instruments, which may have a
stated maturity in excess of 13 months but will, in any event, permit a
Portfolio to demand payment of the principal of the instrument at least once
every 13 months upon not more than thirty days' notice (unless the instrument
is guaranteed by the U.S. Government or an agency or instrumentality thereof).
These instruments may include variable amount master demand notes that permit
the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. Issuers of unrated variable and floating
rate instruments must satisfy the same criteria as set forth above for the
particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase
securities from broker-dealers and 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, so long as the
repurchase agreement itself matures in less than 13 months. Default by or
bankruptcy of the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delays in connection with the disposition
of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make
limited investments in guaranteed investment contracts ("GICs") issued by
highly rated U.S. insurance companies. Under these contracts, the Portfolio
makes cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits interest to the Portfolio on a
monthly basis, which is based on an index (such as the Salomon Brothers CD
Index), but is guaranteed not to be less than a certain minimum rate. The
Money Market
16
<PAGE> 51
Portfolio does not expect to invest more than 5% of its net asset in GICs at
any time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements for temporary purposes (such as to obtain cash to meet
redemption requests when the liquidation of portfolio securities is deemed
disadvantageous or inconvenient). A reverse repurchase agreement involves a
sale by a Portfolio of securities that it holds concurrently with an agreement
by the Portfolio to repurchase the same securities at an agreed-upon price and
date. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities the Portfolio is obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their
daily cash positions, each Portfolio may invest in securities issued by other
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. Securities of other investment
companies will be acquired by a Portfolio within the limits prescribed by the
1940 Act. As a shareholder of another investment company, a Portfolio 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 fees and other expenses the Portfolio bears
directly in connection with its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Portfolios' sub-adviser, suitable obligations are unavailable.
During normal market periods, no more than 20% of a Portfolio's assets will be
held uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10%
of the value of its net assets in securities that are illiquid. Variable and
floating rate instruments that cannot be disposed of within seven days, GICs,
and repurchase agreements and time deposits that do not provide for payment
within seven days after notice, without taking a reduced price, are subject to
this 10% limit. Each Portfolio may purchase securities which are not
registered under the 1933 Act but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the sub-adviser,
acting under guidelines
17
<PAGE> 52
approved and monitored by the Board, that an adequate trading market exists for
that particular security. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS - ADDITIONAL RISK CONSIDERATIONS.
The concentration of investments by the State-Specific Municipal Portfolios in
State-Specific Obligations raises special investment considerations. Changes
in the economic condition and governmental policies of a state and its
political subdivisions could adversely affect the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific
Municipal Portfolios invest are described below. For further information, see
"Special Consideration Regarding State Specific Obligations" in the Statement
of Additional Information.
Ohio. While diversifying more into the service and other
non-manufacturing areas, the economy of Ohio continues to rely in part on
durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result,
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation as
a whole. Agriculture is an important segment of the Ohio economy with over half
the State's area devoted to farming and approximately 15% of total employment in
agribusiness. In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the national figure of
5.5%. However, for the last four years the State rates were below the national
rates (5.5% versus 6.1% in 1994). The unemployment rate and its effects vary
among particular geographic areas of the State. There can be no assurance that
future national, regional or state-wide economic difficulties and the resulting
impact on State or local government finances generally will not adversely affect
the market value of Ohio Municipal Obligations held in the Portfolio or the
ability of particular obligors to make timely payments of debt service on (or
lease payments relating to) those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the
principal operating fund of the Commonwealth) experienced deficits in fiscal
1990 and 1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30, 1993
of $698.9 million. The deficit in the Commonwealth's unreserved/undesignated
funds of prior years also was reversed to a surplus of $64.4 million as of June
30, 1993. Rising unemployment, a relatively high proportion of persons 65 and
older in the Commonwealth and court ordered increases in healthcare
reimbursement rates place increased pressures on the tax resources of the
Commonwealth and its municipalities.
North Carolina. Growth of North Carolina tax revenues slowed
considerably during fiscal 1990-92 requiring tax increases and budget
adjustments, including hiring freezes and restrictions, spending constraints,
changes in the timing of certain collections and payments, and other short-term
budget adjustments, that were needed to comply with North Carolina's
constitutional mandate for a balanced budget. Fiscal years 1993 and 1994,
however, ended with a positive General Fund balance of approximately $500
million each year on a budgetary basis. By law, 25% of such positive fund
balance was required to be reserved in the General Fund of North Carolina as
part of a "Savings Reserve" (subject to a maximum reserve of 5% of the
preceding fiscal year's operating appropriation). An additional portion of
such positive fund balance was reserved in the General Fund as part of a
"Reserve for Repair and Renovation of State Facilities," leaving the remaining
unrestricted fund balance at the end of each such year available for future
appropriations.
18
<PAGE> 53
Virginia. Because of Virginia's proximity to Washington, D.C. and
the concentration of military installations in Northern Virginia and the
Tidewater area, Federal government spending is an important factor in
Virginia's economy. The Federal government has a greater impact on Virginia
relative to its size than any other state except Alaska and Hawaii. While
Federal employment in 1992 accounted for 10.0% of Virginia's personal income
(compared with a national average of 3.3% in that year), it ranked behind
services (19.7%), wholesale and retail trade (10.6%) and manufacturing (10.5%).
The Commonwealth experienced a decrease in its General Fund balances from
fiscal 1989 to fiscal 1990 and again from fiscal 1990 to fiscal 1991,
reflecting the effects of a nationwide recession and increasing expenditures.
General Fund balances have increased since fiscal 1991. In fiscal 1994,
revenues increased 6.0% from the previous year, while total expenditures
increased by 4.5%. Revenues exceeded expenditures by $731.2 million, an
increase of 20% over fiscal 1993.
New Jersey. The State of New Jersey generally has a diversified
economic base consisting of, among others, commerce and service industries,
selective commercial agriculture, insurance, tourism, petroleum refining and
manufacturing, although New Jersey's manufacturing industry has experienced a
downward trend in the last few years. New Jersey is a major recipient of
Federal assistance and, of all the states, is among the highest in the amount
of Federal aid received. Therefore, a decrease in Federal financial assistance
may adversely affect the financial condition of New Jersey and its political
subdivisions and instrumentalities. While New Jersey's economic base has
become more diversified over time and thus its economy appears to be less
vulnerable during recessionary periods, a recurrence of high levels of
unemployment could adversely affect New Jersey's overall economy and the
ability of New Jersey and its political subdivisions and instrumentalities to
meet their financial obligations. In addition, New Jersey maintains a balanced
budget which restricts total appropriation increases to only 5% annually with
respect to any municipality or county, the balanced budget plan may actually
adversely affect a particular municipality's or county's ability to repay its
obligations.
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
A Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval. However, shareholders
will be notified of any such change. No assurance can be provided that a
Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). Several of the Portfolios' fundamental investment policies,
which are set forth in full in the Statement of Additional Information, are
summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and
related repurchase agreements) if more than 5% of its total
assets will be invested in the securities of any one issuer,
except that up to 25% of a Portfolio's total assets may be
invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry, except that the Money Market Portfolio will invest
at least 25% of its total assets in obligations of issuers in
the banking industry or instruments secured by such
obligations except during temporary defensive periods;
19
<PAGE> 54
(3) borrow money except for temporary purposes in amounts up to
one-third of the value of its total assets at the time of such
borrowing. Whenever borrowings exceed 5% of a Portfolio's
total assets, the Portfolio will not make any additional
investments; and
(4) in the case of each Municipal Portfolio, invest less than 80%
of its net assets in instruments the interest on which is
exempt from regular Federal income tax or, for each
State-Specific Municipal Portfolio, in AMT Paper, except
during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal
Portfolios. Instead, as a non-fundamental investment restriction, each
State-Specific Municipal Portfolio will not hold any securities (except U.S.
Government securities and related repurchase agreements) that would cause, at
the end of any tax quarter, more than 5% of its total assets to be invested in
securities of any one issuer, except that up to 50% of a Portfolio's total
assets may be invested without regard to this limitation so long as no more
than 25% of the Portfolio's total assets are invested in any one issuer (except
U.S. Government securities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio
intends, as a non-fundamental policy, to limit its investments in the
securities of any single issuer (other than U.S. Government securities and
related repurchase agreement) to not more than 5% of the value of its total
assets at the time of purchase, except that 25% of the value of its total
assets may be invested in any one issuer for a period of up to three business
days. The Money Market Portfolio will also limit its investments in Eligible
Securities that are not in the highest rating category as determined by two
NRSROs (or one NRSRO if the security is rated by only one NRSRO) or, if
unrated, are not of comparable quality, to 5% of its total assets, with
investments in any one such issuer being limited to no more than 1% of its
total assets or $1 million, whichever is greater, measured at the time of
purchase.
The investment limitations stated above are applied at the time
investment securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. Should the Fund determine that any
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the names of the trustees and certain background information.
INVESTMENT ADVISER AND SUB-ADVISER
PNC Asset Management Group, Inc. ("PAMG"), an indirect wholly-owned
subsidiary of PNC Bank Corp., serves as the investment adviser for the
Portfolios. PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1835 Market Street,
Philadelphia, Pennsylvania 19103. PNC Institutional Management Corporation
("PIMC"), a wholly-owned subsidiary of PAMG, serves as each Portfolio's
sub-adviser. PIMC's principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809. PNC Bank Corp. is a multi-bank holding company.
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<PAGE> 55
As adviser, PAMG is responsible for the overall investment management
of the Portfolios. As sub-adviser, PIMC is responsible for the day-to-day
management of the Portfolios, and generally makes all purchase and sale
investment decisions for the Portfolios. PIMC also provides research and
credit analysis. Portfolio transactions for a Portfolio may be directed
through broker/dealers who sell Fund shares, subject to the requirements of
best execution.
For their investment advisory and sub-advisory services service, PAMG
and PIMC are entitled to fees, computed daily on a Portfolio-by-Portfolio basis
and payable monthly, at the annual rates set forth below. All sub-advisory
fees payable to PIMC are paid by PAMG, and do not represent an extra charge to
the Portfolios.
<TABLE>
<CAPTION>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
------------------------------------------------------
INVESTMENT SUB-ADVISORY
ADVISORY FEE FEE
------------ -------------
<S> <C> <C>
AVERAGE DAILY NET ASSETS
- ------------------------
first $1 billion .45 % .40 %
$1 billion--$2 billion .40 .35
$2 billion--$3 billion .375 .325
greater than $3 billion .35 .30
</TABLE>
For more information about the advisory fees the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolios?"
For the fiscal year ended September 30, 1995, the Portfolios (other than the New
Jersey Municipal Money Market Portfolio) paid investment advisory fees at the
following annual rates after voluntary fee waivers: Money Market Portfolio
____; U.S. Treasury Money Market Portfolio ____; Municipal Money Market
Portfolio ____; Ohio Municipal Money Market Portfolio ____; Pennsylvania
Municipal Money Market Portfolio ____; North Carolina Municipal Money Market
Portfolio ____; and Virginia Municipal Money Market Portfolio ____. For the
fiscal year ended February 28, 1995, the Predecessor New Jersey Municipal Money
Market Portfolio paid investment advisory fees, after voluntary fee waivers, to
Midlantic Bank, N.A., its former adviser, pursuant to the advisory agreement
then in effect, at the annual rate of _____ of average daily net assets (such
fee would have been .40% of average daily net assets without voluntary fee
waivers).
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of each Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .15% of the first $500 million of each Portfolio's average
daily net assets, .13% of the next $500 million of each Portfolio's average
daily net assets, .11% of the next $1 billion of each Portfolio's average daily
net assets and .10% of each Portfolio's average daily net assets in excess of
$2 billion. From time to time the Administrators may waive some or all of
their administration fees from a Portfolio.
For information about the operating expenses the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolio?"
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<PAGE> 56
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Portfolios' custodian and PFPC serves as their
transfer agent and dividend disbursing agent.
SHAREHOLDER SERVICING
The Fund intends to enter into service agreements with institutional
investors ("Institutions") (including PNC Bank, PNC Bank Ohio and their
affiliates) which provide that the Institutions will render support services to
their customers who are the beneficial owners of Service Shares. These
services are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of up to .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
Institutions may provide one or more of the following services: processing
purchase and redemption requests from customers and placing orders with the
Fund's transfer agent or the distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of up
to a separate .15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their customers, Institutions may
provide one or more of these additional services to such customers: responding
to customer inquiries relating to the services performed by the Institution and
to customer inquiries concerning their investments in Service Shares; providing
information periodically to customers showing their positions in Service
Shares; and other similar shareholder liaison services. Customers who are
beneficial owners of Service Shares should read this Prospectus in light of the
terms and fees governing their accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in Portfolio shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities. It is
intended that the services provided by Institutions under their service
agreements will not be prohibited under these laws. However, state securities
laws may differ from the interpretations of Federal law on this issue, and
banks and financial institutions may be required to register as dealers
pursuant to state law.
HOW ARE SHARES PURCHASED AND REDEEMED?
DISTRIBUTOR
Shares of the Portfolios are offered on a continuous basis by PDI as
distributor (the "Distributor"). PDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits PDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of any portion of the fees paid
by the Fund, past profits or other sources. The Fund is not required or
permitted under the plan to make distribution payments with respect to Service
Shares over and above the
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<PAGE> 57
investment advisory and other fees it pays for non-distribution services. The
plan merely permits the reallocation of a portion of these fees to pay for
distribution related and shareholder servicing activities.
PURCHASE OF SHARES
Service Shares are offered without a sales load to Institutions acting
on behalf of their customers [, as well as to certain persons who were
shareholders of the Compass Capital Group of Funds on January __, 1996, when it
was combined with the Fund]. Service Shares will normally be held of record by
Institutions or in the names of nominees of Institutions. Share purchases are
normally effected through a customer's account at an Institution through
procedures established in connection with the requirements of the account. In
these cases, confirmations of Share purchases and redemptions will be sent to
the Institutions. Beneficial ownership of Shares will be recorded by the
Institutions and reflected in the account statements provided by such
Institutions to their customers. Investors wishing to purchase Shares should
contact their Institutions.
Service Shares are sold at the net asset value per share next
determined after an order is received by PFPC Inc. ("PFPC"), the Fund's
transfer agent. Shares may be purchased by Institutions on any Business Day.
A "Business Day" is any weekday that the New York Stock Exchange (the "NYSE")
and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders for each Portfolio except the U.S. Treasury Money
Market Portfolio may be placed by telephoning PFPC at (800) 441-7379 no later
than 12:00 noon (Eastern Time) on a Business Day. Orders received before 12:00
noon (Eastern Time) will be executed at 12:00 noon (Eastern Time). If payment
for such orders is not received by 4:00 p.m. (Eastern Time), the order will be
cancelled and notice thereof will be given to the Institution placing the
order. Orders received after 12:00 noon (Eastern Time) will not be accepted.
Purchase orders for the U.S. Treasury Money Market Portfolio may be
placed by telephoning PFPC at (800) 441-7379 no later than 4:00 p.m. (Eastern
Time) on a Business Day. [Orders received before 12:00 noon (Eastern Time)
will be executed at 12:00 noon (Eastern Time); orders received after 12:00 noon
(Eastern Time) but before 4:00 p.m. (Eastern Time) will be executed at 4:00
p.m. (Eastern Time).] If payment for such orders is not received by 4:00 p.m.
(Eastern Time), the order will be cancelled and notice thereof will be given to
the Institution placing the order. Orders will not be accepted after 4:00 p.m.
(Eastern Time). Under certain circumstances, the Fund may reject large
individual purchase orders received after 12:00 noon (Eastern Time).
Payment for Service Shares must normally be made only in Federal funds
or other funds immediately available to the Fund's custodian. Payment may
also, in the discretion of the Fund, be made in the form of securities that are
permissible investments for the respective Portfolios. For further
information, see the Statement of Additional Information. The minimum initial
investment is $[_____]; however, Institutions may set a higher minimum for
their customers. There is no minimum subsequent investment requirement.
The Fund may in its discretion waive the minimum investment amount and
may reject any order for Service Shares.
REDEMPTION OF SHARES
Customers of Institutions may redeem Service Shares in accordance with
the procedures applicable to their accounts with the Institutions. These
procedures will vary according to the type of account and the Institution
involved, and customers should consult their account managers in this regard.
It is the
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<PAGE> 58
responsibility of Institutions to transmit redemption orders to PFPC and credit
their customers' accounts with the redemption proceeds on a timely basis. In
the case of shareholders holding share certificates, the certificates must
accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800)
441-7379. Shares are redeemed at their net asset value per share next
determined after PFPC's receipt of the redemption order. The Fund, the
Administrators and the Distributor will not be liable for any loss, liability,
cost or expense for acting upon telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions
are genuine, the Fund may use such procedures as are considered reasonable,
including recording those instructions and requesting information as to account
registration (such as the name in which an account is registered, the account
number, recent transactions in the account, and the account holder's Social
Security number, address and/or bank). While the Fund intends to use its best
efforts to maintain each Portfolio's net asset value per share at $1.00, the
proceeds paid upon redemption may be more or less than the amount invested
depending upon the net asset value of a Service Share at the time of
redemption.
Payment for redeemed Shares for which a redemption order is received
by PFPC before 12:00 noon (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the same Business Day,
[provided that the Fund's custodian is also open for business]. Payment for
redemption orders received between 12:00 noon (Eastern Time) and 4:00 p.m.
(Eastern Time) [or on a day when the Fund's custodian is closed] is normally
wired in Federal funds on the next Business Day following redemption [on which
the Fund's custodian is open for business]. The Fund reserves the right to
wire redemption proceeds within seven days after receiving a redemption order
if, in the judgment of the investment adviser, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is
imposed by the Fund, although Institutions may charge customer accounts for
redemption services. Information relating to such redemption services and
charges, if any, should be obtained by customers from their Institution.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [400 Bellevue Parkway, Wilmington, DE 19809].
The Fund may redeem Service Shares in any Portfolio account if the
account balance drops below [$5,000] as the result of a redemption request and
the shareholder does not increase the balance to at least [$5,000] upon thirty
days' written notice. If a customer has agreed with an Institution to maintain
a minimum balance in his account with the Institution, and the balance in the
account falls below that minimum, the customer may be obligated to redeem all
or part of his or her Shares in the Portfolios to the extent necessary to
maintain the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
Persons who were shareholders of the Compass Capital Group of Funds
which were combined with the Fund on January __, 1996, may also purchase and
redeem
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<PAGE> 59
Service Shares of the same Portfolio and for the same account in which they
held Shares on that date through the procedures described in this section.
PURCHASES. Purchase orders may be placed through the transfer agent.
The minimum investment is $100. Purchases through the Automatic Investment
Plan described below are subject to a lower purchase minimum. The name of the
Portfolio for which Shares are purchased must appear on the check or [Federal
Reserve Draft.] Investors may also wire Federal funds in connection with the
purchase of Shares. The wire instructions must include the name of the
Portfolio, the name of the account registration, and the shareholder account
number. Before wiring any funds, however, an investor must call the Portfolios
at 1-800-438-5789 in order to confirm the wire instructions. Purchase orders
for each Portfolio except the U.S. Treasury Money Market Portfolio that are
received by the transfer agent before 12:00 noon (Eastern Time) will be
executed at 12:00 noon provided that payment is received by 4:00 p.m. (Eastern
Time), otherwise the order will be cancelled. Orders received after 12:00 noon
will not be accepted. Purchase orders for the U.S. Treasury Money Market Fund
that are received by the transfer agent before 12:00 noon will be executed at
12:00 noon; purchase orders that are received by the Transfer Agent after 12:00
noon but before 4:00 p.m., will be executed at 4:00 p.m., provided in each case
that payment is received by 4:00 p.m. Orders received after 4:00 p.m. will not
be accepted.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an
investor in Shares of a Portfolio may arrange for periodic investments in that
Portfolio through automatic deductions from a checking or savings account by
completing the AIP Application Form. The minimum pre-authorized investment
amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their
Shares of the Portfolios at any time by sending a written redemption request in
proper form to Compass Capital Funds c/o PFPC, Inc., P.O. Box 8907, Wilmington,
Delaware 19899-8907.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Shareholders holding share
certificates must send their certificates with the redemption request.
Additional documentary evidence of authority is required by PFPC in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above. This privilege may not be used to redeem Shares in certificated form.
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<PAGE> 60
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [P.O. Box 8907, Wilmington, DE 19899-8907].
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described above to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably believed to be genuine.
The Portfolios offer a Systematic Withdrawal Plan ("SWP") which may be
used by shareholders who wish to receive regular distributions from their
accounts. Upon commencement of the SWP, the account must have a current value
of $10,000 or more in a Portfolio. Shareholders may elect to receive automatic
cash payments of $100 or more either monthly, every other month, quarterly,
three times a year, semi-annually, or annually. Automatic withdrawals are
normally processed on the 25th day of the applicable month or, if such day is
not a Business Day, on the next Business Day and are paid promptly thereafter.
An investor may utilize the SWP by completing the SWP Application Form.
Shareholders should realize that if withdrawals exceed income
dividends their invested principal in the account will be depleted. Thus,
depending upon the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, their original investment could
be exhausted entirely. To participate in the SWP, shareholders must have their
dividends automatically reinvested and may not hold share certificates.
Shareholders may change or cancel the SWP at any time, upon written notice to
the transfer agent.
HOW IS NET ASSET VALUE CALCULATED?
The net asset value of the Portfolios' Service Shares is determined as
of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on each Business Day.
A Service Share's net asset value is calculated by dividing the value of all
securities and other assets owned by a Portfolio that are allocated to its
Service Shares, less the liabilities charged to the Service Shares, by the
number of the Portfolio's outstanding Service Shares.
Each Portfolio seeks to maintain a net asset value of $1.00 per share
for purposes of purchases and redemptions, and values its portfolio securities
based on the amortized cost method of valuation described in the Statement of
Additional Information under "Valuation of Shares." A Portfolio may use a
pricing service, bank or broker/dealer to value its securities.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Shareholders are entitled to dividends and distributions arising from
the net income and capital gains, if any, earned on investments held by the
Portfolio in which they invest. Each Portfolio's net income is declared daily
as a dividend (i) to shareholders of record immediately prior to the
determination of net asset value made as of the close of regular trading hours
on the NYSE on days on which net asset value is determined, or (ii) to
shareholders of record immediately prior to 4:00 p.m. (Eastern Time) on days on
which there is no determination of net asset value. Consequently, shareholders
whose purchase orders are executed at 12:00 noon (Eastern Time) receive
dividends for that day.
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<PAGE> 61
On the other hand, shareholders whose redemption orders have been received by
12:00 noon (Eastern Time) do not receive dividends for that day, while
shareholders of each Portfolio whose redemption orders are received after 12:00
noon (Eastern Time) do receive dividends for that day. Because purchase and
redemption orders for the U.S. Treasury Money Market Portfolio are executed at
12:00 noon and at 4:00 p.m., shareholders whose purchase orders have been
received by 4:00 p.m. will receive a dividend for that day.
Dividends are paid monthly by check, or by wire transfer if requested
in writing by the shareholder, within five business days after the end of the
month. Net short-term capital gains, if any, will be distributed at least
annually. The period for which dividends are payable and the time for payment
are subject to change by the Fund's Board of Trustees. The Portfolios do not
expect to realize net long-term capital gains.
Dividends are reinvested in additional full and fractional Service
Shares of the same Portfolio which pays the dividends, unless a shareholder
elects to receive dividends in cash. Such election, or any revocation thereof,
must be made in writing to PFPC, and will become effective with respect to
dividends paid after receipt by PFPC.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If a Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that are "exempt interest
dividends" or are treated as a return of capital), whether the distributions
are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain regardless of the length of
time a shareholder holds Service Shares. All other distributions, to the
extent they are taxable, are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns for informational purposes and in two circumstances such amounts, while
exempt from regular Federal income tax, are taxable to persons subject to
alternative minimum and environmental taxes. First, "exempt interest
dividends" derived from certain private activity bonds generally will
constitute an item of tax preference for taxpayers in determining alternative
minimum tax liability. Second, all "exempt interest dividends" must be taken
into account by corporate taxpayers in determining certain adjustments for
alternative minimum and environmental tax purposes. In addition, investors
should be aware of the possibility of state and local alternative minimum or
minimum income tax liability on interest from private activity bonds.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.
Each Municipal Portfolio will determine annually the percentages of
its net investment income which are exempt from the regular Federal income tax,
which constitute an item of tax preference for purposes of the Federal
alternative minimum tax, and which are fully taxable. These percentages will
apply uniformly to all distributions from net investment income during that
year, and may differ significantly from the actual percentages for any
particular day.
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<PAGE> 62
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record as
of a specified date in those months will be deemed to have been received by the
shareholders on December 31, if the dividends are paid during the following
January.
Since this is not an exhaustive discussion of applicable tax
consequences, investors may wish to contact their tax advisers concerning
investments in the Portfolios. Except as discussed below, dividends paid by
each Portfolio may be taxable to investors under state or local law as dividend
income even though all or a portion of such dividends may be derived from
interest on obligations which, if realized directly, would be exempt from such
income taxes. In addition, shareholders who are nonresident alien individuals,
foreign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or
administrative changes or court decisions may materially affect the tax
consequences of investing in the Portfolios.
OHIO TAXES. Individuals and estates that are subject to Ohio personal
income tax or municipal or school district income taxes in Ohio will not be
subject to such taxes on distributions from the Ohio Municipal Money Market
Portfolio to the extent that such distributions consist of interest on Ohio
State-Specific Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their
subdivisions. Corporations that are subject to the Ohio corporation franchise
tax will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions
either constitute exempt-interest dividends or consist of interest on Ohio
Municipal Obligations or U.S. Obligations. However, shares of the Ohio
Municipal Money Market Portfolio will be included in a corporation's net worth
base for purposes of calculating the Ohio corporation franchise tax.
Distributions consisting of gain on the sale, exchange or other disposition of
Ohio Municipal Obligations will not be subject to the Ohio personal income tax,
or municipal or school district income taxes in Ohio and will not be included
in the net income base of the Ohio corporation franchise tax. Distributions
attributable to other sources will be subject to the Ohio personal income tax
and the Ohio corporation franchise tax.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to
interest realized by the Pennsylvania Municipal Money Market Portfolio from
Pennsylvania State-Specific Obligations or attributable to insurance proceeds
on account of such interest is not taxable to individuals, estates or trusts
under the Personal Income Tax (in the case of insurance proceeds, to the extent
they are exempt for Federal income tax purposes); to corporations under the
Corporate Net Income Tax (in the case of insurance proceeds, to the extent they
are exempt for Federal income tax purposes); nor to individuals under the
Philadelphia School District New Income Tax ("School District Tax"). Income
received by a shareholder attributable to gain on the sale or other disposition
by the Portfolio of Pennsylvania State-Specific Obligations is taxable under
the Personal Income Tax, the Corporate Net Income Tax, and, unless these assets
were held by the Portfolio for more than six months, the School District Tax.
This discussion does not address the extent, if any, to which shares
of the Pennsylvania Municipal Money Market Portfolio, and interest and gain
earned by the Portfolio, is subject to, or included in the measure of, special
taxes
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<PAGE> 63
imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed herein (including the Corporate
Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are
not subject to any of the personal property taxes currently in effect in
Pennsylvania to the extent that the Portfolio is comprised of Pennsylvania
State- Specific Obligations. The taxes referred to include the County Personal
Property Tax.
NORTH CAROLINA TAXES. Interest received in the form of dividends from
the North Carolina Municipal Money Market Portfolio is exempt from North
Carolina state income tax to the extent the distributions represent interest on
direct obligations of the U.S. Government or North Carolina State-Specific
Obligations. Distributions derived from interest earned on obligations of
political subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands,
including the governments thereof and their agencies, instrumentalities and
authorities, are also exempt from North Carolina state income tax.
Distributions paid out of interest earned on obligations that are merely backed
or guaranteed by the U.S. Government (e.g., GNMAs, FNMAs), on repurchase
agreements collateralized by U.S. Government securities or on obligations of
other states (which the Portfolio may acquire and hold for temporary or
defensive purposes) are not exempt from North Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina
Municipal Money Market Portfolio on the sale or exchange of certain obligations
of the State of North Carolina or its subdivisions that were issued before July
1, 1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
VIRGINIA TAXES. Subject to the provisions discussed below, dividends
paid to shareholders by the Virginia Municipal Money Market Portfolio and
derived from interest on obligations of the Commonwealth of Virginia or of any
political subdivision or instrumentality of the Commonwealth or derived from
interest or dividends on obligations of the United States excludable from
Virginia taxable income under the laws of the United States, which obligations
are issued in the exercise of the borrowing power of the Commonwealth or the
United States and are backed by the full faith and credit of the Commonwealth
or the United States, will be exempt from the Virginia income tax. Dividends
paid to shareholders by the Portfolio and derived from interest on debt
obligations of certain territories and possessions of the United States (those
issued by Puerto Rico, the Virgin Islands and Guam) will be exempt from the
Virginia income tax. To the extent a portion of the dividends are derived from
interest on debt obligations other than those described above, such portion
will be subject to the Virginia income tax even though it may be excludable
from gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and
derived from capital gains will be taxable to the shareholders. To the extent
any portion of the dividends are derived from taxable interest for Virginia
purposes or from net short-term capital gains, such portion will be taxable to
the shareholders as ordinary income. The character of long-term capital gains
realized and distributed by the Portfolio will flow through to its shareholders
regardless of how long the shareholders have held their shares. Capital gains
distributed to shareholders derived from Virginia obligations issued pursuant
to special Virginia enabling legislation which provides a specific exemption
for such gains will be exempt from Virginia income tax. Generally, interest on
indebtedness incurred by shareholders to purchase or carry shares of the
Portfolio will not be deductible for Virginia income tax purposes.
29
<PAGE> 64
As a regulated investment company, the Portfolio may distribute
dividends that are exempt from the Virginia income tax to its shareholders if
the Portfolio satisfies all requirements for conduit treatment under Federal
law and, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets consists of obligations the interest on which is
exempt from taxation under Federal law. If the Portfolio fails to qualify, no
part of its dividends will be exempt from the Virginia income tax.
When taxable income of a regulated investment company is commingled
with exempt income, all distributions of the income are presumed taxable to the
shareholders unless the portion of income that is exempt from Virginia income
tax can be determined with reasonable certainty and substantiated. Generally,
this determination must be made for each distribution to each shareholder. The
Virginia Department of Taxation has adopted a policy, however, of allowing
shareholders to exclude from their Virginia taxable income the exempt portion
of distributions from a regulated investment company even though the
shareholders receive distributions monthly but receive reports substantiating
the exempt portion of such distributions at less frequent intervals.
Accordingly, if the Portfolio receives taxable income, the Portfolio must
determine the portion of income that is exempt from Virginia income tax and
provide such information to the shareholders in accordance with the foregoing
so that the shareholders may exclude from Virginia taxable income the exempt
portion of the distribution from the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends
paid by the New Jersey Municipal Money Market Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New
Jersey law as currently in effect, distributions paid by a "qualified
investment fund" will not be subject to the New Jersey personal income tax to
the extent that the distributions are attributable to income received as
interest or gain from New Jersey State-Specific Obligations, or as interest or
gain from direct U.S. Government obligations. Distributions by a qualified
investment fund that are attributable to most other sources will be subject to
the New Jersey personal income tax. If the New Jersey Municipal Money Market
Portfolio qualifies as a qualified investment fund under New Jersey law, any
gain on the redemption or sale of the Portfolio's shares will not be subject to
the New Jersey personal income tax. To be classified as a qualified investment
fund, at least 80% of the Portfolio's investments must consist of New Jersey
State-Specific Obligations or direct U.S. Government obligations; it must have
no investments other than interest-bearing obligations, obligations issued at a
discount, and cash and cash items (including receivables); and it must satisfy
certain reporting obligations and provide certain information to its
shareholders. Shares of the Portfolio are not subject to property taxation by
New Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Fund. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to such authority, the Trustees have authorized
the issuance of an unlimited number of shares in twenty-eight investment
portfolios. Each
30
<PAGE> 65
Portfolio offers [five] separate classes of shares -- Institutional Shares,
Service Shares, Series A Investor Shares, Series B Investor Shares and Series C
Investor Shares. This prospectus relates only to Service Shares of the eight
money market funds described herein.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. In addition, Series A Investor
Shares are sold with a front-end sales charge, and Series B Investor Shares and
Series C Investor Shares are sold with a contingent deferred sales charge, in
each case subject to certain exceptions. Because of these "class expenses,"
the performance of a Portfolio's Institutional Shares is expected to be higher
than the performance of the Portfolio's Service Shares, and the performance of
both the Institutional Shares and Service Shares of a Portfolio is expected to
be higher than the performance of the Portfolio's three classes of Investor
Shares. The Fund offers various services and privileges in connection with its
Investor Shares that are not generally offered in connection with its Service
Shares, including an automatic investment plan, automatic withdrawal plan and
checkwriting. For further information regarding the Fund's Institutional and
Investor Share classes, contact [name and number].
Each share of a Portfolio has a par value of $.001, represents an
equal proportionate interest in that Portfolio and is entitled to the dividends
and distributions earned on that Portfolio's assets as are declared in the
discretion of the Board of Trustees. The Fund's shareholders are entitled to
one vote for each full share held and proportionate fractional votes for
fractional shares held, and will vote in the aggregate and not by class, except
where otherwise required by law or as determined by the Board of Trustees. The
Fund does not currently intend to hold annual meetings of shareholders for the
election of trustees (except as required under the 1940 Act). For a further
discussion of the voting rights of shareholders, see "Additional Information
Concerning Shares" in the Statement of Additional Information.
On January ___, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp.
HOW IS PERFORMANCE CALCULATED?
From time to time each Portfolio may advertise its "yield" and
"effective yield" for Service Shares. Both yield figures are based on
historical earnings and are not intended to indicate future performance.
"Yield" refers to the income generated by an investment in a Portfolio's
Service Shares over a seven-day period. This income is then "annualized." That
is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. "Effective yield" is calculated similarly but,
when annualized, the income earned by an investment in a Portfolio's Service
Shares is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. A Municipal Portfolio's "tax-equivalent yield" may also be
quoted, which shows the level of taxable yield needed to produce an after-tax
equivalent to the Portfolio's tax-free yield for Service Shares.
The performance of Service Shares of a Portfolio may be compared to
the performance of mutual funds with similar investment objectives and to
relevant indexes, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the yield of Service Shares of a
Portfolio may be compared to data prepared by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. and Weisenberger Investment Company Service.
Performance
31
<PAGE> 66
information may also include evaluations of the Portfolios published by
nationally recognized ranking services, and information as reported by
financial publications such as Business Week, Fortune, Institutional Investor,
Money Magazine, Forbes, Barron's, The Wall Street Journal and The New York
Times, or in publications of a local or regional nature, may also be used in
comparing the performance of Service Shares of a Portfolio.
Performance quotations for Shares of a Portfolio represent past
performance and should not be considered as representative of future results.
The yield of any investment is generally a function of portfolio quality and
maturity, type of investment and operating expenses. Yields will fluctuate and
are not necessarily representative of future results. Any fees charged by
affiliates of the Portfolio's investment adviser or other institutions directly
to their customer accounts in connection with investments in the Portfolios
will not be included in the Portfolios' performance calculations.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to
information regarding their investment 24 hours a day, 7 days a week. The
COMPASS CAPITAL FUNDS have an investor information line that can provide such
access.
In addition to account information, COMPASS CAPITAL FUNDS have other
sources of information regarding each Fund and its portfolio holdings, strategy
and current dividend and yield levels.
By selecting the appropriate source of information as listed below,
investors can receive additional information on the COMPASS CAPITAL FUNDS by
either using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) compass
For Information Related to Share Purchase and Redemptions call your
investment adviser or Compass Capital Funds at (800) xxx-xxxx.
For Questions about Shareholder Accounts and Balances held directly at
the Fund, call (800) xxx-xxxx.
Information is also available on the World Wide Web through the
Internet.
Shareholders and investment professionals may access portfolio
information, portfolio manager updates and market data by accessing
COMPASSFUNDS.COM.
32
<PAGE> 67
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
33
<PAGE> 68
THE MONEY
MARKET
PORTFOLIOS
SERVICE SHARES
Prospectus
MONEY MARKET PORTFOLIO
U.S. TREASURY
MONEY MARKET PORTFOLIO
MUNICIPAL
MONEY MARKET PORTFOLIO
NEW JERSEY
MUNICIPAL MONEY MARKET PORTFOLIO
NORTH CAROLINA MUNICIPAL
MONEY MARKET PORTFOLIO
OHIO MUNICIPAL
MONEY MARKET PORTFOLIO
PENNSYLVANIA MUNICIPAL
MONEY MARKET PORTFOLIO
VIRGINIA MUNICIPAL
MONEY MARKET PORTFOLIO
January __, 1996
34
<PAGE> 69
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(INVESTOR A AND INVESTOR B SHARES OF THE MONEY MARKET
PORTFOLIO, U.S. TREASURY MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO,
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO, OHIO MUNICIPAL
MONEY MARKET PORTFOLIO, PENNSYLVANIA MUNICIPAL MONEY MARKET
PORTFOLIO, AND VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 70
THE MONEY MARKET PORTFOLIOS
INVESTOR
The Compass Capital Funds(R) (the "Fund") consist of [twenty-eight]
investment portfolios. This Prospectus describes the Investor Shares of eight
of those portfolios (the "Portfolios"):
- MONEY MARKET PORTFOLIO -
- U.S. TREASURY MONEY MARKET PORTFOLIO -
- MUNICIPAL MONEY MARKET PORTFOLIO -
- NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO -
- NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO -
- OHIO MUNICIPAL MONEY MARKET PORTFOLIO -
- PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO -
- VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO -
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January __, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained upon request free of charge from the Fund by
calling (800) ________. The Statement of Additional Information, as
supplemented from time to time, is incorporated by reference into this
Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. THERE
CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL
PORTFOLIOS LISTED ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE
STATES INDICATED.
PROSPECTUS January __, 1996
<PAGE> 71
INTRODUCING THE COMPASS CAPITAL MONEY MARKET FUNDS:
The Money Market Portfolios of the COMPASS CAPITAL FUNDS consist of nine short
term investment alternatives. Two of these portfolios invest solely in
taxable instruments, and seven of these portfolios invest in tax-exempt
instruments. A detailed description of each portfolio appears on pages ___.
COMPASS CAPITAL FUND LIPPER PEER GROUP
-------------------- -----------------
Money Market Money Market Instrument
U.S. Treasury Money Market U.S. Treasury Money Market
Tax Free Money Market Tax Exempt Money Market
NJ Money Market Single State Tax Exempt Money Market
NC Money Market Single State Tax Exempt Money Market
PA Money Market Single State Tax Exempt Money Market
OH Money Market Single State Tax Exempt Money Market
VA Money Market Single State Tax Exempt Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's investment
adviser. PNC Institutional Management Corporation ("PIMC") serves as the
sub-adviser to the Portfolios as described in this prospectus.
UNDERSTANDING THE COMPASS CAPITAL MONEY MARKET FUNDS
This prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in money
market investing.
CONSIDERING THE RISKS IN MONEY MARKET INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective, or that any Portfolio will be able to maintain a stable
net asset value of $1.00 per share. Certain Portfolios may invest in U.S.
dollar-denominated instruments of foreign issuers or municipal securities
backed by the credit of foreign banks, which may be subject to certain risks in
addition to those inherent in U.S. investments. Each state-specific municipal
Portfolio will concentrate in the securities of issues located in a particular
state, and is non-diversified, which means that its performance may be
dependent upon the performance of a smaller number of securities than the other
Portfolios, which are considered diversified. See "What Additional Investment
Policies Apply?"
ASKING THE KEY QUESTIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Investment Limitations? . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Purchased? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
2
<PAGE> 72
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be incurred by
the Portfolios' Investor Shares for the current fiscal year ending September
30, 1996 as a percentage of average daily net assets. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
U.S. TREASURY MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------- -------------------------------- --------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Advisory fees(1) .06% .06% .06% .06%
12b-1 fees(2) .10 .75 .10 .10
Other operating
expenses .69 .54 .69 .69
--- ---- --- ---
Administration
fees(1) .13 .13 .12 .11
Shareholder
Servicing fees .40 .40 .40 .40
Other
expenses(1) .17 .17 .17 .17
--- ---- --- ---
Total Portfolio
operating
expenses(1) .85% 1.35% .85% .85%
=== ==== === ===
</TABLE>
(1) Without waivers, advisory fees would be .44%, .44%, .44%, .45%, .45%,
.45%, .45%, .45% and .45% and administration fees would be .14%, .14%,
.14%, .15%, .15%, .15%, .15%, .15%, and .15%, respectively. PAMG and
the Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers for the fiscal year ended September 30, 1995, as restated
to reflect current expenses and fee waivers. Without waivers, total
operating expenses would be: (i) 1.24%, 1.28% and 1.38%,
respectively, for Investor A Shares; (ii) 1.74%, ____% and ____%,
respectively, for Investor B Shares; and (iii) ___%, ___% and___%,
respectively, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
3
<PAGE> 73
<TABLE>
<CAPTION>
NEW JERSEY NORTH CAROLINA OHIO
MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- -------------------------------- --------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
Advisory
Fees(1) .05% .06% .06%
12b-1 fees(2) .10 .10 .10
Other operating
expenses .70 .69 .69
--- --- ----
Administration
fees(1) .02 .05 .10
Shareholder
Servicing fees .40 .40 .40
Other
expenses(1) .17 .17 .17
--- --- ----
Total Portfolio
operating
expenses(1) .85% .85% 1.85%
=== === ====
</TABLE>
(1) Without waivers, advisory fees would be .45%, .45%, .45%, .45%, .45%,
.45%, .45%, .45% and .45% and administration fees would be .15%, .15%,
.15%, .15%, .15%, .15%, .15%, .15% and .15%, respectively. PAMG and
the Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers for the fiscal year ended September 30, 1995, as restated
to reflect current expenses and fee waivers. Without waivers, total
operating expenses would be: (i) 1.38%, 1.34%, and 1.29%,
respectively, for Investor A Shares; (ii) ____%, ____%, and ____%,
respectively, for Investor B Shares; and (iii) ___%, ___% and ___%,
respectively, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
4
<PAGE> 74
<TABLE>
<CAPTION>
PENNSYLVANIA
MUNICIPAL VIRGINIA MUNICIPAL
MONEY MARKET EQUITY MONEY MARKET
PORTFOLIO PORTFOLIO
--------------------------------- --------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C>
Advisory Fees(1) .06% 0.5%
12b-1 fees(2) .10 .10
Other operating expenses .69 .70
---- ---
Administration fees(1) .12 .02
Shareholder
Servicing fees .40 .40
Other expenses(1) .17 .17
---- ---
Total Portfolio operating
expenses(1) 1.85% .85%
==== ===
</TABLE>
(1) Without waivers, advisory fees would be .45%,, 45%, .45%, .45%, .45% and
.45% and administration fees would be .15%, .15%, .15%, .15%, .15% and
.15%, respectively. PAMG and the Portfolios' Administrators are under no
obligation to waive or continue waiving their fees, but have informed the
Fund that they expect to waive fees as necessary to maintain the
Portfolios' total operating expenses during the current fiscal year at the
levels set forth in the table. The information in the table is based on
the advisory fees, administration fees and other expenses payable after
fee waivers for the fiscal year ended September 30, 1995, as restated to
reflect current expenses and fee waivers. Without waivers, total
operating expenses would be: (i) 1.27% and 1.38%, respectively, for
Investor A Shares; (ii) ____% and ____%, respectively, for Investor B
Shares, and (iii) ___% and ___%, respectively, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the National
Association of Securities Dealers, Inc. ("NASD").
5
<PAGE> 75
EXAMPLE
An investor in Investor Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Money Market
A Shares $ 9 $27 $ 47 $105
B Shares (Redemption)* **
B Shares (No Redemption) 14 43 74 136**
C Shares*
U.S. Treasury Money Market
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
Municipal Money Market
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
New Jersey Municipal Money Market
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
North Carolina Municipal Money Market
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
Ohio Municipal Money Market
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
Pennsylvania Municipal Money Market
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
Virginia Municipal Money Portfolio
A Shares 9 27 47 105
B Shares (Redemption)* **
B Shares (No Redemption) **
C Shares*
</TABLE>
* These expense figures do not reflect the imposition of the deferred
sales charge which may be deducted upon the redemption of Investor B
or Investor C Shares a Portfolio received in an exchange transaction
for Investor B or Investor C Shares of a non-money market investment
portfolio of the Fund. See "What Are the Shareholder Features of the
Fund? -- Exchange Privilege."
** Based on the conversion of the Investor B Shares to Investor A Shares
after [six] years.
The foregoing Table and Example are intended to assist investors in
understanding the Portfolios' shareholder transaction and estimated operating
6
<PAGE> 76
tables do not reflect any charges that may be imposed by affiliates of the
Portfolios' investment adviser on their customer accounts in connection with
investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference into the Statement of Additional
Information and has been audited by [_______________________], the Fund's
independent accountants. This financial information should be read together
with those financial statements. For the periods shown, the New Jersey
Municipal Money Market Portfolio offered only one class of shares to both
institutional and retail investors. Further information about the performance
of the Portfolios is available in the annual report to shareholders. Both the
Statement of Additional Information and the annual report to shareholders may
be obtained from the Fund free of charge by calling the number on the front
cover of this Prospectus.
7
<PAGE> 77
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
----------------- ------------
FOR THE
FOR THE PERIOD
PERIOD (1)
YEAR YEAR 1/13/93(1) --------
ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment
operations
Net investment income 0.0308 0.0188
Net realized gain (loss)
on investments -- --
------- ------- ------- -------
Total from investment
operations 0.0308 0.0188
------- ------- ------- -------
Less distributions
Distributions from net
investment income (0.0308) (0.0188)
Distributions from net
realized capital gains -- --
------- ------- ------- -------
Total distributions (0.0308) (0.0188)
------- ------- ------- -------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return % 3.12% 1.89% %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 4,342 $ 49 $
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.75% 0.67%(2) %(2)
Before advisory/administration
fee waivers % 1.16% 0.78%(2) %(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 3.39% 2.62%(2) %(2)
Before advisory/administration
fee waivers % 2.98% 2.51%(2) %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
8
<PAGE> 78
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
-----------------
FOR THE
PERIOD
YEAR YEAR 11/2/92(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Income from investment
operations
Net investment income 0.0193 0.0181
Net realized gain (loss)
on investments -- --
------- ------- -------
Total from investment
operations 0.0193 0.0181
------- ------- -------
Less distributions
Distributions from net
investment income (0.0193) (0.0181)
Distributions from net
realized capital gains -- --
------- ------- -------
Total distributions (0.0193) (0.0181)
------- ------- -------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total return % 1.95 % 1.83 %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 41 $ 15
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.75 % 0.72 %(2)
Before advisory/administration
fee waivers % 1.23 % 0.83 %(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 2.05 % 2.23 %(2)
Before advisory/administration
fee waivers % 1.58 % 2.12 %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
9
<PAGE> 79
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
-----------------
FOR THE
PERIOD
YEAR YEAR 1/14/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Income from investment
operations
Net investment income 0.0309 0.0183
Net realized gain (loss)
on investments -- --
------- ------- -------
Total from investment
operations 0.0309 0.0183
------- ------- -------
Less distributions
Distributions from net
investment income (0.0309) (0.0183)
Distributions from net
realized capital gains -- --
------- ------- -------
Total distributions (0.0309) (0.0183)
------- ------- -------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total return % 3.11 % 1.85 %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 1,656 $ 50
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.75 % 0.65 %(2)
Before advisory/administration
fee waivers % 1.20 % 0.78 %(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 3.60 % 2.57 %(2)
Before advisory/administration
fee waivers % 3.14 % 2.44 %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
10
<PAGE> 80
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
-----------------
FOR THE
PERIOD
YEAR 10/5/93(1)
ENDED THROUGH
9/30/95 9/30/94
------- -------
<S> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00
------- -------
Income from investment
operations
Net investment income 0.0199
Net realized gain (loss)
on investments --
------- -------
Total from investment
operations 0.0199
------- -------
Less distributions
Distributions from net
investment income (0.0199)
Distributions from net
realized capital gains --
------- -------
Total distributions (0.0199)
------- -------
Net asset value at end
of period $ 1.00 $ 1.00
======= =======
Total return % 2.01 %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 28
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.62 %(2)
Before advisory/administration
fee waivers % 1.26 %(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 1.94 %(2)
Before advisory/administration
fee waivers % 1.30 %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
11
<PAGE> 81
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR 12/28/93(1)
ENDED THROUGH
9/30/95 9/30/94
------- -------
<S> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00
------- -------
Income from investment
operations
Net investment income 0.0153
Net realized gain (loss)
on investments --
------- -------
Total from investment
operations 0.0153
------- -------
Less distributions
Distributions from net
investment income (0.0153)
Distributions from net
realized capital gains --
------- -------
Total distributions (0.0153)
------- -------
Net asset value at end
of period $ 1.00 $ 1.00
======= =======
Total return % 1.58 %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $ 139
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.65 %(2)
Before advisory/administration
fee waivers % 1.22 %(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 2.11 %(2)
Before advisory/administration
fee waivers % 1.54 %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
12
<PAGE> 82
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA VIRGINIA
MUNICIPAL MONEY MARKET MUNICIPAL MONEY MARKET
PORTFOLIO PORTFOLIO
---------------------- ----------------------
INVESTOR A SHARES INVESTOR A SHARES
----------------- -----------------
FOR THE
FOR THE PERIOD
PERIOD (1)
2/14/95(1) --------
THROUGH THROUGH
9/30/95 9/30/95
------- -------
<S> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00
------- -------
Income from investment
operations
Net investment income
Net realized gain (loss)
on investments
------- -------
Total from investment
operations
------- -------
Less distributions
Distributions from net
investment income
Distributions from net
realized capital gains
------- -------
Total distributions
------- -------
Net asset value at end
of period $ 1.00 $ 1.00
======= =======
Total return % %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ $
Ratios of expenses to average
net assets
After advisory/administration
fee waivers %(2) %(2)
Before advisory/administration
fee waivers %(2) %(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers %(2) %(2)
Before advisory/administration
fee waivers %(2) %(2)
</TABLE>
(1) Commencement of operations.
(2) Annualized.
13
<PAGE> 83
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
--------------------------------------------
Period
Ended Fiscal Year Fiscal Year
August 31, 1995 Ended Ended
(unaudited) February 28, 1995 February 28, 1994
--------------- ----------------- -----------------
<S> <C> <C>
Net asset value at beginning of period $ 1.00 $ 1.00
-------- --------
Income from investment operations
Net investment income 0.02 0.02
Net realized gain (loss) on investments -- --
-------- --------
Total from investment operations 0.02 0.02
-------- --------
Less distributions
Distributions from net investment income (0.02) (0.02)
Distributions from net realized capital gains -- --
-------- --------
Total distributions (0.02) (0.02)
-------- --------
Net asset value at end of period $ 1.00 $ 1.00
======== ========
Total return 2.46% 1.79%
Ratios/Supplemental data
Net assets at end of period (in thousands) $ 43,610 $ 39,408
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.63% 0.65%
Before advisory/administration fee waivers 0.70% 0.72%
Ratios of net investment income to
average net assets
After advisory/administration fee waivers 2.46% 1.77%
Before advisory/administration fee waivers 2.39% 1.70%
For the Period
Fiscal Year July 1, 1991(1)
Ended to
February 28, 1993 February 28, 1992
----------------- -----------------
<S> <C> <C>
Net asset value at beginning of period $ 1.00 $ 1.00
-------- --------
Income from investment operations
Net investment income 0.02 0.02
Net realized gain (loss) on investments -- --
-------- --------
Total from investment operations 0.02 0.02
-------- --------
Less distributions
Distributions from net investment income (0.02) (0.02)
Distributions from net realized capital gains -- --
-------- --------
Total distributions (0.02) (0.02)
-------- --------
Net asset value at end of period $ 1.00 $ 1.00
======== ========
Total return 2.19% 3.53%(2)
Ratios/Supplemental data
Net assets at end of period (in thousands) $ 38,836 $ 35,005
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.73% 0.47%(2)
Before advisory/administration fee waivers 0.76% 0.62%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee waivers 2.17% 3.44%(2)
Before advisory/administration fee waivers 2.14% 3.29%(2)
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor Portfolio") of The Compass Capital Group, which was
organized as a Massachusetts business trust. On January __, 1996, the
assets and liabilities of the Predecessor Portfolio were transferred
to the Portfolio, which had no prior operating history.
(1) Commencement of operations.
(2) Annualized.
14
<PAGE> 84
WHAT ARE THE PORTFOLIOS?
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide
as high a level of current interest income as is consistent with maintaining
liquidity and stability of principal. The Portfolio may invest in a broad
range of short-term, high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are available in the
money markets. In particular, the Portfolio may invest in:
(A) U.S. dollar-denominated obligations issued or supported by the
credit of U.S. or foreign banks or savings institutions with
total assets in excess of $1 billion (including obligations of
foreign branches of such banks);
(B) high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers
rated (at the time of purchase) A-2 or higher by Standard &
Poor's Ratings Group ("S&P"), Prime-2 or higher by Moody's
Investors Service, Inc. ("Moody's"), Duff 2 or higher by Duff
& Phelps Credit Co. ("Duff"), F-2 or higher by Fitch Investors
Service, Inc. ("Fitch") or TBW-2 or higher by Thomson
BankWatch, Inc. ("TBW"), as well as high quality corporate
bonds rated (at the time of purchase) AA or higher by S&P,
D&P, Fitch or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's
sub-adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations and
credit card receivables);
(E) securities issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentalities
and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by foreign
governments or their political subdivisions, agencies or
instrumentalities;
(G) guaranteed investment contracts issued by highly-rated U.S.
insurance companies;
(H) securities issued or guaranteed by state or local governmental
bodies; and
(I) repurchase agreements relating to the above instruments.
U.S. TREASURY MONEY MARKET PORTFOLIO
The investment objective of the U.S. Treasury Money Market Portfolio
is to provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It pursues this objective by
investing exclusively in short-term U.S. Treasury bills, notes and other
obligations issued or guaranteed by the U.S. Treasury and repurchase agreements
relating to such obligations.
15
<PAGE> 85
MUNICIPAL PORTFOLIOS
The investment objective of the Municipal Money Market Portfolio is to
provide as high a level of current interest income exempt from Federal income
taxes as is consistent with maintaining liquidity and stability of principal.
It pursues this objective by investing substantially all of its assets in
short-term obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia, and their political
subdivisions, agencies, instrumentalities and authorities ("Municipal
Obligations").
The investment objective of the New Jersey Municipal Money Market
Portfolio, North Carolina Municipal Money Market Portfolio, Ohio Municipal
Money Market Portfolio, Pennsylvania Municipal Money Market Portfolio and
Virginia Municipal Money Market Portfolio and (the "State-Specific Municipal
Portfolios") is, for each Portfolio, to seek as high a level of current income
exempt from Federal, and to the extent possible, state income tax of the
specified state in which a Portfolio concentrates, as is consistent with
maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Municipal
Portfolios (together, the "Municipal Portfolios") seek to achieve their
investment objectives by primarily investing in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher by
Fitch;
(B) tax-exempt commercial paper and similar debt instruments rated
Prime-2 or higher by Moody's, A-2 or higher by S&P, Duff 2 or
higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or higher
by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of
comparable quality as determined by the Portfolios'
sub-adviser under guidelines established by the Fund's Board
of Trustees; and
(E) municipal bonds and notes which are guaranteed as to principal
and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are Municipal
Obligations. In addition, under normal conditions, the Municipal Money Market
Portfolio intends to invest less than 25% of its total assets in Municipal
Obligations of issuers located in the same state. Each State-Specific
Municipal Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name ("State-Specific Obligations"). During temporary defensive periods,
however, each Municipal Portfolio may invest without limitation in obligations
that are not Municipal Obligations and may hold without limitation uninvested
cash reserves.
Each State-Specific Portfolio may invest without limitation in private
activity bonds the interest on which is an item of tax preference for purposes
of the Federal alternative minimum tax ("AMT Paper"). The Municipal Money
Market Portfolio may invest up to 20% of its total assets in AMT Paper when
added together with any taxable investments held by the Portfolio. Interest on
AMT
16
<PAGE> 86
Paper that is received by taxpayers subject to the Federal alternative minimum
tax is taxable.
Each Municipal Portfolio may invest 25% or more of its net assets in
Municipal Obligations the interest on which is paid solely from revenues of
similar projects. To the extent a Portfolio's assets are invested in Municipal
Obligations payable from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
QUALITY, MATURITY AND DIVERSIFICATION
All securities acquired by the Portfolios will be determined at the
time of purchase by the Portfolios' sub- adviser, under guidelines established
by the Fund's Board of Trustees, to present minimal credit risks and will be
"Eligible Securities" as defined by the SEC. Eligible Securities are (a)
securities that either (i) have short-term debt ratings at the time of purchase
in the two highest rating categories by at least two unaffiliated nationally
recognized statistical rating organizations ("NRSROs") (or one NRSRO if the
security is rated by only one NRSRO), or (ii) are comparable in priority and
security with an instrument issued by an issuer which has such ratings, and (b)
securities that are unrated (including securities of issuers that have
long-term but not short-term ratings) but are of comparable quality as
determined in accordance with guidelines approved by the Board of Trustees.
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not exceed 90 days.
In no event will a Portfolio purchase securities which mature more than 397
days from the date of purchase (except for certain variable and floating rate
instruments and securities collateralizing repurchase agreements). Securities
in which the Portfolios invest may not earn as high a level of income as longer
term or lower quality securities, which generally have greater market risk and
more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal Money
Market Portfolios are classified as diversified portfolios, and the State
Specific Municipal Portfolios are classified as non-diversified portfolios,
under the Investment Company Act of 1940 (the "1940 Act"). Investment returns
on a non-diversified portfolio typically are dependent upon the performance of
a smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than it would a
diversified portfolio.
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios may invest in debt obligations
of domestic or foreign corporations and banks, and may acquire commercial
obligations issued by Canadian corporations and Canadian counterparts of U.S.
corporations, as well as Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer. Bank obligations may include certificates of
deposit, notes, bankers' acceptances and fixed time deposits. These
obligations may be general obligations of the parent bank or may be limited to
the issuing branch or subsidiary by the terms of specific obligation or by
government regulation. The Money Market Portfolio may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.
17
<PAGE> 87
Commercial paper issues include securities issued by corporations
without registration under the Securities Act of 1933 (the "1933 Act") in
reliance on the exemption in Section 3(a)(3), and commercial paper issued in
reliance on the so-called "private placement" exemption in Section 4(2)
("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
which make a market in Section 4(2) paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios may also purchase obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are backed by the full faith and credit of the United
States. Others are backed by the right of the issuer to borrow from the U.S.
Treasury or are backed only by the credit of the agency or instrumentality
issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the state or governmental body has no obligation to
make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that is not yet as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase at the Portfolio's option specific Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligation to
which such commitment relates. Each Municipal Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
18
<PAGE> 88
The amount of information regarding the financial condition of issuers
of Municipal Obligations may not be as extensive as that which is made
available by public corporations, and the secondary market for Municipal
Obligations may be less liquid than that for taxable obligations. Accordingly,
the ability of a Municipal Portfolio to buy and sell tax-exempt securities may,
at any particular time and with respect to any particular securities, be
limited.
The Municipal Portfolios may invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participation, beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal or state income tax are rendered by
counsel to the respective issuers or sponsors at the time of issuance. The
Fund and its investment adviser will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Each Portfolio may invest in
mortgage-related securities issued by the U.S. Government or its agencies or
instrumentalities or issued by private companies. Mortgage-related securities
may include collateralized mortgage obligations ("CMOs") issued by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or
other U.S. Government agencies or instrumentalities or issued by private
companies. The average life of mortgage-related securities is likely to be
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, a
mortgage-related security's stated maturity may be shortened and, therefore, it
may be difficult to predict precisely the security's total return to the
particular Portfolio. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by the particular Portfolio will generally
be at lower rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase
rated and unrated variable and floating rate instruments, which may have a
stated maturity in excess of 13 months but will, in any event, permit a
Portfolio to demand payment of the principal of the instrument at least once
every 13 months upon not more than thirty days' notice (unless the instrument
is guaranteed by the U.S. Government or an agency or instrumentality thereof).
These instruments may include variable amount master demand notes that permit
the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. Issuers of unrated variable and floating
rate instruments must satisfy the same criteria as set forth above for the
particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase
securities from broker-dealers and 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, so long as the
repurchase agreement itself matures in less than 13 months. Default by or
bankruptcy of the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delays in connection with the disposition
of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make
limited investments in guaranteed investment contracts ("GICs") issued by
highly rated U.S. insurance companies. Under these contracts, the Portfolio
makes cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits interest to the Portfolio on a
monthly basis, which is based on an index (such as the Salomon Brothers CD
Index), but is guaranteed not to be less than a certain minimum rate. The
Money Market
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Portfolio does not expect to invest more than 5% of its net asset in GICs at
any time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements for temporary purposes (such as to obtain cash to meet
redemption requests when the liquidation of portfolio securities is deemed
disadvantageous or inconvenient). A reverse repurchase agreement involves a
sale by a Portfolio of securities that it holds concurrently with an agreement
by the Portfolio to repurchase the same securities at an agreed-upon price and
date. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities the Portfolio is obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their
daily cash positions, each Portfolio may invest in securities issued by other
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. Securities of other investment
companies will be acquired by a Portfolio within the limits prescribed by the
1940 Act. As a shareholder of another investment company, a Portfolio 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 fees and other expenses the Portfolio bears
directly in connection with its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Portfolios' sub-adviser, suitable obligations are unavailable.
During normal market periods, no more than 20% of a Portfolio's assets will be
held uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10%
of the value of its net assets in securities that are illiquid. Variable and
floating rate instruments that cannot be disposed of within seven days, GICs,
and repurchase agreements and time deposits that do not provide for payment
within seven days after notice, without taking a reduced price, are subject to
this 10% limit. Each Portfolio may purchase securities which are not
registered under the 1933 Act but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the sub-adviser,
acting under guidelines
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approved and monitored by the Board, that an adequate trading market exists for
that particular security. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS - ADDITIONAL RISK CONSIDERATIONS.
The concentration of investments by the State-Specific Municipal Portfolios in
State-Specific Obligations raises special investment considerations. Changes
in the economic condition and governmental policies of a state and its
political subdivisions could adversely the value of a Portfolio's shares.
Certain matters relating to the states in which the State-Specific Municipal
Portfolios invest are described below. For further information, see "Special
Consideration Regarding State Specific Obligations" in the Statement of
Additional Information.
Ohio. While diversifying more into the service and other
non-manufacturing areas, the economy of Ohio continues to rely in part on
durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result,
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation as
a whole. Agriculture is an important segment of the Ohio economy with over half
the State's area devoted to farming and approximately 15% of total employment in
agribusiness. In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the national figure of
5.5%. However, for the last four years the State rates were below the national
rates (5.5% versus 6.1% in 1994). The unemployment rate and its effects vary
among particular geographic areas of the State. There can be no assurance that
future national, regional or state-wide economic difficulties and the resulting
impact on State or local government finances generally will not adversely affect
the market value of Ohio Municipal Obligations held in the Portfolio or the
ability of particular obligors to make timely payments of debt service on (or
lease payments relating to) those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the
principal operating fund of the Commonwealth) experienced deficits in fiscal
1990 and 1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30, 1993
of $698.9 million. The deficit in the Commonwealth's unreserved/undesignated
funds of prior years also was reversed to a surplus of $64.4 million as of June
30, 1993. Rising unemployment, a relatively high proportion of persons 65 and
older in the Commonwealth and court ordered increases in healthcare
reimbursement rates place increased pressures on the tax resources of the
Commonwealth and its municipalities.
North Carolina. Growth of North Carolina tax revenues slowed
considerably during fiscal 1990-92 requiring tax increases and budget
adjustments, including hiring freezes and restrictions, spending constraints,
changes in the timing of certain collections and payments, and other short-term
budget adjustments, that were needed to comply with North Carolina's
constitutional mandate for a balanced budget. Fiscal years 1993 and 1994,
however, ended with a positive General Fund balance of approximately $500
million each year on a budgetary basis. By law, 25% of such positive fund
balance was required to be reserved in the General Fund of North Carolina as
part of a "Savings Reserve" (subject to a maximum reserve of 5% of the
preceding fiscal year's operating appropriation). An additional portion of
such positive fund balance was reserved in the General Fund as part of a
"Reserve for Repair and Renovation of State Facilities," leaving the remaining
unrestricted fund balance at the end of each such year available for future
appropriations.
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<PAGE> 91
Virginia. Because of Virginia's proximity to Washington, D.C. and
the concentration of military installations in Northern Virginia and the
Tidewater area, Federal government spending is an important factor in
Virginia's economy. The Federal government has a greater impact on Virginia
relative to its size than any other state except Alaska and Hawaii. While
Federal employment in 1992 accounted for 10.0% of Virginia's personal income
(compared with a national average of 3.3% in that year), it ranked behind
services (19.7%), wholesale and retail trade (10.6%) and manufacturing (10.5%).
The Commonwealth experienced a decrease in its General Fund balances from
fiscal 1989 to fiscal 1990 and again from fiscal 1990 to fiscal 1991,
reflecting the effects of a nationwide recession and increasing expenditures.
General Fund balances have increased since fiscal 1991. In fiscal 1994,
revenues increased 6.0% from the previous year, while total expenditures
increased by 4.5%. Revenues exceeded expenditures by $731.2 million, an
increase of 20% over fiscal 1993.
New Jersey. The State of New Jersey generally has a diversified
economic base consisting of, among others, commerce and service industries,
selective commercial agriculture, insurance, tourism, petroleum refining and
manufacturing, although New Jersey's manufacturing industry has experienced a
downward trend in the last few years. New Jersey is a major recipient of
Federal assistance and, of all the states, is among the highest in the amount
of Federal aid received. Therefore, a decrease in Federal financial assistance
may adversely affect the financial condition of New Jersey and its political
subdivisions and instrumentalities. While New Jersey's economic base has
become more diversified over time and thus its economy appears to be less
vulnerable during recessionary periods, a recurrence of high levels of
unemployment could adversely affect New Jersey's overall economy and the
ability of New Jersey and its political subdivisions and instrumentalities to
meet their financial obligations. In addition, New Jersey maintains a balanced
budget which restricts total appropriation increases to only 5% annually with
respect to any municipality or county, the balanced budget plan may actually
adversely affect a particular municipality's or county's ability to repay its
obligations.
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
A Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval. However, shareholders
will be notified of any such change. No assurance can be provided that a
Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). Several of the Portfolios' fundamental investment policies,
which are set forth in full in the Statement of Additional Information, are
summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and
related repurchase agreements) if more than 5% of its total
assets will be invested in the securities of any one issuer,
except that up to 25% of a Portfolio's total assets may be
invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry, except that the Money Market Portfolio will invest
at least 25% of its total assets in obligations of issuers in
the banking industry or instruments secured by such
obligations except during temporary defensive periods;
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(3) borrow money except for temporary purposes in amounts up to
one-third of the value of its total assets at the time of such
borrowing. Whenever borrowings exceed 5% of a Portfolio's
total assets, the Portfolio will not make any additional
investments; and
(4) in the case of each Municipal Portfolio, invest less than 80%
of its net assets in instruments the interest on which is
exempt from regular Federal income tax or, for each
State-Specific Municipal Portfolio, in AMT Paper, except
during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal
Portfolios. Instead, as a non-fundamental investment restriction, each
State-Specific Municipal Portfolio will not hold any securities (except U.S.
Government securities and related repurchase agreements) that would cause, at
the end of any tax quarter, more than 5% of its total assets to be invested in
securities of any one issuer, except that up to 50% of a Portfolio's total
assets may be invested without regard to this limitation so long as no more
than 25% of the Portfolio's total assets are invested in any one issuer (except
U.S. Government securities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio
intends, as a non-fundamental policy, to limit its investments in the
securities of any single issuer (other than U.S. Government securities and
related repurchase agreement) to not more than 5% of the value of its total
assets at the time of purchase, except that 25% of the value of its total
assets may be invested in any one issuer for a period of up to three business
days. The Money Market Portfolio will also limit its investments in Eligible
Securities that are not in the highest rating category as determined by two
NRSROs (or one NRSRO if the security is rated by only one NRSRO) or, if
unrated, are not of comparable quality, to 5% of its total assets, with
investments in any one such issuer being limited to no more than 1% of its
total assets or $1 million, whichever is greater, measured at the time of
purchase.
The investment limitations stated above are applied at the time
investment securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. Should the Fund determine that any
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the names of the trustees and certain background information.
INVESTMENT ADVISER AND SUB-ADVISER
PNC Asset Management Group, Inc. ("PAMG"), an indirect wholly-owned
subsidiary of PNC Bank Corp., serves as the investment adviser for the
Portfolios. PAMG has its principal offices at 1835 Market Street,
Philadelphia, Pennsylvania 19103. PNC Institutional Management Corporation
("PIMC"), a wholly-owned subsidiary of PAMG, serves as each Portfolio's
sub-adviser. PIMC's principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809. PNC Bank Corp. is a multi-bank holding company.
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As adviser, PAMG is responsible for the overall investment management
of the Portfolios. As sub-adviser, PIMC is responsible for the day-to-day
management of the Portfolios, and generally makes all purchase and sale
investment decisions for the Portfolios. PIMC also provides research and
credit analysis. Portfolio transactions for a Portfolio may be directed
through broker/dealers who sell Fund shares, subject to the requirements of
best execution.
For their investment advisory and sub-advisory services service, PAMG
and PIMC are entitled to fees, computed daily on a Portfolio-by-Portfolio basis
and payable monthly, at the annual rates set forth below. All sub-advisory
fees payable to PIMC are paid by PAMG, and do not represent an extra charge to
the Portfolios.
<TABLE>
<CAPTION>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
------------------------------------------------------
INVESTMENT SUB-ADVISORY
ADVISORY FEE FEE
------------ -------------
<S> <C> <C>
AVERAGE DAILY NET ASSETS
- ------------------------
first $1 billion .45 % .40 %
$1 billion--$2 billion .40 .35
$2 billion--$3 billion .375 .325
greater than $3 billion .35 .30
</TABLE>
For more information about the advisory fees the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolios?"
For the fiscal year ended September 30, 1995, the Portfolios paid investment
advisory fees at the following annual rates after voluntary fee waivers: Money
Market Portfolio ____; U.S. Treasury Money Market Portfolio ____; Municipal
Money Market Portfolio ____; Ohio Municipal Money Market Portfolio ____;
Pennsylvania Municipal Money Market Portfolio ____; North Carolina Municipal
Money Market Portfolio ____; and Virginia Municipal Money Market Portfolio
____. For the fiscal year ended February 28, 1995, the Predecessor New Jersey
Municipal Money Market Portfolio paid investment advisory fees, after voluntary
fee waivers, to Midlantic Bank, N.A., its former adviser, pursuant to the
advisory agreement then in effect, at the annual rate of _____ of average daily
net assets (such fee would have been .40% of average daily net assets without
voluntary fee waivers).
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC"), and
Provident Distributors, Inc. ("PDI") (the "Administrators"), serve as the
Fund's co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries
of PNC Bank Corp. A majority of the stock of PDI is owned by its officers and
the remaining outstanding stock is owned by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCo is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of each Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .15% of the first $500 million of each Portfolio's average
daily net assets, .13% of the next $500 million of each Portfolio's average
daily net assets, .11% of the next $1 billion of each Portfolio's average daily
net assets and .10% of each Portfolio's average daily net assets in excess of
$2 billion. From time to time the Administrators may waive some or all of
their administration fees from a Portfolio.
For information about the operating expenses the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolio?"
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<PAGE> 94
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Portfolios' custodian and PFPC serves as their
transfer agent and dividend disbursing agent.
DISTRIBUTION AND SERVICE PLAN
Under the Fund's Distribution and Service Plan, Investor Shares of the
Portfolios bear the expense of payments ("distribution fees") made to PDI, as
the Fund's distributor (the "Distributor") or affiliates of PNC Bank for
distribution and sales support services. The distribution fees will be used
primarily to compensate the Distributor for distribution services and to
compensate the Distributor and PNC Bank affiliates for sales support services
provided in connection with the offering and sale of Investor Shares. The
distribution fees may also be used to reimburse the Distributor and PNC Bank
affiliates for related expenses, including payments to brokers, dealers,
financial institutions and industry professionals ("Service Organizations") for
sales support services and related expenses. Distribution fees payable under
the Plan will not exceed .10% (annualized) of the average daily net asset value
of each Portfolio's outstanding Investor A Shares and .75% (annualized) of the
average daily net asset value of each Portfolio's outstanding Investor B Shares
and Investor C Shares.
Under the Plan, the Fund intends to enter into service agreements with
Service Organizations (including PNC Bank and its affiliates) with respect to
each class of Investor Shares pursuant to which Service Organizations will
render certain support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder servicing fee of
up to .25% (annualized) of the average daily net asset value of Investor Shares
owned by their customers, Service Organizations will provided general
shareholder liaison services. In consideration for a separate shareholder
processing fee of up to .15% (annualized) of the average daily net asset value
of Investor Shares owned by their customers, Service Organizations will provide
sub-accounting and sub-transfer agency services.
HOW ARE SHARES PURCHASED?
GENERAL
Initial and subsequent purchase orders may be placed through
securities brokers, dealers or financial institutions ("brokers"), or the
Transfer Agent. Generally, individual investors will purchase Investor Shares
through a broker who will then transmit the purchase order directly to the
Transfer Agent.
The minimum investment for the initial purchase of Shares is $500;
there is a $100 minimum for subsequent investments. Purchases through the
Automatic Investment Plan described below are subject to a lower initial
purchase minimum. In addition, the minimum initial investment for employees of
the Fund, the Fund's investment adviser, sub- advisers, distributor or transfer
agent or employees of their affiliates is $100.
When placing purchase orders, investors should specify whether the
order is for Investor A, Investor B or Investor C Shares of a Portfolio. All
share purchase orders that fail to specify a class will automatically be
invested in Investor A Shares.
PURCHASES THROUGH BROKERS
Shares may be purchased through brokers which have entered into dealer
agreements with the Distributor.
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<PAGE> 95
It is the responsibility of brokers to transmit orders for purchases
by their customers and for the broker to deliver required funds on a timely
basis. If funds are not received within the periods described above, the order
will be canceled, notice thereof will be given, and the broker and its
customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the Transfer Agent.
PURCHASES THROUGH THE TRANSFER AGENT
Investors may also purchase Investor Shares by completing and signing
the Account Application Form and mailing it to the Transfer Agent, together
with a check in at least the minimum initial purchase amount payable to the
Compass Capital Funds. An Account Application Form may be obtained by calling
[number]. The name of the Portfolio for which Shares are purchased must also
appear on the check or [Federal Reserve Draft.] Investors may also wire
Federal funds in connection with the purchase of shares. The wire instructions
must include the name of the Portfolio, the name of the account registration,
and the shareholder account number. Before wiring any funds, however, an
investor must call the Portfolios at 1-800-438-5789 in order to confirm the
wire instructions.
OTHER PURCHASE INFORMATION
Purchase orders for shares of each Portfolio except the U.S. Treasury
Money Market Portfolio that are received before noon will be executed at noon.
If payment for such orders is not received by 4:00 p.m., the order will be
cancelled and notice thereof will be given to the institution placing the
order. Orders received after 12:00 noon will not be accepted. The Fund may in
its discretion reject any order for shares.
Purchase orders for Shares of the U.S. Treasury Money Market Portfolio
that are received before noon will be executed at noon; purchase orders for
Shares of the U.S. Treasury Money Market Portfolio that are received after noon
but before 4:00 p.m. will be executed at 4:00 p.m. If payment for such orders
is not received by 4:00 p.m., the order will be cancelled and notice thereof
will be given to the institution placing the order. Orders will not be
accepted after 4:00 p.m. Under certain circumstances, the Fund may reject
large individual purchase orders received after 12:00 noon. The Fund may in
its discretion reject any order for Shares.
Investor B Shares and Investor C Shares of the Portfolios are
available only to the holders of Investor B Shares or Investor C Shares in the
Fund's non-money market portfolios who wish to exchange their Shares in such
portfolios for Shares in a Portfolio described in this Prospectus. [ ] years
after the date of purchase of the exchanged Investor B Shares, Investor B
Shares of a Portfolio will automatically convert to Investor A Shares. The
purpose of the conversion is to relieve the holders of Investor B Shares of the
higher operating expenses charged to Investor B Shares. The conversion from
Investor B Shares to Investor A Shares will take place at the net asset value
of each class of Shares at the time of the conversion. Upon such conversion,
an investor would hold Investor A Shares subject to the operating expenses for
Investor A Shares discussed below. Upon each conversion of Investor B Shares
that were not acquired through reinvestment of dividends or distributions, a
proportionate amount of Investor B Shares that were acquired through
reinvestment of dividends or distributions will likewise automatically convert
to Investor A Shares.
Shares of each Portfolio are sold on a continuous basis by the
Distributor. The Distributor maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Purchases may be
effected on weekdays on which both the New York Stock Exchange and the Federal
Reserve Bank of Philadelphia are open for business (a "Business Day"). Payment
for orders which are not received or accepted will be returned after prompt
inquiry. The issuance of shares is
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<PAGE> 96
recorded on the Fund. Certificates are not issued for fractional shares.
Certificates for Investor A Shares will be issued only upon request. No
certificates will be issued for Investor B or Investor C Shares. Payments for
Shares of a Portfolio may, in the discretion of the investment adviser, be made
in the form of securities that are permissible investments for that Portfolio.
The Fund reserves the right to reject any purchase order or to waive the
minimum initial investment requirement.
HOW ARE SHARES REDEEMED?
REDEMPTION
Shareholders may redeem for cash some or all of their Shares at any
time. A written redemption request in proper form must be sent directly to the
Compass Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907. Except for the contingent deferred sales charge that may be
charged with respect to Investor B and Investor C Shares, there is no charge
for a redemption. See "What Are the Shareholder Features of the Fund (Exchange
Privilege)?". Shareholders may also place redemption requests through a broker
or other institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD
INDICATE WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR
INVESTOR C SHARES. If a redeeming shareholder owns both Investor A and
Investor B Shares or Investor C Shares in the same Portfolio, the Investor A
Shares will be redeemed first unless the shareholder indicates otherwise.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Shareholders holding Investor A
Share certificates must send their certificates with the redemption request.
Additional documentary evidence of authority is required by PFPC in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
REDEMPTION BY CHECK. Upon request, the Fund will provide the holders
of Investor A Shares with checkwriting privileges. An investor wishing to use
this checkwriting redemption procedure must complete the checkwriting
application and signature card when completing the account application.
Investors interested in obtaining the checkwriting option on existing accounts
may contact the Fund's transfer agent at (800) 441-7762 and application forms
will be provided. The checkwriting option is not available in connection with
the redemption of Investor B or Investor C Shares.
Upon receipt of the checkwriting application and signature card by
PFPC, checks will be forwarded to the investor.
The minimum amount of a check is $100. Checks may be made payable to
anyone and are negotiated according to bank clearing procedures. If more than
one shareholder owns the account, each shareholder must sign each check, unless
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<PAGE> 97
an election has been made to permit checkwriting by a limited number of
signatures and such election is on file with PFPC.
Investor A Shares represented by a check redemption will continue to
earn daily income until the check is presented for payment. The bank, as the
investor's agent, will cause the Fund to redeem a sufficient number of Investor
A Shares owned to cover the check.
When redeeming Investor A Shares by check, an investor should make
certain that there is an adequate number of Investor A Shares in the account to
cover the amount of the check. If an insufficient number of Investor A Shares
is held or if checks are not properly endorsed, they may not be honored and a
service charge may be incurred.
Checks may not be presented for cash payments at the offices of the
bank. This limitation does not affect checks used for the payment of bills or
cash at other banks.
EXPEDITED REDEMPTIONS
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above. This privilege may not be used to redeem Investor A Shares in
certificated form. During periods of substantial economic or market change,
telephone redemptions may be difficult to complete. Redemption requests may
also be mailed to PFPC at [P.O. Box 8907, Wilmington, DE 19899-8907].
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described above) to the Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably believed to be genuine.
ACCOUNTS WITH LOW BALANCES
The Fund reserves the right to redeem a shareholder's account in any
Portfolio at any time the net asset value of the account in such Portfolio
falls below the minimum initial investment requirement amount as the result of
a redemption or an exchange request. A shareholder will be notified in writing
that the value of the shareholder's account in a Portfolio is less than the
required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
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PAYMENT OF REDEMPTION PROCEEDS
The redemption price for Shares is the net asset value per share of
the Portfolio next determined after the request for redemption is received in
proper form by the Compass Capital Funds c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907. While the Fund intends to use its best efforts to
maintain each Portfolio's net asset value per share at $1.00, the proceeds paid
on redemption may be more or less than the amount invested depending on a
Share's net asset value at the time of redemption. Proceeds from the
redemption of Investor B and Investor C Shares will be reduced by the amount of
any applicable contingent deferred sales charge. Unless another payment option
is used as described above, payment for redeemed Shares is normally made by
check mailed within seven days after acceptance by PFPC of the request and any
other necessary documents in proper order. Payment may, however, be postponed
or the right of redemption suspended as provided by the rules of the SEC. If
the Shares to be redeemed have been recently purchased by check, the Fund's
transfer agent may delay the payment of redemption proceeds, which may be a
period of up to 15 days after the purchase date, pending a determination that
the check has cleared.
WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
The COMPASS CAPITAL FUNDS offer shareholders many special features
which enable an investor to have greater investment flexibility as well as
greater access to information about the Fund throughout the investment period.
Additional information on each of these features is available through
our transfer agent at (800) xxx-xxxx.
EXCHANGE PRIVILEGE
Investor A, B and C Shares of each Portfolio may be exchanged for
shares of the same Class of other portfolios of the Fund, based on their
respective net asset values, subject to any applicable sales charge.
Unless an exception applies, a front-end sales charge will be charged
in connection with exchanges for Investor A Shares of the Fund's non-money
market investment portfolios. Investor B Shares of the Portfolios are only
exchangeable for Investor B Shares of the Fund's non-money market investment
portfolios, and Investor C Shares of the Portfolios are only exchangeable for
Investor C Shares of the Fund's non-money market investment portfolios.
Investor B and Investor C Shares are exchangeable without the payment of any
contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemption of Investor B and Investor C Shares, the holding
period of the Investor B or Investor C Shares originally held will be added to
the holding period of the Investor B or Investor C Shares acquired through
exchange. No exchange fee is imposed by the Fund.
Investor A Shares of a money market portfolio of the Fund that were
(1) acquired through the use of the exchange privilege and (2) can be traced
back to a purchase of shares in one or more investment portfolios of the Fund
for which a sales charge was paid, can be exchanged for Investor A Shares of a
portfolio subject to differential sales charges as applicable.
The exchange of Investor B and Investor C Shares will not be subject
to a CDSC, which will continue to be measured from the date of the original
purchase and will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a
written request to PFPC at the address given above. Shareholders are
automatically
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provided with telephone exchange privileges when opening an account, unless
they indicate on the Application that they do not wish to use this privilege.
Shareholders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange
requests. To add this feature to an existing account that previously did not
provide for this option, a Telephone Exchange Authorization Form must be filed
with PFPC. This form is available from PFPC. Once this election has been
made, the shareholder may simply contact PFPC by telephone at (800) 441-7762
(in Delaware call collect (302) 791-1194) to request the exchange. During
periods of substantial economic or market change, telephone exchanges may be
difficult to complete and shareholders may have to submit exchange requests to
PFPC in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
Authorized Dealer of record as the account from which shares are exchanged,
unless otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as defined above. In order to
participate in the automatic investment program or establish a systematic
withdrawal plan for the new account, however, an exchanging shareholder must
file a specific written request.
Any share exchange must satisfy the requirements relating to the
minimum initial investment requirement, and must be legally available for sale
in the state of the investor's residence. For Federal income tax purposes, a
share exchange is a taxable event and, accordingly, a capital gain or loss may
be realized. Before making an exchange request, shareholders should consult a
tax or other financial adviser and should consider the investment objective,
policies and restrictions of the investment portfolio into which the
shareholder is making an exchange, as set forth in the applicable prospectus.
Brokers may charge a fee for handing exchanges.
The Fund reserves the right to modify or terminate the exchange
privilege at any time. Notice will be given to shareholders of any material
modification or termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request.
Telephone exchanges may be subject to limitations as to amount or frequency,
and to other restrictions that may be established from time to time to ensure
that exchanges do not operate to the disadvantage of any portfolio or its
shareholders. Exchange orders may also be sent by mail to the shareholder's
broker or to the Transfer Agent at the address set forth in [heading].
AUTOMATIC INVESTMENT PLAN ("AIP")
An investor in Shares of any Portfolio may arrange for periodic
investments in that Portfolio through automatic deductions from a checking or
savings account by completing the AIP Application Form. The minimum
pre-authorized investment amount is $50.
RETIREMENT PLANS
Portfolio Shares may be purchased in conjunction with individual
retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of its
affiliates acts as custodian. For further information as to applications and
annual fees, contact the Distributor. To determine whether the benefits of an
IRA are available and/or appropriate, a shareholder should consult with a tax
adviser.
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SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Portfolios offer a Systematic Withdrawal Plan which may be used by
investors who wish to receive regular distributions from their accounts. Upon
commencement of the SWP, the account must have a current value of $10,000 or
more in a Portfolio. Shareholders may elect to receive automatic cash payments
of $100 or more either monthly, every other month, quarterly, three times a
year, semi-annually, or annually. Automatic withdrawals are normally processed
on the 25th day of the applicable month or, if such day is not a Business Day,
on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form.
Shareholders should realize that if withdrawals exceed income
dividends their invested principal in the account will be depleted. To
participate in the SWP, shareholders must have their dividends and
distributions automatically reinvested and may not hold share certificates.
Shareholders may change or cancel the SWP at any time, upon written notice to
the Transfer Agent. Purchases of additional Investor A Shares of the Fund
concurrently with withdrawals may be disadvantageous to investors because of
the sales charges involved, and, therefore, is discouraged. Investor B and
Investor C Shares, if any, that are redeemed in connection with the SWP are
still subject to the applicable CDSC.
HOW IS NET ASSET VALUE CALCULATED?
Net asset value is calculated separately for each class of Investor
Shares as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on each
Business Day by dividing the value of all securities and other assets owned by
a Portfolio that are allocated to a particular class of Shares, less the
liabilities charged to that class, by the number of shares of the class that
are outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share
for purposes of purchases and redemptions, and values its portfolio securities
based on the amortized cost method of valuation described in the Statement of
Additional Information under "Valuation of Shares." A Portfolio may use a
pricing service, bank or broker/dealer to value its securities.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Shareholders are entitled to dividends and distributions arising from
the net income and capital gains, if any, earned on investments held by the
Portfolio in which they invest. Each Portfolio's net income is declared daily
as a dividend (i) to shareholders of record immediately prior to the
determination of net asset value made as of the close of regular trading hours
on the NYSE on days on which net asset value is determined, or (ii) to
shareholders of record immediately prior to 4:00 p.m. (Eastern Time) on days
on which there is no determination of net asset value. Consequently,
shareholders whose purchase orders are executed at 12:00 noon (Eastern Time)
receive dividends for that day. On the other hand, shareholders whose
redemption orders have been received by 12:00 noon (Eastern Time) do not
receive dividends for that day, while shareholders of each Portfolio whose
redemption orders are received after 12:00 noon (Eastern Time) do receive
dividends for that day. Because purchase orders for the U.S. Treasury Money
Market Portfolio are executed at 12:00 noon and at 4:00 p.m., shareholders
whose purchase orders are executed at 4:00 p.m. will receive a dividend for
that day.
Dividends are paid monthly by check, or by wire transfer if requested
in writing by the shareholder, within five business days after the end of the
month. Net short-term capital gains, if any, will be distributed at least
annually. The period for which dividends are payable and the time for payment
are subject to
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change by the Fund's Board of Trustees. The Portfolios do not expect to
realize net long-term capital gains.
Dividends are reinvested in additional full and fractional Investor
Shares of the same class on which the dividends are paid, unless a shareholder
elects to receive dividends in cash. Such election, or any revocation thereof,
must be made in writing to PFPC, and will become effective with respect to
dividends paid after receipt by PFPC.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If a Portfolio qualifies, it generally will be relieved of Federal
income tax on amounts distributed to shareholders, but shareholders, unless
otherwise exempt, will pay income or capital gains taxes on distributions
(except distributions that are "exempt interest dividends" or are treated as a
return of capital), whether the distributions are paid in cash or reinvested in
additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain regardless of the length of
time a shareholder holds Investor Shares. All other distributions, to the
extent taxable, are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns for informational purposes and in two circumstances such amounts, while
exempt from regular Federal income tax, are taxable to persons subject to
alternative minimum and environmental taxes. First, "exempt interest
dividends" derived from certain private activity bonds generally will
constitute an item of tax preference for taxpayers in determining alternative
minimum tax liability. Second, all "exempt interest dividends" must be taken
into account by corporate taxpayers in determining certain adjustments for
alternative minimum and environmental tax purposes. In addition, investors
should be aware of the possibility of state and local alternative minimum or
minimum income tax liability on interest from private activity bonds.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.
Each Municipal Portfolio will determine annually the percentages of
its net investment income which are exempt from the regular Federal income tax,
which constitute an item of tax preference for Federal alternative minimum tax
purposes, and which are fully taxable. These percentages will apply uniformly
to all distributions from net investment income during that year, and may
differ significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record as
of a specified date in those months will be deemed to have been received by the
shareholders on December 31, if the dividends are paid during the following
January.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. Except as discussed below, dividends paid by each Portfolio
may be taxable to investors under state or local law as dividend income even
though all
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or a portion of such dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In
addition, shareholders who are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships may be subject to
different Federal income tax treatment. Future legislative or administrative
changes or court decisions may materially affect the tax consequences of
investing in the Portfolios.
OHIO TAXES. Individuals and estates that are subject to Ohio personal
income tax or municipal or school district income taxes in Ohio will not be
subject to such taxes on distributions from the Ohio Municipal Money Market
Portfolio to the extent that such distributions consist of interest on Ohio
State-Specific Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their
subdivisions. Corporations that are subject to the Ohio corporation franchise
tax will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions
either constitute exempt-interest dividends or consist of interest on Ohio
Municipal Obligations or U.S. Obligations. However, shares of the Ohio
Municipal Money Market Portfolio will be included in a corporation's net worth
base for purposes of calculating the Ohio corporation franchise tax.
Distributions consisting of gain on the sale, exchange or other disposition of
Ohio Municipal Obligations will not be subject to the Ohio personal income tax,
or municipal or school district income taxes in Ohio and will not be included
in the net income base of the Ohio corporation franchise tax. Distributions
attributable to other sources will be subject to the Ohio personal income tax
and the Ohio corporation franchise tax.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to
interest realized by the Pennsylvania Municipal Money Market Portfolio from
Pennsylvania State-Specific Obligations or attributable to insurance proceeds
on account of such interest is not taxable to individuals, estates or trusts
under the Personal Income Tax (in the case of insurance proceeds, to the extent
they are exempt for Federal income tax purposes); to corporations under the
Corporate Net Income Tax (in the case of insurance proceeds, to the extent they
are exempt for Federal income tax purposes); nor to individuals under the
Philadelphia School District New Income Tax ("School District Tax"). Income
received by a shareholder attributable to gain on the sale or other disposition
by the Portfolio of Pennsylvania State-Specific Obligations is taxable under
the Personal Income Tax, the Corporate Net Income Tax, and, unless these assets
were held by the Portfolio for more than six months, the School District Tax.
This discussion does not address the extent, if any, to which shares
of the Pennsylvania Municipal Money Market Portfolio, and interest and gain
earned by the Portfolio, is subject to, or included in the measure of, special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed herein (including the Corporate
Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are
not subject to any of the personal property taxes currently in effect in
Pennsylvania to the extent that the Portfolio is comprised of Pennsylvania
State-Specific Obligations. The taxes referred to include the County Personal
Property Tax.
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NORTH CAROLINA TAXES. Interest received in the form of dividends from
the North Carolina Municipal Money Market Portfolio is exempt from North
Carolina state income tax to the extent the distributions represent interest on
direct obligations of the U.S. Government or North Carolina State-Specific
Obligations. Distributions derived from interest earned on obligations of
political subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands,
including the governments thereof and their agencies, instrumentalities and
authorities, are also exempt from North Carolina state income tax.
Distributions paid out of interest earned on obligations that are merely backed
or guaranteed by the U.S. Government (e.g., GNMAs, FNMAs), on repurchase
agreements collateralized by U.S. Government securities or on obligations of
other states (which the Portfolio may acquire and hold for temporary or
defensive purposes) are not exempt from North Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina
Municipal Money Market Portfolio on the sale or exchange of certain obligations
of the State of North Carolina or its subdivisions that were issued before July
1, 1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
VIRGINIA TAXES. Subject to the provisions discussed below, dividends
paid to shareholders by the Virginia Municipal Money Market Portfolio and
derived from interest on obligations of the Commonwealth of Virginia or of any
political subdivision or instrumentality of the Commonwealth or derived from
interest or dividends on obligations of the United States excludable from
Virginia taxable income under the laws of the United States, which obligations
are issued in the exercise of the borrowing power of the Commonwealth or the
United States and are backed by the full faith and credit of the Commonwealth
or the United States, will be exempt from the Virginia income tax. Dividends
paid to shareholders by the Portfolio and derived from interest on debt
obligations of certain territories and possessions of the United States (those
issued by Puerto Rico, the Virgin Islands and Guam) will be exempt from the
Virginia income tax. To the extent a portion of the dividends are derived from
interest on debt obligations other than those described above, such portion
will be subject to the Virginia income tax even though it may be excludable
from gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and
derived from capital gains will be taxable to the shareholders. To the extent
any portion of the dividends are derived from taxable interest for Virginia
purposes or from net short-term capital gains, such portion will be taxable to
the shareholders as ordinary income. The character of long-term capital gains
realized and distributed by the Portfolio will flow through to its shareholders
regardless of how long the shareholders have held their shares. Capital gains
distributed to shareholders derived from Virginia obligations issued pursuant
to special Virginia enabling legislation which provides a specific exemption
for such gains will be exempt from Virginia income tax. Generally, interest on
indebtedness incurred by shareholders to purchase or carry shares of the
Portfolio will not be deductible for Virginia income tax purposes.
As a regulated investment company, the Portfolio may distribute
dividends that are exempt from the Virginia income tax to its shareholders if
the Portfolio satisfies all requirements for conduit treatment under Federal
law and, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets consists of obligations the interest on which is
exempt from taxation under Federal law. If the Portfolio fails to qualify, no
part of its dividends will be exempt from the Virginia income tax.
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When taxable income of a regulated investment company is commingled
with exempt income, all distributions of the income are presumed taxable to the
shareholders unless the portion of income that is exempt from Virginia income
tax can be determined with reasonable certainty and substantiated. Generally,
this determination must be made for each distribution to each shareholder. The
Virginia Department of Taxation has adopted a policy, however, of allowing
shareholders to exclude from their Virginia taxable income the exempt portion
of distributions from a regulated investment company even though the
shareholders receive distributions monthly but receive reports substantiating
the exempt portion of such distributions at less frequent intervals.
Accordingly, if the Portfolio receives taxable income, the Portfolio must
determine the portion of income that is exempt from Virginia income tax and
provide such information to the shareholders in accordance with the foregoing
so that the shareholders may exclude from Virginia taxable income the exempt
portion of the distribution from the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends
paid by the New Jersey Municipal Money Market Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New
Jersey law as currently in effect, distributions paid by a "qualified
investment fund" will not be subject to the New Jersey personal income tax to
the extent that the distributions are attributable to income received as
interest or gain from New Jersey State-Specific Obligations, or as interest or
gain from direct U.S. Government obligations. Distributions by a qualified
investment fund that are attributable to most other sources will be subject to
the New Jersey personal income tax. If the New Jersey Municipal Money Market
Portfolio qualifies as a qualified investment fund under New Jersey law, any
gain on the redemption or sale of the Portfolio's shares will not be subject to
the New Jersey personal income tax. To be classified as a qualified investment
fund, at least 80% of the Portfolio's investments must consist of New Jersey
State-Specific Obligations or direct U.S. Government obligations; it must have
no investments other than interest-bearing obligations, obligations issued at a
discount, and cash and cash items (including receivables); and it must satisfy
certain reporting obligations and provide certain information to its
shareholders. Shares of the Portfolio are not subject to property taxation by
New Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of Trust authorizes the Board
of Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Trustees have authorized
the issuance of an unlimited number of shares in twenty-eight investment
portfolios. Each portfolio offers [five] separate classes of shares --
Institutional Shares, Service Shares, Series A Investor Shares, Series B
Investor Shares and Series C Investor Shares. This prospectus relates only to
Investor Shares of the eight money market funds described herein.
Shares of each class bear their pro rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the
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Fund's Distribution and Service Plan. Because of these "class expenses", the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The Fund offers various services and privileges in connection with its
Investor Shares that are not offered in connection with its Institutional
Shares, including an automatic investment plan, automatic withdrawal plan and
checkwriting. For further information regarding the Fund's Service and
Investor share classes, contact [name and number].
Each share of a Portfolio has a par value of $.001, represents an
equal proportionate interest in that Portfolio and is entitled to the dividends
and distributions earned on that Portfolio's assets as are declared in the
discretion of the Board of Trustees. The Fund's shareholders are entitled to
one vote for each full share held and proportionate fractional votes for
fractional shares held, and will vote in the aggregate and not by class, except
where otherwise required by law or as determined by the Board of Trustees. The
Fund does not currently intend to hold annual meetings of shareholders for the
election of trustees (except as required under the 1940 Act). For a further
discussion of the voting rights of shareholders, see "Additional Information
Concerning Shares" in the Statement of Additional Information.
On January __, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp.
HOW IS PERFORMANCE CALCULATED?
From time to time each Portfolio may advertise its "yield" and
"effective yield" for each class of Investor Shares. Both yield figures are
based on historical earnings and are not intended to indicate future
performance. "Yield" refers to the income generated by an investment in a
particular class of a Portfolio's Investor Shares over a seven-day period.
This income is then "annualized." That is, the amount of income generated by
the investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. "Effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in a particular class of a Portfolio's Investor Shares is assumed to
be reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. A Municipal
Portfolio's "tax equivalent yield" may also be quoted, which shows the level of
taxable yield needed to produce an after-tax equivalent to the Portfolio's
tax-free yield for a particular class of Investor Shares.
The performance of each class of Investor Shares of a Portfolio may be
compared to the performance of mutual funds with similar investment objectives
and to relevant indexes, as well as to ratings or rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the yield of a particular class
of Investor Shares of a Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Performance information may also include
evaluations of the Portfolios published by nationally recognized ranking
services, and information as reported by financial publications such as
Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature, may also be used in comparing the performance of a
particular class of Investor Shares of a Portfolio.
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Performance quotations for Shares of a Portfolio represent past
performance and should not be considered as representative of future results.
The yield of any investment is generally a function of portfolio quality and
maturity, type of investment and operating expenses. Yields will fluctuate and
are not necessarily representative of future results. Any fees charged by
affiliates of the Portfolios' investment adviser or other institutions directly
to their customers' accounts in connection with investments in the Portfolios
will not be included in the Portfolios' calculations of yield and performance.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to
information regarding their investment 24 hours a day, 7 days a week. The
COMPASS CAPITAL FUNDS have an investor information line that can provide such
access.
In addition to account information, COMPASS CAPITAL FUNDS have other
sources of information regarding each Fund and its portfolio holdings, strategy
and current dividend and yield levels.
By selecting the appropriate source of information as listed below,
investors can receive additional information on the COMPASS CAPITAL FUNDS by
either using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) compass
For Information Related to Share Purchase and Redemptions call your
investment adviser or Compass Capital Funds at (800) xxx-xxxx.
For Questions about Shareholder Accounts and Balances held directly at
the Fund, call (800) xxx-xxxx.
Information is also available on the World Wide Web through the
Internet.
Shareholders and investment professionals may access portfolio
information, portfolio manager updates and market data by accessing
COMPASSFUNDS.COM.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
38
<PAGE> 108
THE MONEY
MARKET
PORTFOLIOS
INVESTOR
SHARES
PROSPECTUS
MONEY
MARKET PORTFOLIO
U.S. TREASURY
MONEY MARKET PORTFOLIO
MUNICIPAL
MONEY MARKET PORTFOLIO
NEW JERSEY MUNICIPAL
MONEY MARKET PORTFOLIO
NORTH CAROLINA MUNICIPAL
MONEY MARKET PORTFOLIO
OHIO MUNICIPAL
MONEY MARKET PORTFOLIO
PENNSYLVANIA MUNICIPAL
MONEY MARKET PORTFOLIO
VIRGINIA MUNICIPAL
MONEY MARKET PORTFOLIO
JANUARY __, 1996
39
<PAGE> 109
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(INSTITUTIONAL SHARES OF THE SHORT GOVERNMENT BOND
PORTFOLIO, INTERMEDIATE GOVERNMENT PORTFOLIO, INTERMEDIATE
BOND PORTFOLIO, GOVERNMENT INCOME PORTFOLIO, MANAGED INCOME PORTFOLIO,
INTERNATIONAL BOND PORTFOLIO, TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA
TAX-FREE INCOME PORTFOLIO AND OHIO TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 110
THE BOND PORTFOLIOS
INSTITUTIONAL SHARES
The Compass Capital Funds(R) (the "Fund") consists of [twenty-eight]
investment portfolios. This Prospectus describes the Institutional Shares of
nine of those portfolios ("Portfolios"):
. Short Government Bond Portfolio .
. Intermediate Government Portfolio .
. Intermediate Bond Portfolio .
. Government Income Portfolio .
. Managed Income Portfolio .
. International Bond Portfolio .
. Tax-Free Income Portfolio .
. Pennsylvania Tax-Free Income Portfolio .
. Ohio Tax-Free Income Portfolio .
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January ___, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by calling (800)
________. The Statement of Additional Information, as supplemented from time
to time, is incorporated by reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE
PORTFOLIOS ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
PROSPECTUS January ___, 1996
<PAGE> 111
INTRODUCING THE BOND PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Bond Portfolios of the COMPASS CAPITAL FUNDS consist of eleven investment
products, nine of which are described in this Prospectus, that provide
investors with a broad spectrum of investment alternatives within the fixed
income sector. Seven of these Portfolios invest in taxable bonds, and four of
these Portfolios invest in tax-exempt bonds. A detailed description of each
Portfolio appears on pages ____.
<TABLE>
<CAPTION>
COMPASS CAPITAL FUND PERFORMANCE BENCHMARK LIPPER PEER GROUP
- -------------------- --------------------- -----------------
<S> <C> <C>
Short Gov't Merrill 1-3 Year Treasury Index Short U.S. Government
Intermediate Gov't Lehman Brothers Intermediate Gov't Intermediate U.S. Gov't
Intermediate Bond Lehman Brothers Intermediate Intermediate Gov't/Corp
Gov't/Corp
Gov't Income Lehman Mortgage/10 Year Treasury General U.S. Gov't
Managed Income Salomon BIG Corporate Debt A-Rated
International Bond Salomon Non-U.S. Hedged Government General World Income
Bond Index
Tax-Free Lehman Municipal Bond Index General Municipal Debt
PA Tax-Free Lehman Local GO Index PA Municipal Debt
OH Tax Free Lehman Local GO Index OH Municipal Debt
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc. ("BlackRock") serves
as sub-adviser to each Portfolio except the International Bond Portfolio, which
is sub-advised by Morgan Grenfell Investment Services Limited ("Morgan
Grenfell").
UNDERSTANDING THE COMPASS CAPITAL BONDS FUNDS:
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in fixed
income investing.
CONSIDERING THE RISKS IN BOND INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective. Some or all of the Portfolios may purchase
mortgage-related securities, asset-backed, foreign and illiquid securities;
enter into repurchase and reverse repurchase agreements and engage in
leveraging techniques; lend portfolio securities to third parties; and enter
into futures contracts and options. Each state-specific tax-free Portfolio
concentrates in the securities of issuers located in a particular state, and is
non-diversified, which means that its performance may be dependent upon the
performance of a smaller number of Securities than the other Portfolios, which
are considered diversified. See "What Additional Investment Policies Apply?"
ASKING THE KEY QUESTIONS
Page
----
What Are the Expenses of the Portfolios? . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . .
What Are the Differences Among the Portfolios? . . . . . . . . . .
What Types of Securities Are in the Portfolios? . . . . . . . . . .
What Are the Portfolios' Fundamental Limitations? . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Purchased and Redeemed? . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . .
[END OF PAGE]
<PAGE> 112
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be
incurred by the Portfolios' Institutional Shares for the current fiscal year
ending September 30, 1996. An example based on the summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
GOVERNMENT GOVERNMENT INTERMEDIATE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- --------------------------------- ---------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
for Institutional Shares After
Fee Waivers As a
Percentage of Daily Net
Assets
Advisory fees(1) .30% .30% .30%
Other operating expenses .25 .25 .25
--- --- ---
Administration fees(1) .15 .13 .13
Other expenses(1) .10 .10 .12
--- ---- ---
Total Portfolio operating expenses .55% .55% .55%
=== ==== ====
</TABLE>
(1) Without waivers, advisory fees would be .50%, .50% and .50% and
administration fees would be .23%, .23% and .23%, respectively. PAMG and
the Portfolios' Administrators are under no obligation to waive fees or
reimburse expenses, but have informed the Fund that they expect to waive
fees and reimburse expenses during the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. The information in the tables is based on the advisory and
administration fees and other expenses payable after fee waivers for the
fiscal year ended September 30, 1995, as restated to reflect current
expenses and fee waivers. Without waivers, total operating expenses would
be .83%, .83% and .85%, respectively.
<PAGE> 113
<TABLE>
<CAPTION>
GOVERNMENT INCOME MANAGED INCOME
PORTFOLIO PORTFOLIO
--------- ---------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
for Institutional Shares After
Fee Waivers As a
Percentage of Daily Net
Assets
Advisory fees(1) .30% .35%
Other operating expenses .25 .23
----- ----
Administration fees(1) .15 .12
Other expenses(1) .10 .11
----- ---
Total Portfolio operating expenses .55% .58%
==== =====
</TABLE>
(1) Without waivers, advisory fees would be .52%, and .50% and
administration fees would be .23% and .23%, respectively. PAMG and
the Portfolios' Administrators are under no obligation to waive fees
or reimburse expenses, but have informed the Fund that they expect to
waive fees and reimburse expenses during the current fiscal year as
necessary to maintain the Portfolios' total operating expenses at the
levels set forth in the table. The information in the tables is based
on the advisory and administration fees and other expenses payable
after fee waivers for the fiscal year ended September 30, 1995, as
restated to reflect current expenses and fee waivers. Without
waivers, total operating expenses would be .83% and .84%,
respectively.
<PAGE> 114
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- --------------------------------- ---------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
FOR INSTITUTIONAL SHARES AFTER
FEE WAIVERS AS A
PERCENTAGE OF DAILY NET
ASSETS
Advisory fees(1) .55% .30% .30%
Other operating expenses .43 .25 .25
---- --- ----
Administration fees(1) .15 .13 .13
Other expenses(1) .28 .12 .12
---- ---- ----
Total Portfolio operating expenses .98% .55% .55%
==== ==== ====
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50% and .50% and
administration fees would be .23%, .23% and .23%, respectively. [In
addition, the Expense Summary reflects reimbursements made to the Tax-Free
Income Portfolio by the adviser.] PAMG and the Portfolios' Administrators
are under no obligation to waive fees or reimburse expenses, but have
informed the Fund that they expect to waive fees and reimburse expenses
during the current fiscal year as necessary to maintain the Portfolios'
total operating expenses at the levels set forth in the table. The
information in the tables is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended
September 30, 1995, as restated to reflect current expenses and fee
waivers. Without waivers, total operating expenses would be 1.06%, .85%
and .85%, respectively.
<PAGE> 115
<TABLE>
<CAPTION>
OHIO
TAX-FREE INCOME
PORTFOLIO
---------------------------------
<S> <C>
ANNUAL FUND OPERATING
Expenses for Institutional
Shares After Fee Waivers
As a Percentage of Daily
Net Assets
Advisory Fees(1) .30%
Other operating expenses .25
-----
Administration fees(1) .10
Other expenses(1) .15
-----
Total Portfolio operating expenses .55%
============
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23%, respectively. PAMG and the Portfolios' Administrators are under
no obligation to waive fees or reimburse expenses, but have informed the
Fund that they expect to waive fees and reimburse expenses during the
current fiscal year as necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the table. The information
in the tables is based on the advisory and administration fees and other
expenses payable after fee waivers for the fiscal year ended September 30,
1995, as restated to reflect current expenses and fee waivers. Without
waivers, total operating expenses would be .88%.
<PAGE> 116
EXAMPLE
An investor in Institutional Shares would pay the following expenses
on a $1,000 investment in Shares of each of the Portfolios, assuming (1) 5%
annual return, and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Short Government Bond Portfolio $6 $18 $31 $69
Intermediate Government Portfolio 6 18 31 69
Intermediate Bond Portfolio 6 18 31 69
Government Income Portfolio 6 18 31 69
Managed Income Portfolio 6 9 32 73
International Bond 10 31 - -
Tax-Free Income Portfolio 6 18 31 69
Pennsylvania Tax-Free Income Portfolio 6 18 31 69
Ohio Tax-Free Income Portfolio 6 18 31 69
</TABLE>
The foregoing Expense Table and Example are intended to assist
investors in understanding the costs and expenses that an investor in the
Portfolios will bear either directly or indirectly. The tables do not reflect
any charges that may be imposed by brokers or other institutions directly on
their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
<PAGE> 117
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference in the Statement of Additional
Information and has been audited by [ ], the Fund's
independent accountants. This financial information should be read together
with those financial statements. For the periods shown, the Short U.S.
Government Bond Portfolio offered only one class of shares to institutional
investors, and the International Bond Portfolio offered one class of shares to
both institutional and retail investors. Further information about the
performance of the Portfolios is available in the Fund's annual shareholder
reports. Both the Statement of Additional Information and the annual reports
may be obtained from the Fund free of charge by calling the number on the front
cover of this Prospectus.
<PAGE> 118
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
THE SHORT GOVERNMENT BOND PORTFOLIO+
<TABLE>
<CAPTION>
YEAR YEAR JULY 17, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . . $ 9.71 $ 9.96 $10.00
------ ------ ------
Net investment income (net of $.014,
$.011 and $.005 respectively, of
interest expense)(**) . . . . . . . . . . . . . . . 0.58 0.48 0.51
Net realized and unrealized loss on
investments . . . . . . . . . . . . . . . . . . . . 0.13 (0.25) (0.06)
------ ------ ------
Net increase from investment
operations . . . . . . . . . . . . . . . . . . . . . 0.71 0.23 0.45
------ ------ ------
Dividends from net investment income . . . . . . . . . (0.58) (0.48) (0.49)
Distributions from net realized capital
gains . . . . . . . . . . . . . . . . . . . . . . . . (0.01) --- ---
------ ------ ------
Total dividends and distributions . . . . . . . . . . (0.59) (0.48) (0.49)
------ ------ ------
Net asset value, end of period . . . . . . . . . . . . $ 9.83 $ 9.71 $ 9.96
====== ====== ======
TOTAL INVESTMENT RETURN(***) . . . . . . . . . . . . . 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) . . . . . . . . . . . . . . . . . . . . . 0.57% 0.57% 0.56%(****)
Net investment income(**) . . . . . . . . . . . . . . . 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . . $34,236 $36,686 $67,540
Portfolio turnover . . . . . . . . . . . . . . . . . . 586% 455% 513%
Net assets, end of period (in thousands) . . . . . . . $44,486 $31,265 $51,611
</TABLE>
- --------------------------------------------------------------------------------
+ This Portfolio commenced operations on July 17, 1992 as the Short
Duration Portfolio, a separate investment portfolio (the "Predecessor
Short Government Bond Portfolio") of The BFM Institutional Trust
Inc., which was organized as a Maryland business corporation. On
January __, 1996, the assets and liabilities of the Predecessor Short
Government Bond Portfolio were transferred to this Portfolio, and
were combined with the assets of a pre-existing portfolio investment
maintained by the Fund.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Short Government Bond
Portfolio waived fees amounting to $102,707 and $110,232 and
reimbursed expenses amounting to $61,195 and $55,582, for the periods
ended June 30, 1995 and June 30, 1994, respectively. For the period
July 17, 1992 through June 30, 1993, the administrator of the
Predecessor Short Bond Portfolio waived fees amounting to $64,580. If
all expenses had been borne, the expense ratios would have been 1.05%,
1.02% and 0.66% for the periods ended June 30, 1995, June 30, 1994 and
June 30, 1993, respectively. The net investment income ratios would
have been 5.60%, 4.25% and 5.22% for the periods ended June 30, 1995,
June 30, 1994 and June 30, 1993, respectively. The net investment
income on a per share basis would have been $0.53, $0.43 and $0.49 for
the periods ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively.
(***) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
(****) Annualized.
<PAGE> 119
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 4/20/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning of
period $ 10.60 $ 10.46 $ 10.00
-------- -------- --------
Income from investment operations
Net investment income 0.55 0.54 0.24
Net gain (loss) on investments
(both realized and unrealized) (0.86) 0.16 0.46
-------- -------- --------
Total from investment operations (0.31) 0.70 0.70
-------- -------- --------
Less distributions
Distributions from net investment
income (0.55) (0.54) (0.24)
Distributions from net realized
capital gains (0.10) (0.02) --
-------- -------- --------
Total distributions (0.65) (0.56) (0.24)
-------- -------- --------
Net asset value at end of period $ 9.64 $ 10.60 $ 10.46
======== ======== ========
Total return (3.08)% 6.88% 7.14%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $128,974 $137,065 $105,620
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.40% 0.73% 0.80%(2)
Before advisory/administration
fee waivers 0.80% 0.81% 0.80%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 5.48% 5.23% 5.28%(2)
Before advisory/administration
fee waivers 5.08% 5.15% 5.28%(2)
Portfolio turnover rate 9% 80% 38%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 120
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/17/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning
of period $ 10.01 $ 10.00
------- -------
Income from investment
operations
Net investment income 0.54 0.02
Net gain (loss) on
investments (both
realized and unrealized) (0.88) (0.01)
------- -------
Total from investment
operations (0.34) 0.01
------- -------
Less distributions
Distributions from net
investment income (0.56) --
Distributions from net
realized capital gains (0.06) --
------- -------
Total distributions (0.62) --
------- -------
Net asset value at end of
period $ 9.05 $ 10.01
======= =======
Total return (3.52)% 0.10%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $71,896 $56,713
Ratios of expenses to
average net assets
After advisory/administration fee
waivers 0.45% 0.45%(2)
Before advisory/administration fee
waivers 0.88% 0.84%(2)
Ratios of net investment
income to average net
assets
After advisory/administration
fee waivers 5.54% 4.72%(2)
Before advisory/administration
fee waivers 5.11% 4.33%(2)
Portfolio turnover rate 92% 4%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 121
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
GOVERNMENT INCOME PORTFOLIO
---------------------------
FOR THE
PERIOD
12/__/94(1)
THROUGH
9/30/95
-------
Net asset value at beginning
of period
Income from investment
operations
Net investment income
Net gain (loss) on
investments (both
realized and unrealized)
Total from investment
operations
Less distributions
Distributions from net
investment income
Distribution in excess
of net investment income
Distributions from net
realized capital gains
Distributions in excess
of net realized gains
Total distributions
Net asset value at end
of period
Total return
Ratios/Supplemental data
Net assets at end of period
(in thousands)
Ratios of expenses to
average net assets
After advisory/
administration fee waivers
Before advisory/
administration fee waivers
Ratios of net investment
income to average net
assets
After advisory/
administration fee waivers
Before advisory/
administration fee waivers
Portfolio turnover rate
(1) Commencement of operations.
(2) Annualized.
<PAGE> 122
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 11/1/89(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
-------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on
investments (both
realized and unrealized) (1.21) 0.56 0.48 0.63 (0.29)
-------- -------- -------- ------- -------
Total from investment
operations (0.57) 1.23 1.17 1.37 0.37
-------- -------- -------- ------- -------
Less distributions
Distributions from net
investment income (0.64) (0.67) (0.69) (0.73) (0.66)
Distribution in excess of
net investment income (0.02) -- -- (0.08) (0.01)
Distributions from net
realized capital gains (0.14) (0.13) -- -- --
Distributions in excess
of net realized gains (0.01) -- -- -- --
-------- -------- -------- ------- -------
Total distributions (0.81) (0.80) (0.69) (0.81) (0.67)
-------- -------- -------- ------- -------
Net asset value at end of
period $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
======== ======== ======== ======= =======
Total return (5.27)% 12.13% 11.80% 14.74% 3.80%
Ratios/Supplemental data
Net assets at end of
period (in thousands) $395,060 $341,791 $314,075 $52,802 $38,328
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.55% 0.74% 0.80% 0.80% 0.80%(2)
Before advisory/
administration fee
waivers 0.77% 0.78% 0.80% 0.84% 0.82%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers 6.11% 6.25% 6.28% 7.36% 7.31%2
Before advisory/
administration fee
waivers 5.89% 6.21% 6.28% 7.32% 7.29%2
Portfolio turnover rate 61% 72% 56% 38% 18%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 123
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net asset value at beginning
of period $10.75 $11.76 $10.21 $10.00
------ ------ ------ ------
Income from investment
operations
Net investment income 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both
realized and unrealized (0.48) 0.46 0.47 0.26
------ ----- ------ ------
Total from investment
operations (0.14) 1.11 0.99 0.57
------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.13) (0.90) (0.30) --
Distributions from net
realized capital gains (0.24) (0.22) (0.14) (0.06)
------ ------ ------ ------
In Excess of Net
Realized Gains -- -- -- (0.30)
Total distributions (0.37) 1.12 (0.44) (0.36)
------ ------ ------ ------
Net asset value at end of
period $10.52 $10.75 $10.76 $10.21
====== ====== ====== ======
Total return 1.50% 10.24% 9.55% 8.92%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.24% 1.38% 1.30% 1.37%*
Ratios of net investment
income to average net
assets 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 5.96% 6.00% 6.31% 6.75%*
Portfolio turnover rate 130.64% 128.14% 115.25% 110.13%
</TABLE>
- ------------------------------------------
+This Portfolio commenced operations on July 1, 1991 as the Compass
International Fixed Income Fund, a separate investment portfolio (the
"Predecessor International Bond Portfolio") of The Compass Capital Group of
Funds, which was organized as a Massachusetts business trust. On January __,
1996, the assets and liabilities of the Predecessor International Bond
Portfolio were transferred to this Portfolio, which had no prior operating
history.
** Commenced operations on July 1, 1991.
* Annualized.
<PAGE> 124
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 1/21/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of
period $11.31 $10.61
------ ------
Income from investment operations
Net investment income 0.53 0.42
Net gain (loss) on investments
(both realized and unrealized) (0.93) 0.70
------ ------
Total from investment operations (0.40) 1.12
------ ------
Less distributions
Distributions from net investment
income (0.53) (0.42)
Distributions from net realized
capital gains (0.34) --
------ ------
Total distributions (0.87) (0.42)
------ ------
Net asset value at end of period $10.04 $11.31
====== ======
Total return (3.77)% 10.72%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 132 $ 675
Ratios of expenses to average net
assets
After advisory/administration
fee waivers 0.50% 0.50%(2)
Before advisory/administration
fee waivers 1.73% 1.28%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 4.97% 5.14%(2)
Before advisory/administration
fee waivers 3.74% 4.36%(2)
Portfolio turnover rate 40% 71%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 125
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 12/1/92(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of
period $10.70 $10.00
====== ======
Income from investment operations
Net investment income 0.53 0.39
Net gain (loss) on investments
(both realized and unrealized) (0.85) 0.73
------ ------
Total from investment
operations (0.32) 1.12
------ ------
Less distributions
Distributions from net
investment income (0.53) (0.39)
Distributions from net realized
capital gains (0.03) (0.03)
------ ------
Total distributions (0.56) (0.42)
------ ------
Net asset value at end of period $ 9.82 $10.70
====== ======
Total return (2.96)% 11.69%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 639 $ 256
Ratios of expenses to average
net assets
After advisory/
administration fee waivers 0.39% 0.09%(2)
Before advisory/
administration fee waivers 0.99% 0.97%(2)
Ratios of net investment
income to average net assets
After advisory/
administration fee waivers 5.27% 5.19%(2)
Before advisory/
administration fee waivers 4.67% 4.31%(2)
Portfolio turnover rate 30% 40%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 126
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 12/1/92(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of
period $10.53 $10.00
------ ------
Income from investment operations
Net investment income 0.53 0.36
Net gain (loss) on investments
(both realized and unrealized) (0.91) 0.53
------ ------
Total from investment
operations (0.38) 0.89
------ ------
Less distributions
Distributions from net
investment income (0.53) (0.36)
Distributions from net
realized capital gains (0.02) --
------ ------
Total distributions (0.55) (0.36
------ ------
Net asset value at end of period $ 9.60 $10.53
====== ======
Total return (3.75)% 9.10%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 127 $1,676
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.10% 0.08%(2)
Before advisory/
administration fee waivers 1.49% 2.59%(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.16% 4.99%(2)
Before advisory/
administration fee waivers 3.77% 2.48%(2)
Portfolio turnover rate 61% 36%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 127
WHAT ARE THE PORTFOLIOS?
The COMPASS CAPITAL FUNDS have been structured to include many
different investment styles across the spectrum of fixed income investments so
that investors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of the COMPASS CAPITAL FUNDS consist of [eleven]
investment products that provide investors with a broad spectrum of investment
alternatives within the fixed income sector. Seven of these portfolios invest
solely in taxable bonds, and four of these portfolios invest in tax exempt
bonds.
In certain investment cycles and over certain holding periods, a fund
that invests in any one of these styles may perform above or below the market.
An investment program that combines these multiple disciplines allows investors
to select from among these various product options in the way that most closely
fits the individual's investment goals and sentiments.
<TABLE>
<CAPTION>
==================================================================================================
Portfolio Investment Objective
--------- --------------------
- --------------------------------------------------------------------------------------------------
<S> <C>
Short Government Bond To seek to realize a rate of return that exceeds the
total return of the Merrill Lynch 1-3 year Treasury
Index.
- --------------------------------------------------------------------------------------------------
Intermediate Government, To seek current income consistent with the preservation
Intermediate Bond, Government of capital.
Income, Managed Income and
International Bond
- --------------------------------------------------------------------------------------------------
Tax-Free Income, Pennsylvania Tax- To seek as high a level of current income exempt from
Free Income and Ohio Tax-Free Income Federal income tax and, to the extent possible for each
State-Specific Municipal Portfolio, income tax of the
specific state in which the Portfolio concentrates, as
is consistent with preservation of capital.
==================================================================================================
</TABLE>
<PAGE> 128
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
Portfolio
Characteristics:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Performance Benchmark Dollar-Weighted Credit Quality Min
Portfolio Average Concentration Credit Quality
Maturity
(Approximate)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Gov't Bond Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Treasury Index
- -----------------------------------------------------------------------------------------------------------------
Intermediate Gov't Lehman Brothers 5-10 Years Gov't/Agency AAA
Intermediate Gov't
- -----------------------------------------------------------------------------------------------------------------
Intermediate Bond Lehman Brothers 5-10 Years Investment Grade BBB
Intermediate Gov't/Corp Spectrum
- -----------------------------------------------------------------------------------------------------------------
Gov't Income Lehman Mortgage/10 Year 10-15 Years Gov't/Agency AAA
Treasury
- -----------------------------------------------------------------------------------------------------------------
Managed Income Salomon BIG 5-10 Years Investment Grade BBB
Spectrum
- -----------------------------------------------------------------------------------------------------------------
International Bond Salomon Non-U.S. Hedged 5-15 Years Investment Grade Below Investment
Government Bond Index Spectrum Grade
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Index Spectrum
- -----------------------------------------------------------------------------------------------------------------
PA Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
- -----------------------------------------------------------------------------------------------------------------
OH Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
For more information on a Portfolio's Benchmark, see the Appendix at the back
of this Prospectus.
<PAGE> 129
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
Yes: The Fund will hold a significant concentration of these securities at all
times.
Elig: TheFund may purchase these securities, butthey may or may notbe a
significant holding at agiven time.
Temp. The Fund may purchase these securities but under normal market
conditions is not expected to do so
No: The Fund may not purchase these securities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Treasuries Agencies Agency Non Agency/ Corp. ABS Foreign Municipals
MBS Commercial Securities/
MBS Currency Risk
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Bond Yes Yes Yes No Elig. Elig. No Elig.
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Gov't Yes Yes Yes No Yes Elig. No Elig.
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Yes Yes Yes Elig. Yes Yes No Elig.
- ------------------------------------------------------------------------------------------------------------------------------------
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
- ------------------------------------------------------------------------------------------------------------------------------------
Managed Income Yes Yes Yes Elig. Yes Yes Elig. Elig.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Yes Yes Elig. Elig. Elig. Elig. Yes Elig.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Temp. No No No No No No Yes
- ------------------------------------------------------------------------------------------------------------------------------------
PA Tax-Free Temp. No No No No No No Yes
- ------------------------------------------------------------------------------------------------------------------------------------
OH Tax Free Temp. No No No No No No Yes
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 130
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL LIMITATIONS?
A Portfolio's investment objective may be changed by the Fund's Board
of Trustees without shareholder approval. However, shareholders will be
notified of any such change. No assurance can be provided that a Portfolio
will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). The following descriptions summarize several of the Portfolios'
fundamental investment policies, which are set forth in full in the Statement
of Additional Information.
No Portfolio may:
(1) purchase securities (except U.S. Government Securities) if
more than 5% of its total assets will be invested in the
securities of any one issuer, except that up to 25% of a
Portfolio's total assets may be invested without regard to
this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry; and
(3) in the case of each Municipal Portfolio, invest less than 80%
of its net assets in instruments the interest on which is
exempt from regular Federal income tax or, for each
State-Specific Municipal Portfolios, in AMT Paper, except
during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal
Portfolios. Instead, as a non-fundamental investment restriction, each
State-Specific Municipal Portfolio will not invest in securities (except U.S.
Government securities and related repurchase agreements) that would cause, at
the end of any tax quarter, more than 5% of its total assets to be invested in
securities of any one issuer, except that up to 50% of a Portfolio's total
assets may be invested without regard to this limitation so long as no more
than 25% of the Portfolio's total assets are invested in any one issuer (except
U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment
securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. If the Fund determines that any such
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
INVESTMENT QUALITY. Securities acquired by the Short Government Bond
Portfolio, Intermediate Government Portfolio and Government Income Portfolio
(the "Government Portfolios") will be rated in the highest rating category at
the time of purchase or, if unrated, of comparable
<PAGE> 131
quality as determined by the Portfolios' sub-adviser. Securities acquired by
the other Portfolios will be rated investment grade at the time of purchase
(within the four highest voting categories by S&P, Duff, Fitch or Moody's) or,
if unrated, of comparable quality as determined by a Portfolio's sub-adviser.
Securities rated "Baa" on "BBB" are generally considered to be investment grade
although they have speculative characteristics. The International Bond
Portfolio may also invest up to 5% of its net assets in securities rated below
the investment grade (commonly referred to as "junk bonds") or in comparable
unrated securities. If a security is reduced below the minimum rating that is
permitted for a Portfolio, the Portfolio's sub-adviser will consider whether
the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at
least 80% of the value of its total assets in debt securities. The Government
Portfolios will invest at least 65% of their net assets in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its net assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio
and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios")
and the Tax-Free Income Portfolio (together with the "State-Specific Tax-Free
Portfolios" called the "Tax-Free Portfolios") will invest, during normal market
conditions, at least 80% of their net assets in obligations issued by or on
behalf of states, territories and possessions of the United States, the
District of Columbia and their political sub-divisions, agencies,
instrumentalities and authorities and related tax-exempt derivative securities
("Municipal Obligations"). In addition, each State-Specific Tax-Free Portfolio
intends to invest at least 65% of its net assets in Municipal Obligations of
issuers located in the particular state indicated by its name. The Tax-Free
Income Portfolio intends to invest less than 25% of its net assets in Municipal
Obligations of issuers located in the same state. During temporary defensive
periods each Tax-Free Portfolio may invest without limitation in securities
that are not Municipal Obligations and may hold without limitation uninvested
cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest
primarily in foreign securities and currencies. The Managed Income Portfolio
may invest up to 10% of its total assets in debt securities of foreign issuers
and may hold from time to time various foreign currencies pending their
investment or conversion into U.S. dollars. Investing in securities of foreign
issuers involves considerations not typically associated with investing in
securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Portfolio that invests in foreign securities
will be affected favorably or unfavorably by changes in currency exchange
rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. While the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock
<PAGE> 132
Exchange. Accordingly, a Portfolio's foreign investments may be less liquid
and their prices may be more volatile than comparable investments in securities
in U.S. companies. In addition, there is generally less government supervision
and regulation of securities exchanges, brokers and issuers in foreign
countries than in the United States.
[Foreign investments may include: (a) debt obligations issued or
guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state,
province or municipality; (b) debt obligations of supranational organizations
such as the World Bank, Asian Development Bank, European Investment Bank, and
European Economic Community; (c) debt obligations of foreign banks and bank
holding companies; (d) debt obligations of domestic banks and corporations
issued in foreign currencies; (e) debt obligations denominated in the European
Currency Unit (ECU); (f) foreign corporate debt securities and commercial
paper; and (g) private placements. Such securities may include loan
participations and assignments, convertible securities and zero-coupon
securities.]
[To maintain greater flexibility, the International Bond Portfolio may
invest in instruments which have the characteristics of futures securities.
Such instruments may take a variety of forms, such as debt securities with
interest or principal payments determined by reference to the value of a
currency or commodity at a future point in time. The risks of such investments
could reflect the risks of investing in futures, currencies and securities,
including volatility and illiquidity.]
The expense ratio of the International Bond Portfolio can be expected
to be higher than those of Portfolios investing primarily in domestic
securities. The costs attributable to investing abroad are usually higher for
several reasons, such as higher investment research costs, higher cost foreign
custody costs, higher commission costs and additional costs arising from delays
in settlements of transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the state or governmental body has no obligation to
make
<PAGE> 133
these payments in future years unless money is appropriated on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
is not yet as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in
private activity bonds the interest on which is an item of tax preferences for
purposes of the Federal alternative minimum tax ("AMT Paper") when added
together with any taxable investments held by the Portfolio. In addition, each
Tax-Free Portfolio may invest 25% or more of its net assets in Municipal
Obligations the interest on which is paid solely from revenues of similar
projects. To the extent a Portfolio's assets are invested in Municipal
Obligations payable from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified
portfolio, and the State-Specific Tax-Free Portfolios are classified as
non-diversified portfolios, under the 1940 Act. Investment returns on a
non-diversified portfolio typically are dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than it would a
diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase at the Portfolio's option specified Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligations
to which the commitment relates. Each Tax-Free Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
The Tax-Free Portfolios may invest in tax-exempt derivative securities
relating to Municipal Obligations, including tender option bonds,
participations, beneficial interest in trust and partnership interest. The
amount of information regarding the financial condition of issuers of Municipal
Obligations may not be as extensive as that which is made available by public
corporations and the secondary market for Municipal Obligations may be less
liquid than that for taxable fixed-income securities. Accordingly, the ability
of a Tax-Free Portfolio to buy and sell tax-exempt securities may, at any
particular time and with respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal and state income tax are rendered by
counsel to the respective issuers and sponsors of the obligations at the time
of issuance. The Fund and its investment adviser and sub-adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative securities, or the bases for such opinions.
[The Ohio Tax-Free Income Portfolio will not trade its securities for
the purpose of seeking profits. For purposes of this policy, the Portfolio may
vary its portfolio securities if (i) there has been an adverse change in a
security's credit rating or in that of its issuer or in the adviser's or
sub-adviser's credit analysis of the security or its issuer; (ii) there has
been, in the opinion of the adviser
<PAGE> 134
and sub-adviser, a deterioration or anticipated deterioration in general
economic or market conditions affecting issuers of Ohio Municipal Obligations,
or a change or anticipated change in interest rates; (iii) adverse changes or
anticipated changes in market conditions or economic or other factors
temporarily affecting the issuers of one or more portfolio securities make
necessary or desirable the sale of such security or securities in anticipation
of the Portfolio's repurchase of the same or comparable securities at a later
date; or (iv) the adviser or sub-adviser engages in temporary defensive
investment strategies.]
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios may
purchase securities that are secured or backed by mortgages as well as other
assets (e.g., automobile loans and credit card receivables). These
mortgage-related and asset-backed securities may be issued by the U.S.
Government, GNMA, FNMA, Federal Home Loan Mortgage Corporation, and private
issuers such as commercial banks, financial companies, finance subsidiaries of
industrial companies, savings and loan associations, mortgage banks and
investment banks.
The Portfolios may acquire several types of mortgage-related
securities, including guaranteed mortgage pass-through certificates, which
provide the holder with a pro rata interest in the underlying mortgages,
adjustable rate mortgage-related securities ("ARMs") and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-related securities. Primarily, these securities do
not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and Federal consumer credit
laws, many of which give debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. A major difference is that
the principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, if a mortgage-related or asset-backed security is purchased at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if one of these
securities is purchased at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will decrease, yield to
maturity. In calculating the average weighted
<PAGE> 135
maturity of a Portfolio, the maturity of mortgage-related and asset-backed
securities will be based on estimates of average life which take prepayments
into account.
Prepayments on mortgage-related and asset-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and
social factors. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Like other fixed income
securities, when interest rates rise the value of a mortgage-related or
asset-backed security generally will decline; however, when interest rates
decline, the value of these securities that have prepayment features may not
increase as much as that of other fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with
their investment objectives, the Portfolios may purchase Treasury receipts and
other "stripped" securities that evidence ownership in either the future
interest payments or the future principal payments on U.S. Government and other
obligations. These participations, which may be issued by the U.S. Government
(or a U.S. Government agency or instrumentality) or by private issuers such as
banks and other institutions, are issued at a discount to their "face value,"
and may include stripped mortgage-backed securities ("SMBS"). Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The International Bond Portfolio also may
purchase "stripped" securities that evidence ownership in the future interest
payments or principal payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool
of mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class receives all of the
principal. However, in some cases, one class will receive some of the interest
and most of the principal while the other class will receive most of the
interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, a Portfolio may
fail to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be extremely volatile in response
to changes in interest rates. The yields on a class of SMBS that receives all
or most of the interest are generally higher than prevailing market yields on
other mortgage-related obligations because their cash flow patterns are also
volatile and there is a greater risk that the initial investment will not be
fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by the
Fund's Board of Trustees if they can be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of a Portfolio's per share net asset value.
Each Portfolio may invest in zero coupon bonds, which are normally
issued at a significant discount from free value and do not provide for
periodic interest payments. Zero coupon bonds may experience greater
volatility in market value than debt obligations which provide for regular
interest payments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios, may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian
<PAGE> 136
counterparts of U.S. corporations, as well as Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer. Bank obligations may
include certificates of deposit, notes, bankers' acceptances and fixed time
deposits. These obligations may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of specific
obligation or by government regulation. The Portfolios may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in
their interest rates, maturities and times of issuance. Obligations of certain
agencies and instrumentalities of the U.S. Government such as the Government
National Mortgage Association are supported by the United States' full faith
and credit; others such as those of the Federal National Mortgage Association
and the Student Loan Marketing Association are supported by the right of the
issuer to borrow from the Treasury; others such as those of the Federal Farm
Credit Banks or the Federal Home Loan Mortgage Corporation are supported only
by the credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter
into interest rate swaps and may purchase or sell interest rate caps and
floors. The Portfolios expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of their
holdings, as a duration management technique or to protect against an increase
in the price of securities a Portfolio anticipates purchasing at a later date.
The Portfolios intend to use these transactions as a hedge and not as a
speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor.
In addition, the International Bond Portfolio may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Portfolio expects to engage in foreign currency
exchange transactions in connection with the purchase and sale of portfolio
securities (transaction hedging) and to protect the value of specific portfolio
positions (position hedging). The Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in that
foreign currency, and may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts (futures contracts). The Portfolio may also
purchase exchange-listed and over-the-counter call and put options on futures
contracts and on foreign currencies, and may write covered call options on up
to 100% of the currencies in its portfolio. In order to protect against
currency fluctuations, the International Bond Portfolio may enter into currency
swaps. Currency swaps involve the exchange of the rights of the Portfolio and
another party to make or receive payments in specified currencies.
<PAGE> 137
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its
investment objective, each Portfolio may write covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or, with
respect to the International Bond Portfolio, cross-hedging. These options may
relate to particular securities, financial instruments, foreign currencies,
securities indices or the yield differential between two securities, and may or
may not be listed on a securities exchange and may or may not be issued by the
Options Clearing Corporation. A Portfolio will not purchase put and call
options where the aggregate premiums on outstanding options exceed 5% of its
net assets at the time of purchase, and will not write options on more than 25%
of the value of its net assets (measured at the time an option is written).
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. In addition, unlisted options are not subject to
the protections afforded purchasers of listed options issued by the Options
Clearing Corporation, which performs the obligations of its members if they
default.
To the extent consistent with its investment objective, each Portfolio
may also invest in futures contracts and options on futures contracts for
hedging purposes or to maintain liquidity. The value of a Portfolio's
contracts may equal or exceed 100% of the Fund's total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately
afterwards the aggregate amount of margin deposits on its existing futures
positions plus the amount of premiums paid for related futures options is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a
stated quantity of a foreign currency. A Portfolio may sell a futures contract
in order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange
fluctuation. A Portfolio may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales
of securities, in the value of the securities to be sold. In addition, a
Portfolio may utilize futures contracts in anticipation of changes in the
composition of its holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases
an option on a futures contracts, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
during the option period. When Portfolio sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with a Portfolio's position in a futures contract
or related option, the Fund will create a segregated account of liquid high
grade assets or will otherwise cover its position in accordance with applicable
SEC requirements.
The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of
the instruments held by a Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) a sub-adviser's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see the Statement of Additional Information.
<PAGE> 138
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Portfolios from registration as a
"commodity pool operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, a Portfolio makes cash
contributions to a deposit fund of the insurance company's general account.
The insurance company then credits to the Portfolio, on a monthly basis,
interest which is based on an index (such as the Salomon Brothers CD Index),
but is guaranteed not to be less than a certain minimum rate. Each Portfolio
does not expect to invest more than 5% of its net assets in GICs at any time
during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase
rated and unrated variable and floating rate instruments. These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The Portfolios may invest up to 10% of their total assets in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Issuers of unrated
variable and floating rate instruments must satisfy the same criteria as set
forth above for a Portfolio. The absence of an active secondary market with
respect to particular variable and floating rate instruments, however, could
make it difficult for the Portfolio to dispose of a variable or floating rate
instrument if the issuer defaulted on its payment obligation or during periods
when the Portfolio is not entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements").
Repurchase agreements are in substance loans. Default by or bankruptcy of the
seller would, however, expose a Portfolio to possible loss because of adverse
market action or delays in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is
authorized to make limited borrowings. If the securities held by a Portfolio
should decline in value while borrowings are outstanding, the net asset value
of the Portfolio's outstanding shares will decline in value by proportionately
more than the decline in value suffered by the Portfolio's securities.
Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios (except the Tax-Free Portfolios) may use reverse
repurchase agreements when it is anticipated that the interest income to be
earned from the investment
<PAGE> 139
of the proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by a Portfolio may decline below the price of the securities the Fund is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid high-grade debt
securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an
additional 5% of its total assets for temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued
by other investment companies within the limits prescribed by the 1940 Act. As
a shareholder of another investment company, a Portfolio 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 Portfolio bears directly in connection
with its own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15%
of the value of its net assets in securities that are illiquid. GICs, variable
and floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered
under the Securities Act of 1933 (the "1933 Act") 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 a Portfolio's sub-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 a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive
opportunities in the mortgage market and to enhance current income, each
Portfolio (except the Tax-Free Portfolios) may enter into dollar roll
transactions. A dollar roll transaction involves a sale by the Portfolio of a
mortgage-backed or other security concurrently with an agreement by the
Portfolio to repurchase a similar security at a later date at an agreed-upon
price. The securities that are repurchased will bear the same interest rate
and stated maturity as those sold, but pools of mortgages collateralizing such
<PAGE> 140
securities may have different prepayment histories than those sold. During the
period between the sale and repurchase, a Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of
the sale will be invested in additional instruments for the Portfolio, and the
income from these investments will generate income for the Portfolio. If such
income does not exceed the income, capital appreciation and gain or loss that
would have been realized on the securities sold as part of the dollar roll, the
use of this technique will diminish the investment performance of a Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that a Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
government securities or other liquid high grade debt obligations having a
value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained.
Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed
upon repurchase price of those securities. If the broker/dealer to whom a
Portfolio sells securities becomes insolvent, the Portfolio's right to purchase
or repurchase securities may be restricted and the instruments which the
Portfolio is required to repurchase may be worth less than an instrument which
the Portfolio originally held when the Portfolio is able to complete the
purchase. Successful use of mortgage dollar rolls may depend upon a
sub-adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities
"against-the-box." A short sale is a transaction in which a Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline. The Portfolios expect to make short sales both as a form of
hedging to offset potential declines in long positions in similar securities
and in order to maintain portfolio flexibility. In a short sale
"against-the-box," at the time of sale, the Portfolio owns or has the immediate
and unconditional right to acquire the identical security at no additional
cost. When selling short "against-the-box," a Portfolio forgoes an opportunity
for capital appreciation in the security.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is
expected that the annual portfolio turnover rate for each Portfolio will not
exceed [ ]. A Portfolio's annual portfolio turnover rate will not, however,
be a factor preventing a sale or purchase when the sub-adviser believes
investment considerations warrant such sale or purchase. Portfolio turnover
may vary greatly from year to year as well as within a particular year. High
portfolio turnover rates will generally result in higher transaction costs to a
Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing
interest rates. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than securities with shorter maturities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS.
The concentration of investments by the State Specific Municipal Portfolios in
State-Specific Obligations raises special investment considerations. In
particular, changes in the economic condition and governmental policies of a
state and its political subdivisions could adversely the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific
Municipal Portfolios invest are
<PAGE> 141
described below. For further information, see "Special Consideration Regarding
State- Specific Obligations" in the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the
principal operating fund of the Commonwealth) experienced deficits in fiscal
1990 and 1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30,
1993 of $698.9 million. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to a surplus of
$64.4 million as of June 30, 1993. Rising unemployment, a relatively high
proportion of persons 65 and older in the Commonwealth and court ordered
increases in healthcare reimbursement rates place increased pressures on the
tax resources of the Commonwealth and its municipalities. The Commonwealth has
sold a substantial amount of bonds over the past several years, but the debt
burden remains moderate. The recession has affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January, but
the Commonwealth is likely to continue to show fiscal restraint.
Ohio. While diversifying more into the service and other
non-manufacturing areas, the economy of Ohio continues to rely in part on
durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result,
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Agriculture is an important segment of the Ohio economy with over
half the State's area devoted to farming and approximately 15% of total
employment in agribusiness. In prior years, the State's overall unemployment
rate was commonly somewhat higher than the national figure. For example, the
reported 1990 average monthly State rate was 5.7%, compared to the national
figure of 5.5%. However, for the last four years the State rates were below
the national rates (5.5% versus 6.1% in 1994). The unemployment rate and its
effects vary among particular geographic areas of the State. There can be no
assurance that future national, regional or state-wide economic difficulties
and the resulting impact on State or local government finances generally will
not adversely affect the market value of Ohio Municipal Obligations held in the
Portfolio or the ability of particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of its Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
ADVISER AND SUB-ADVISERS
The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Management
Group. Each of the Portfolios within the Compass Capital Fund Family, except
the International Bond Portfolio, is managed by an experienced portfolio
manager who is a member of PNC Asset Management Group's
<PAGE> 142
distinguished fixed income portfolio management subsidiary, BlackRock Financial
Corporation, Inc. The sub-adviser of the International Bond Portfolio is Morgan
Grenfell Investment Services Limited.
The [eleven] portfolios and their investment sub-advisers and
portfolio managers are as follows:
<TABLE>
<CAPTION>
Compass Capital Portfolio Investment Sub-Adviser Portfolio Manager
- ------------------------- ---------------------- -----------------
<S> <C> <C>
Short Government Bond BlackRock(1) Robert S. Kapito; Vice Chairman of BlackRock since 1988; Portfolio co-
manager since 1995.
Michael P. Lustig; Vice President of BlackRock since 1989; Portfolio co-
manager since 1995.
Scott Amero; Managing Director of BlackRock since 1990; Portfolio co-
manager since 1995.
Intermediate Government BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
Intermediate Bond BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
Government Income BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
Managed Income BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
International Bond Morgan Grenfell(2) Martin A. Hall; Director of Morgan Grenfell since 1991; Portfolio
manager since ______.
Tax-Free Income BlackRock(1) Kevin Klingert; portfolio manager at BlackRock since 1991; prior to
joining BlackRock, Assistant Vice President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager since 1995.
</TABLE>
<PAGE> 143
<TABLE>
<S> <C> <C>
Pennsylvania Tax-Free BlackRock(1) Kevin Klingert (see above); Portfolio manager since 1995.
Ohio Tax-Free BlackRock(1) Kevin Klingert (see above); Portfolio manager since 1995.
</TABLE>
- -------------------
(1) BlackRock Financial Corporation, Inc. ("BlackRock") has its primary
offices at 345 Park Avenue, New York, New York 10154.
(2) Morgan Grenfell Investment Services Limited ("Morgan Grenfell") has
its primary offices at 20 Finsbury Circus, London ECZM, 1NB England.
PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1835 Market Street, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company. Morgan Grenfell is an indirect
wholly-owned subsidiary of Deutsche Bank, A.G., a German financial services
conglomerate.
For their investment advisory and sub-advisory services, PAMG and the
portfolios' sub-advisers are entitled to fees, computed daily on a
Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth
in the following table. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
<TABLE>
<CAPTION>
ANNUAL CONTRACTUAL FEE RATE
----------------------------------------------------------------------
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
---------------- ----------------------------
INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ADVISORY FEE FEE ADVISORY FEE FEE
------------ ------------ ------------ ------------
AVERAGE DAILY NET ASSETS
- ------------------------
<S> <C> <C> <C> <C>
first $1 billion .50% .35% .55% .40%
$1 billion--$2 billion .45 .30 .50 .35
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .40 .25 .45 .30
</TABLE>
For their last fiscal year, the Portfolios paid investment advisory
fees at the following annual rates after voluntary fee waivers: Managed Income
Portfolio .35%; Tax-Free Income Portfolio 0%; Intermediate Government Portfolio
.20%; Ohio Tax-Free Income Portfolio 0%; Pennsylvania Tax-Free Income Portfolio
.27%; Short Government Bond Portfolio ___%; Intermediate Bond Portfolio .25%;
Government Income Portfolio 0%; and International Bond Portfolio _______.
<PAGE> 144
Brokerage transactions for the Portfolios may be directed through
registered broker/dealers who have entered into dealer agreements with the
Fund's distributor, subject to the requirements of best execution.
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania Merchant Group
Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI is entitled to a fee, computed daily and payable monthly, at an annual
rate of .03% of each Portfolio's average daily net assets, and PFPC and PDI are
entitled to receive a combined fee, computed daily and payable monthly, at an
annual rate of .20% of the first $500 million of each Portfolio's average daily
net assets, .18% of the next $500 million of each Portfolio's average daily net
assets, .16% of the next $1 billion of each Portfolio's average daily net
assets and .15% of each Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. Expenses include, but are not limited
to, fees paid to PAMG and the Administrators, transfer agency and custodian
fees, trustee fees, taxes, interest, professional fees, distribution and
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their Shares for distribution under Federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, insurance premiums, the expense
of independent pricing services, and other expenses which are not expressly
assumed by PAMG or the Fund's service providers under their agreements with the
Fund. Any general expenses of the Fund that do not belong to a particular
investment portfolio will be allocated among all investment portfolios by or
under the direction of the Board of Trustees in a manner the Board determines
to be fair and equitable.
<PAGE> 145
HOW ARE SHARES PURCHASED AND REDEEMED?
DISTRIBUTOR
Shares of each Portfolio are sold on a continuous basis by PDI as
distributor (the "Distributor"). PDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits PDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of any portion of the fees paid
by the Fund, past profits or other sources. The Fund is not required or
permitted under the plan to make distribution payments with respect to
Institutional Shares over and above the investment advisory and other fees it
pays for non-distribution services. The plan merely permits the reallocation
of a portion of these fees to pay for distribution related and shareholder
servicing activities.
PURCHASE OF SHARES
Institutional Shares are offered to institutional investors, including
registered investment advisers with a minimum investment of $500,000 and
individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per share next
determined after an order is received by PFPC. Orders received by PFPC by 4:00
p.m. (Eastern Time) on a Business Day are priced the same day. A "Business
Day" is any weekday that the New York Stock Exchange (the "NYSE") and the
Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders for each Portfolio may be placed by telephoning PFPC at (800)
441-7379. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced
the following Business Day.
Payment for Institutional Shares must normally be made in Federal
funds or other funds immediately available to the Fund's custodian. Payment
may also, in the discretion of the Fund, be made in the form of securities that
are permissible investments for the respective Portfolios. For further
information, see the Statement of Additional Information. The minimum initial
investment is [$______]. There is no minimum subsequent investment.
The Fund may in its discretion waive the minimum investment amount and
may reject any order for Institutional Shares.
REDEMPTION OF SHARES
Redemption orders for Institutional Shares may be placed by
telephoning PFPC at (800) 441-7379. Institutional Shares are redeemed at their
net asset value per share next determined after PFPC's receipt of the
redemption order. The Fund and its service providers will not be liable for
any loss, liability, cost or expense for acting upon telephone instructions
that are reasonably believed to be genuine. In attempting to confirm that
telephone instructions are genuine, the Fund may use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered,
<PAGE> 146
the account number, recent transactions in the account, and the account
holder's Social Security number, address and/or bank).
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
[provided that the Fund's custodian is also open for business]. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) [or on a day when
the Fund's custodian is closed] is normally wired in Federal funds on the next
Business Day following redemption [on which the Fund's custodian is open for
business]. The Fund reserves the right to wire redemption proceeds within
seven days after receiving a redemption order if, in the judgment of PAMG, an
earlier payment could adversely affect a Portfolio. No charge for wiring
redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC, [P.O. Box 8907, Wilmington, DE 19899-8907].
The Fund may redeem Institutional Shares in any Portfolio account if
the account balance drops below [$5,000] as the result of redemption requests
and the shareholder does not increase the balance to at least [$5,000] upon
thirty days' written notice.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
HOW IS NET ASSET VALUE CALCULATED?
Net asset value is calculated separately of the close of regular
trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each Business
Day by dividing the value of all securities and other assets owned by a
Portfolio that are allocated to a particular class of Shares, less the
liabilities charged to that class, by the number of shares of the class that
are outstanding.
Most securities held by a Portfolio are priced based on their market
value as determined by reported sales prices or the mean between their bid and
asked prices. Portfolio securities which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except when an occurrence
subsequent to the time a value was so established is likely to have changed
such value. Securities for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the Portfolio's sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value.
<PAGE> 147
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. All
distributions are reinvested at net asset value in the form of additional full
and fractional Shares of the same class of Shares of the relevant Portfolio
unless a shareholder elects otherwise. Such election, or any revocation
thereof, must be made in writing to PFPC, and will become effective with
respect to dividends paid after its receipt by PFPC. The net investment income
of the Managed Income, Tax-Free Income, Intermediate Government,
Intermediate Bond and International Bond Portfolios is declared monthly as
a dividend to investors who are Shareholders of such Portfolio at the close of
business on the day of declaration. [The net investment income of the
Pennsylvania Tax-Free Income, Ohio Tax-Free Income, Government Income and
Short Government Bond Portfolios is declared daily as a dividend to investors
who are Shareholders of such Portfolio at, and whose payment for Share
purchases are available to the particular Portfolio in Federal funds by, the
close of business on the day of declaration.] All dividends are paid within
ten days after the end of each month and, in the case of the Pennsylvania
Tax-Free Income, Ohio Tax-Free Income, Government Income and Short Government
Bond Portfolios, within seven days after redemption of all of a shareholder's
Shares in a Portfolio. Net realized capital gains (including net short-term
capital gains), if any, will be distributed by each Portfolio at least
annually.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. If a
Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
regardless of whether the distributions are paid in cash or reinvested in
additional Shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds Shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns, and in two circumstances such amounts, while exempt from regular
Federal income tax, are taxable to persons subject to alternative minimum and
environmental taxes. First, "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute an
item of tax preference for corporate and non-corporate taxpayers in determining
alternative minimum and environmental tax liability. Second, "exempt interest
dividends" must be taken into account by corporate taxpayers in determining
certain adjustments for alternative minimum and environmental tax purposes.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its
net investment income which are exempt from the regular Federal income tax,
which constitute an item of tax preference for
<PAGE> 148
purposes of the Federal alternative minimum tax, and which are fully taxable.
These percentages will apply uniformly to all distributions declared from net
investment income during that year, and may differ significantly from the
actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid the
following January.
An investor considering buying shares of a Portfolio on or just before
the record date of a taxable dividend should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Portfolio Shares depending upon their tax
basis and their price at the time of redemption, transfer or exchange.
Any loss upon the sale or exchange of Shares held for six months or
less will be disallowed for Federal income tax purposes to the extent of any
exempt interest dividends received by the shareholder. For the Ohio Tax-Free
Income Portfolio, the loss will be disallowed for Ohio income tax purposes to
the same extent, even though, for Ohio income tax purposes, some portion of
such dividends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by
the International Bond Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the
value of the Portfolio's total assets at the close of the taxable year in
question consists of stock or securities of foreign corporations, the Portfolio
may elect, for U.S. Federal income tax purposes, to treat certain foreign taxes
paid by it, including generally any withholding taxes and other foreign income
taxes, as paid by its shareholders. The Portfolio intends to make this
election. As a result, the amount of such foreign taxes paid by the Portfolio
will be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder generally will
be entitled either (a) to credit a proportionate amount of such taxes against
U.S. Federal income tax liabilities, or (b) if a shareholder itemizes
deductions, to deduct such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. Except as discussed below, dividends paid by each Portfolio
may be taxable to investors under state or local law as dividend income even
though all or a portion of the dividends may be derived from interest on
obligations which, if realized directly, would be exempt from such income
taxes. In addition, future legislative or administrative changes or court
decisions may materially affect the tax consequences of investing in a
Portfolio. Shareholders who are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships may be subject to
different U.S. Federal income tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder
attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio
from Pennsylvania Municipal Obligations or
<PAGE> 149
attributable to insurance proceeds on account of such interest, is not taxable
to individuals, estates or trusts under the Personal Income Tax imposed by
Article III of the Tax Reform Code of 1971 (in the case of insurance proceeds,
to the extent they are exempt for Federal Income Tax purposes); to corporations
under the Corporate Net Income Tax imposed by Article IV of the Tax Reform Code
of 1971 (in the case of insurance proceeds, to the extent they are exempt for
Federal Income Tax purposes); nor to individuals under the Philadelphia School
District New Income Tax ("School District Tax") imposed on Philadelphia
resident individuals under authority of the Act of August 9, 1963, P.L. 640.
Income received by a shareholder attributable to gain on the sale or
other disposition by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania
Municipal Obligations is taxable under the Personal Income Tax, the Corporate
Net Income Tax, and, unless these assets were held by the Pennsylvania Tax-Free
Income Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain
realized on Pennsylvania Municipal Obligations held by the Pennsylvania
Tax-Free Income Portfolio, such gain may be subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a share held for more
than six months is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares,
or interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not
subject to any of the personal property taxes currently in effect in
Pennsylvania to the extent that the Portfolio is comprised of Pennsylvania
Municipal Obligations and Federal obligations (if the interest on such
obligations is exempt from state and local taxation under the laws of the
United States). The taxes referred to include the County Personal Property Tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to
Ohio personal income tax, municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions from the Ohio Tax-Free
Income Portfolio to the extent that such distributions consist of interest on
Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their
subdivisions. Corporations that are subject to the Ohio corporation franchise
tax will not have to include distributions from the Ohio Tax-Free Income
Portfolio in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions
either constitute exempt-interest dividends or consist of interest on Ohio
Municipal Obligations or U.S. Obligations. However, Shares of the Ohio
Tax-Free Income Portfolio will be included in a corporation's net worth base
for purposes of calculating the Ohio corporation franchise tax. Distributions
consisting of gain on the sale, exchange or other disposition of Ohio Municipal
<PAGE> 150
Obligations will not be subject to the Ohio personal income tax, or municipal
or school district income taxes in Ohio and will not be included in the net
income base of the Ohio corporation franchise tax. Distributions attributable
to other sources will be subject to the Ohio personal income tax and the Ohio
corporation franchise tax.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of Trust authorizes the Board
of Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Board of Trustees has
authorized the issuance of an unlimited number of shares in twenty-eight
separate investment portfolios. Each Portfolio described in this prospectus
offers five separate classes of shares - Institutional Shares, Service Shares,
Investor A Shares, Investor B Shares and Investor C Shares. This prospectus
relates only to Investor Shares of the nine Portfolios described herein, each
of which is classified as a diversified Portfolio under the 1940 Act.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. In addition, each class of
Investor Shares are sold with different sales charges. Because of these "class
expenses" and sales charges, the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the Portfolio's three classes of
Investor Shares. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan,
automatic withdrawal plan and checkwriting. For further information regarding
the Fund's Investor and Service share classes, contact [name and number].
Each share of an investment portfolio has a par value of $.001,
represents an interest in the particular portfolio and is entitled to such
dividends and distributions earned on such portfolio's assets as are declared
in the discretion of the Board of Trustees. The Fund's shareholders are
entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except where otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular class or investment portfolio. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
On January __, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank
holding company.
<PAGE> 151
HOW IS PERFORMANCE CALCULATED?
Total return and yield information for each class of Institutional
Shares of the Portfolios may be quoted in advertisements and communications to
shareholders. Total return will be calculated on an average annual total
return basis for various periods. Average annual total return reflects the
average annual percentage change in value of an investment in a class of Shares
over the measuring period. Total return may also be calculated on an aggregate
total return basis. Aggregate total return reflects the total percentage
change in value over the measuring period. Both methods of calculating total
return assume that dividends and capital gain distributions made by a Portfolio
with respect to a class of Shares are reinvested in Shares of the same class.
The yield of a class of Shares is computed by dividing the Portfolio's
net income per share allocated to that class during a 30-day (or one month)
period by the maximum offering price per Share on the last day of the period
and annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's
"tax-equivalent yield" may also be quoted, which shows the level of taxable
yield needed to produce an after-tax equivalent to a Portfolio's tax-free
yield. This is done by increasing the Portfolio's yield (calculated above) by
the amount necessary to reflect the payment of Federal and/or state income tax
at a stated tax rate.
The performance of a Share class may be compared to the performance
other mutual funds with similar investment objectives and to other relevant
indices or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the total return and/or yield of a class of Shares may be
compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Lehman GMNA Index, the Lehman Index of Baa-rated Corporate
Bonds, the T-Bill Index, the "stocks, bonds and inflation Index" published
annually by Ibbotson Associates and the Lehman Government Corporate Bond Index.
Performance information may also include evaluations of the Portfolios and
their Share classes published by nationally recognized ranking services and
information as reported by financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of a class of Shares of a particular Portfolio, a
Portfolio may provide other information demonstrating hypothetical investment
returns. This information may include, but is not limited to, illustrating the
compounding effects of a dividend in a dividend reinvestment plan or the impact
of tax-deferred investing.
Performance quotations represent past performance and should not be
considered representative of future results. The investment return and
principal value of an investment in a Portfolio will fluctuate so that an
investor's Shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, performance data for a Portfolio
cannot necessarily be used to compare an investment in the Portfolio with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged
<PAGE> 152
by brokers or other institutions directly to their customer accounts in
connection with investments in a Portfolio will not be included in the
Portfolio's calculations of yield and total return.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, COMPASS CAPITAL FUNDS have other sources of
information regarding each Fund and its portfolio holdings, strategy and
current dividend and yield levels.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL FUNDS by either using
a toll-free number or through electronic access:
For Performance and Portfolio Management Questions, dial (800) compass
For Information Related to Share Purchase and Redemptions call your investment
adviser or Compass Capital Funds at (800) xxx-xxxx
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) xxx-xxxx
Information is also available on the World Wide Web through the Internet.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing COMPASSFUNDS.COM
<PAGE> 153
APPENDIX
<TABLE>
<CAPTION>
========================================================================================================================
Compass Capital Performance
--------------- -----------
Fund Benchmark Description
---- --------- -----------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short Government Merrill 1-3 Year Treasuries with maturities ranging from 1 to 2.99 years
Bond Treasury Index
- ------------------------------------------------------------------------------------------------------------------------
Intermediate Lehman Brothers Treasury and agency issues in the Lehman Aggregate, excluding maturities
Government Intermediate above 9.99 years
Government
- ------------------------------------------------------------------------------------------------------------------------
Intermediate Lehman Brothers Treasury, agency and corporate issues in the Lehman Aggregate, excluding
Bond Intermediate maturities above 9.99 years
Gov't/Corp
- ------------------------------------------------------------------------------------------------------------------------
Government Lehman 50% allocation to the mortgage component of the Lehman Aggregate Index and
Income Mortgage/10 Year a 50% allocation to the Merrill Lynch 10 Year Index
Treasury
- ------------------------------------------------------------------------------------------------------------------------
Managed Income Salomon BIG Very similar to the Lehman Aggregate, the Salomon BIG is a market-weighted
index comprised of U.S. Treasury, government-sponsored, investment grade
corporate (Baa3/BBB-or better), mortgage and asset-backed securities.
- Issues comprising the index have an average life of at least 1
year, with no maximum maturity
- Corporate and government-sponsored issues have a minimum face
amount of $100 million to qualify for entry, and a minimum of $75
million face amount to exit
- Treasury and mortgage issues have a minimum face amount of $1
billion for both entry and exit
- Excludes CMOs, ARMs, manufactured homes, nonagency bonds,
buydowns, graduated equity mortgages, project loans and non-
conforming ("jumbo") mortgages
- As of June 1995, the composition of the Index is:
- allocation to Treasury and government securities
- allocation to mortgage-backed securities
allocation to corporate and asset-backed securities
- ------------------------------------------------------------------------------------------------------------------------
International Salomon Non-U.S. FILL IN
Bond Hedged Government
Bond Index
- ------------------------------------------------------------------------------------------------------------------------
Tax-Free Income Lehman Municipal All of the bonds in the following Municipal Indices possess the following
Bond Index characteristics:
- A minimum credit rating of Baa3
- Outstanding par value of at least $3 million
- Must be issued as part of a deal of at least $50 million
- Individual bonds must have been issued within the last 5 years
- Remaining maturity of not less than one year
Excludes bonds subject to the alternative minimum tax (AMT), taxable
municipal bonds, and floating-rate or zero coupon municipal bonds
- ------------------------------------------------------------------------------------------------------------------------
Pennsylvania Lehman Local GO local general obligation bonds
Tax-Free Income Index
- ------------------------------------------------------------------------------------------------------------------------
Ohio Tax-Free Lehman Local GO local general obligation bonds
Income Index
========================================================================================================================
</TABLE>
<PAGE> 154
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
[A R T]
THE BOND
PORTFOLIOS
INSTITUTIONAL SHARES
PROSPECTUS
SHORT GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
MANAGED INCOME PORTFOLIO
TAX-FREE INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
January __, 1996
<PAGE> 155
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(SERVICE SHARES OF THE SHORT GOVERNMENT BOND
PORTFOLIO, INTERMEDIATE GOVERNMENT PORTFOLIO, INTERMEDIATE
BOND PORTFOLIO, GOVERNMENT INCOME PORTFOLIO, MANAGED INCOME PORTFOLIO,
INTERNATIONAL BOND PORTFOLIO, TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA
TAX-FREE INCOME PORTFOLIO AND OHIO TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 156
THE BOND PORTFOLIOS
SERVICE SHARES
The Compass Capital Funds(R) (the "Fund") consists of [twenty-eight]
investment portfolios. This Prospectus describes the Service Shares of nine of
those portfolios ("Portfolios"):
. Short Government Bond Portfolio .
. Intermediate Government Portfolio .
. Intermediate Bond Portfolio .
. Government Income Portfolio .
. Managed Income Portfolio .
. International Bond Portfolio .
. Tax-Free Income Portfolio .
. Pennsylvania Tax-Free Income Portfolio .
. Ohio Tax-Free Income Portfolio .
This Prospectus contains information that a prospective investor needs to
know before investing. Please keep it for future reference. A Statement of
Additional Information dated January ___, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by calling (800)
__________. The Statement of Additional Information, as supplemented from time
to time, is incorporated by reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND ARE NOT
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE
PORTFOLIOS ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
PROSPECTUS January ___, 1996
<PAGE> 157
INTRODUCING THE BOND PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Bond Portfolios of the COMPASS CAPITAL FUNDS consist of eleven investment
products, nine of which are described in this Prospectus, that provide
investors with a broad spectrum of investment alternatives within the fixed
income sector. Seven of these Portfolios invest in taxable bonds, and four of
these Portfolios invest in tax-exempt bonds. A detailed description of each
Portfolio appears on pages ____.
<TABLE>
<CAPTION>
COMPASS CAPITAL FUND PERFORMANCE BENCHMARK LIPPER PEER GROUP
- -------------------- --------------------- -----------------
<S> <C> <C>
Short Gov't Merrill 1-3 Year Treasury Index Short U.S. Government
Intermediate Gov't Lehman Brothers Intermediate Gov't Intermediate U.S. Gov't
Intermediate Bond Lehman Brothers Intermediate Intermediate Gov't/Corp
Gov't/Corp
Gov't Income Lehman Mortgage/10 Year Treasury General U.S. Gov't
Managed Income Salomon BIG Corporate Debt A-Rated
International Bond Salomon Non-U.S. Hedged Government General World Income
Bond Index
Tax-Free Lehman Municipal Bond Index General Municipal Debt
PA Tax-Free Lehman Local GO Index PA Municipal Debt
OH Tax Free Lehman Local GO Index OH Municipal Debt
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc. ("BlackRock") serves
as sub-adviser to each Portfolio except the International Bond Portfolio, which
is sub-advised by Morgan Grenfell Investment Services Limited ("Morgan
Grenfell").
UNDERSTANDING THE COMPASS CAPITAL BONDS FUNDS:
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in fixed
income investing.
CONSIDERING THE RISKS IN BOND INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective. Some or all of the Portfolios may purchase
mortgage-related, asset-backed, foreign and illiquid securities; enter into
repurchase and reverse repurchase agreements and engage in leveraging
techniques; lend portfolio securities to third parties; and enter into futures
contracts and options. Each state-specific tax-free Portfolio concentrates in
the securities of issuers located in a particular state, and is
non-diversified, which means that its performance may be dependent upon the
performance of a smaller number of Securities than the other Portfolios, which
are considered diversified. See "What Additional Investment Policies Apply?"
<TABLE>
<CAPTION>
ASKING THE KEY QUESTIONS
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Differences Among the Portfolios? . . . . . . . . . . . . . .
What Types of Securities Are in the Portfolios? . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Limitations? . . . . . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Purchase and Redeemed? . . . . . . . . . . . . . . . . . . .
What Special Purchase and Redemption
Procedures May Apply? . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
[END OF PAGE]
<PAGE> 158
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be
incurred by the Portfolios' Service Shares for the current fiscal year ending
September 30, 1996. An example based on the summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
GOVERNMENT BOND GOVERNMENT INTERMEDIATE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------ ---------------------- --------------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
for Service Shares After
Fee Waivers As a
Percentage of Daily Net
Assets
Advisory fees(1) .30% .30% .30%
Other operating expenses .35 .55 .55
---- --- ----
Administration fees(1) .15 .15 .13
Shareholder Servicing Fees .15 .15 .15
Other expenses(1) .25 .25 .27
---- ---- ----
Total Portfolio operating expenses .85% .85% .85%
==== ==== =====
</TABLE>
(1) Without waivers, advisory fees would be .50%, .50% and
.50% and administration fees would be .23%, .23% and
.23%, respectively. PAMG and the Portfolios'
Administrators are under no obligation to waive fees or
reimburse expenses, but have informed the Fund that they
expect to waive fees and reimburse expenses during the
current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set
forth in the table. The information in the tables is
based on the advisory and administration fees and other
expenses payable after fee waivers for the fiscal year
ended September 30, 1995, as restated to reflect current
expenses and fee waivers. Without waivers, total
operating expenses would be 1.13%, 1.32% and 1.30%,
respectively.
<PAGE> 159
<TABLE>
<CAPTION>
GOVERNMENT INCOME MANAGED INCOME
PORTFOLIO PORTFOLIO
--------------------------------- ---------------------------------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
for Service Shares After
Fee Waivers As a
Percentage of Daily Net
Assets
Advisory fees(1) .30% .35%
Other operating expenses .55 .53
----- -----
Administration fees(1) .15 .12
Shareholder Servicing Fees .15 .15
Other expenses(1) .25 .26
----- -----
Total Portfolio operating expenses .85% .88%
==== ====
</TABLE>
(1) Without waivers, advisory fees would be .52% and
.50% and administration fees would be .23% and
.23%, respectively. PAMG and the Portfolios'
Administrators are under no obligation to waive
fees or reimburse expenses, but have informed the
Fund that they expect to waive fees and reimburse
expenses during the current fiscal year as
necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the
table. The information in the tables is based on
the advisory and administration fees and other
expenses payable after fee waivers for the fiscal
year ended September 30, 1995, as restated to
reflect current expenses and fee waivers. Without
waivers, total operating expenses would be 1.15%
and 1.14%, respectively.
<PAGE> 160
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------- ------------------- -----------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
FOR SERVICE SHARES AFTER
FEE WAIVERS AS A
PERCENTAGE OF DAILY NET
ASSETS
Advisory fees(1) .55% 30% .30%
Other operating expenses .73 .55 .55
----- ----- -----
Administration fees(1) .15 .13 .13
Shareholder Servicing Fees .15 .15 .15
Other expenses(1) .43 .27 .27
----- ----- -----
Total Portfolio operating expenses 1.28% .85% .85%
===== ==== ====
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50%
and .50% and administration fees would be .23%,
.23% and .23%, respectively. [In addition, the
Expense Summary reflects reimbursements made to the
Tax-Free Income Portfolio by the adviser.] PAMG
and the Portfolio's Administrators are under no
obligation to waive fees or reimburse expenses, but
have informed the Fund that they expect to waive
fees and reimburse expenses during the current
fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels
set forth in the table. The information in the
tables is based on the advisory and administration
fees and other expenses payable after fee waivers
for the fiscal year ended September 30, 1995, as
restated to reflect current expenses and fee
waivers. Without waivers, total operating expenses
would be 1.36%, 1.15% and 1.15%, respectively.
<PAGE> 161
<TABLE>
<CAPTION>
OHIO
TAX-FREE INCOME
PORTFOLIO
---------------------------------
<S> <C>
ANNUAL FUND OPERATING
Expenses for Service
Shares After Fee Waivers
As a Percentage of Daily
Net Assets
Advisory Fees(1) .30%
Other operating expenses .55
----
Administration fees(1) .15
Service fees .30
Other expenses(1) .30
----
Total Portfolio operating expenses .85%
====
</TABLE>
(1) Without waivers, advisory fees would be .50% and
administration fees would be .23%. PAMG and the
Portfolios' Administrators are under no obligation
to waive fees or reimburse expenses, but have
informed the Fund that they expect to waive fees
and reimburse expenses during the current fiscal
year as necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the
table. The information in the tables is based on
the advisory and administration fees and other
expenses payable after fee waivers for the fiscal
year ended September 30, 1995, as restated to
reflect current expenses and fee waivers. Without
waivers, total operating expenses would be 1.18%
<PAGE> 162
EXAMPLE
An investor in Service Shares would pay the following expenses on a
$1,000 investment in Shares of each of the Portfolios, assuming (1) 5% annual
return, and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Short Government Bond Portfolio $9 $27 $47 $105
Intermediate Government Portfolio 9 27 47 105
Intermediate Bond Portfolio 9 27 47 105
Government Income Portfolio 9 27 47 105
Managed Income Portfolio 9 28 49 108
International Bond Portfolio 13 41
Tax-Free Income Portfolio 9 27 47 105
Pennsylvania Tax-Free Income Portfolio 9 27 47 105
Ohio Tax-Free Income Portfolio 9 27 47 105
</TABLE>
The foregoing Expense Table and Example are intended to assist
investors in understanding the costs and expenses that an investor in the
Portfolios will bear either directly or indirectly. The tables do not reflect
any charges that may be imposed by brokers or other institutions directly on
their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
<PAGE> 163
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference in the Statement of Additional
Information and has been audited by [ ], the Fund's
independent accountants. This financial information should be read together
with those financial statements. For the periods shown, the Short U.S.
Government Bond Portfolio offered only one class of shares to institutional
investors, and the International Bond Portfolio offered one class of shares to
both institutional and retail investors. Further information about the
performance of the Portfolios is available in the Fund's annual shareholder
reports. Both the Statement of Additional Information and the annual reports
may be obtained from the Fund free of charge by calling the number on the front
cover of this Prospectus.
<PAGE> 164
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
THE SHORT U.S. GOVERNMENT BOND PORTFOLIO+
<TABLE>
<CAPTION>
YEAR YEAR JULY 17, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
--------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . $ 9.71 $ 9.96 $10.00
---- ---- ------
Net investment income (net of $.014,
$.011 and $.005 respectively, of
interest expense)(**) . . . . . . . . . . . . . . 0.58 0.48 0.51
Net realized and unrealized loss on
investments . . . . . . . . . . . . . . . . . . . 0.13 (0.25) (0.06)
------ ------ ------
Net increase from investment
operations . . . . . . . . . . . . . . . . . . . . 0.71 0.23 0.45
------ ------ ------
Dividends from net investment income . . . . . . . . (0.58) (0.48) (0.49)
Distributions from net realized capital
gains . . . . . . . . . . . . . . . . . . . . . . . (0.01) --- ---
------ ------ ------
Total dividends and distributions . . . . . . . . . (0.59) (0.48) (0.49)
------ ------ ------
Net asset value, end of period . . . . . . . . . . . $ 9.83 $ 9.71 $ 9.96
====== ====== ======
TOTAL INVESTMENT RETURN(***) . . . . . . . . . . . . 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) . . . . . . . . . . . . . . . . . . . . 0.57% 0.57% 0.56%(****)
Net investment income(**) . . . . . . . . . . . . . . 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . $34,236 $36,686 $67,540
Portfolio turnover . . . . . . . . . . . . . . . . . 586% 455% 513%
Net assets, end of period (in thousands) . . . . . . $44,486 $31,265 $51,611
</TABLE>
- --------------------------------------------------------------------------------
+ This Portfolio commenced operations on July 17, 1992 as the Short
Duration Portfolio, a separate investment portfolio (the "Predecessor
Short Government Bond Portfolio") of The BFM Institutional Trust
Inc., which was organized as a Maryland business corporation. On
January __, 1996, the assets and liabilities of the Predecessor Short
Government Bond Portfolio were transferred to this Portfolio,
and were combined with the assets of a pre-existing portfolio
investment maintained by the Fund.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Short Government Bond
Portfolio waived fees amounting to $102,707 and $110,232 and
reimbursed expenses amounting to $61,195 and $55,582, for the periods
ended June 30, 1995 and June 30, 1994, respectively. For the period
July 17, 1992 through June 30, 1993, the administrator of the
Predecessor Short Bond Portfolio waived fees amounting to $64,580.
If all expenses had been borne, the expense ratios would have been
1.05%, 1.02% and 0.66% for the periods ended June 30, 1995, June 30,
1994 and June 30, 1993, respectively. The net investment income
ratios would have been 5.60%, 4.25% and 5.22% for the periods ended
June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The
net investment income on a per share basis would have been $0.53,
$0.43 and $0.49 for the periods ended June 30, 1995, June 30, 1994
and June 30, 1993, respectively.
(***) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
(****) Annualized.
<PAGE> 165
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $10.60 $ 10.45
------ -------
Income from investment operations
Net investment income 0.53 0.09
Net gain (loss) on investments
(both realized and unrealized) (0.86) 0.15
------ ------
Total from investment operations (0.33) 0.24
------ ------
Less distributions
Distributions from net investment
income (0.53) (0.09)
Distributions from net realized
capital gains (0.10) --
------
Total distributions (0.63) (0.09)
------- ------
Net asset value at end of period $ 9.64 $ 10.60
======= =======
Total return (3.31) % 2.30%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $60,812 $15,035
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.65% 0.67%(2)
Before advisory/administration fee
waivers 1.05% 0.75%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.30% 5.14%(2)
Before advisory/administration fee
waivers 4.90% 5.06%(2)
Portfolio turnover rate 9% 80%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 166
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $10.01 $ 9.99
------ ------
Income from investment operations
Net investment income 0.54 --
Net gain (loss) on investments
(both realized and unrealized) (0.91) 0.02
------ ------
Total from investment operations (0.37) 0.02
------ ------
Less distributions
Distributions from net investment
income (0.53) --
Distributions from net realized
capital gains (0.06) --
-------- -----
Total distributions (0.59) --
-------- -----
Net asset value at end of period $ 9.05 $ 10.01
======= =======
Total return (3.80)% 0.20%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $35,764 $ 91
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.70% 0.70%(2)
Before advisory/administration fee
waivers 1.13% 1.09%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.33% 4.35%(2)
Before advisory/administration fee
waivers 4.90% 3.96%(2)
Portfolio turnover rate 92% 4%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 167
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GOVERNMENT INCOME PORTFOLIO
---------------------------
FOR THE
PERIOD
12/__/94(1)
THROUGH
9/30/95
-------
Net asset value at beginning
of period
Income from investment
operations
Net investment income
Net gain (loss) on
investments (both
realized and unrealized)
Total from investment
operations
Less distributions
Distributions from net
investment income
Distribution in excess
of net investment income
Distributions from net
realized capital gains
Distributions in excess
of net realized gains
Total distributions
Net asset value at end
of period
Total return
Ratios/Supplemental data
Net assets at end of period
(in thousands)
Ratios of expenses to
average net assets
After advisory/
administration fee waivers
Before advisory/
administration fee waivers
Ratios of net investment
income to average net
assets
After advisory/
administration fee waivers
Before advisory/
administration fee waivers
Portfolio turnover rate
(1) Commencement of operations.
(2) Annualized.
<PAGE> 168
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $11.17 $ 10.96
------ -------
Income from investment operations
Net investment income 0.59 0.11
Net gain (loss) on investments
(both realized and unrealized) (1.18) .21
------ -------
Total from investment operations (0.59) 0.32
------ -------
Less distributions
Distributions from net investment
income (0.62) (0.11)
Distribution in excess of net
investment income (0.02) --
Distributions from net realized
capital gains (0.14) --
Distributions in excess of net
realized gains (0.01) --
------- ----
Total distributions (0.79) (0.11)
------- -------
Net asset value at end of period $ 9.79 $ 11.17
======= =======
Total return (5.49) % 2.93%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $67,655 $15,322
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.80% 0.80%(2)
Before advisory/administration fee
waivers 1.02% 0.84%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.95% 5.83%(2)
Before advisory/administration fee
waivers 5.73% 5.79%(2)
Portfolio turnover rate 61% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 169
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning
of period $10.75 $11.76 $10.21 $10.00
------ ------ ------ ------
Income from investment
operations
Net investment income 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both
realized and unrealized) (0.48) 0.46 0.47 0.26
------ ----- ------ ------
Total from investment
operations (0.14) 1.11 0.99 0.57
------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.13) (0.90) (0.30) --
Distributions from net
realized capital gains (0.24) (0.22) (0.14) (0.06)
------ ------ ------ ------
In Excess of Net Realized Gains -- -- -- (0.30)
Total distributions (0.37) 1.12 (0.44) (0.36)
------ ------ ------ ------
Net asset value at end of
period $10.52 $10.75 $10.76 $10.21
====== ====== ====== ======
Total return 1.50% 10.24% 9.55% 8.92%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.24% 1.38% 1.30% 1.37%*
Ratios of net investment
income to average net
assets 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 5.96% 6.00% 6.31% 6.75%*
Portfolio turnover rate 130.64% 128.14% 115.25% 110.13%
</TABLE>
- ------------------------------------------
+This Portfolio commenced operations on July 1, 1991 as the Compass
International Fixed Income Fund, a separate investment portfolio (the
"Predecessor International Bond Portfolio") of The Compass Capital Group of
Funds, which was organized as a Massachusetts business trust. On January __,
1996, the assets and liabilities of the Predecessor International Bond
Portfolio were transferred to this Portfolio, which had no prior operating
history.
** Commenced operations on July 1, 1991.
* Annualized.
<PAGE> 170
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $11.31 $ 10.97
------ -------
Income from investment operations
Net investment income 0.51 0.09
Net gain (loss) on investments
(both realized and unrealized) (0.93) .34
------ -------
Total from investment operations (0.42) 0.43
------ -------
Less distributions
Distributions from net investment
income (0.51) (0.09)
Distributions from net realized
capital gains (0.34) --
------
Total distributions (0.85) (0.09)
Net asset value at end of period $10.04 $ 11.31
====== =======
Total return (4.02)% 3.92%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 2,109 $ 634
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.75% 0.71%(2)
Before advisory/administration fee
waivers 1.98% 1.49%(2)
Ratios of net investment income to
average net assets
After advisory/ administration fee
waivers 4.75% 4.99%(2)
Before advisory/administration fee
waivers 3.52% 4.21%(2)
Portfolio turnover rate 40% 71%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 171
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/94
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $10.70 $ 10.43
------ -------
Income from investment operations
Net investment income 0.51 0.09
Net gain (loss) on investments
(both realized and unrealized) (0.85) 0.28
------- -------
Total from investment operations (0.34) 0.37
------- -------
Less distributions
Distributions from net investment
income (0.51) (0.09)
Distributions from net realized
capital gains 0.03) 0.01)
------- --------
Total distributions (0.54) (0.10)
------- --------
Net asset value at end of period $ 9.82 $ 10.70
====== =======
Total return (3.20)% 3.54%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $11,518 $ 3,894
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.55% 0.34%(2)
Before advisory/administration fee
waivers 1.15% 1.22%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 4.97% 4.90%(2)
Before advisory/administration fee
waivers 4.37% 4.02%(2)
Portfolio turnover rate 30% 40%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 172
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/94
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $10.53 $ 10.24
------ -------
Income from investment operations
Net investment income 0.49 0.09
Net gain (loss) on investments
(both realized and unrealized) (0.91) 0.29
------ ------
Total from investment operations (0.42) 0.38
------ ------
Less distributions
Distributions from net investment
income (0.49) (0.09)
Distributions from net realized
capital gains (0.02) --
-------- ------
Total distributions (0.51) (0.09)
-------- -------
Net asset value at end of period $ 9.60 $ 10.53
======= =======
Total return (4.00)% 3.68%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $4,428 $ 907
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.35% 0.32%(2)
Before advisory/administration fee
waivers 1.74% 2.83%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.06% 4.71%(2)
Before advisory/administration fee
waivers 3.67% 2.20%(2)
Portfolio turnover rate 61% 36%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
<PAGE> 173
WHAT ARE THE PORTFOLIOS?
The COMPASS CAPITAL FUNDS have been structured to include many different
investment styles across the spectrum of fixed income investments so that
investors may participate across multiple disciplines in order to seek their
long-term financial goals.
The Bond Portfolios of the COMPASS CAPITAL FUNDS consist of eleven
investment products that provide investors with a broad spectrum of investment
alternatives within the fixed income sector. Seven of these portfolios invest
solely in taxable bonds, and four of these portfolios invest in tax exempt
bonds.
In certain investment cycles and over certain holding periods, a fund that
invests in any one of these styles may perform above or below the market. An
investment program that combines these multiple disciplines allows investors to
select from among these various product options in the way that most closely
fits the individual's investment goals and sentiments.
<TABLE>
<CAPTION>
===================================================================================================
Portfolio Investment Objective
--------- --------------------
- --------------------------------------------------------------------------------------------------
<S> <C>
Short Government Bond To seek to realize a rate of return that exceeds the
total return of the Merrill Lynch 1-3 year Treasury
Index.
- --------------------------------------------------------------------------------------------------
Intermediate Government, To seek current income consistent with the preservation
Intermediate Bond, Government of capital.
Income, Managed Income and
International Bond
- --------------------------------------------------------------------------------------------------
Tax-Free Income, Pennsylvania Tax- To seek as high a level of current income exempt from
Free Income and Ohio Tax-Free Income Federal income tax and, to the extent possible for each
State-Specific Municipal Portfolio, income tax of the
specific state in which the Portfolio concentrates, as
is consistent with preservation of capital.
===================================================================================================
</TABLE>
<PAGE> 174
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
Portfolio
Characteristics:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Performance Benchmark Dollar-Weighted Credit Quality Min
Portfolio Average Concentration Credit Quality
Maturity
(Approximate)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Gov't Bond Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Treasury Index
- --------------------------------------------------------------------------------------------------------------
Intermediate Gov't Lehman Brothers 5-10 Years Gov't/Agency AAA
Intermediate Gov't
- --------------------------------------------------------------------------------------------------------------
Intermediate Bond Lehman Brothers 5-10 Years Investment Grade BBB
Intermediate Gov't/Corp Spectrum
- --------------------------------------------------------------------------------------------------------------
Gov't Income Lehman Mortgage/10 Year 10-15 Years Gov't/Agency AAA
Treasury
- --------------------------------------------------------------------------------------------------------------
Managed Income Salomon BIG 5-10 Years Investment Grade BBB
Spectrum
- --------------------------------------------------------------------------------------------------------------
International Bond Salomon Non-U.S. Hedged 5-15 Years Investment Grade Below Investment
Government Bond Index Spectrum Grade
- --------------------------------------------------------------------------------------------------------------
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Index Spectrum
- --------------------------------------------------------------------------------------------------------------
PA Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
- --------------------------------------------------------------------------------------------------------------
OH Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
- --------------------------------------------------------------------------------------------------------------
</TABLE>
For more information on a Portfolio's Benchmark, see the Appendix at the back
of this Prospectus.
<PAGE> 175
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
Yes: The Fund will hold a significant concentration of these securities at
all times.
Elig: The Fund may purchase these securities, butthey may or may notbe a
significant holding at agiven time.
Temp. The Fund may purchase these securities but under normal market conditions
is not expected to do so
No: The Fund may not purchase these securities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Treasuries Agencies Agency Non Agency/ Corp. ABS Foreign Municipals
MBS Commercial Securities/
MBS Currency
Risky
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Bond Yes Yes Yes No Elig. Elig. No Elig.
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Gov't Yes Yes Yes No Yes Elig. No Elig.
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Yes Yes Yes Elig. Yes Yes No Elig.
- ----------------------------------------------------------------------------------------------------------------------------------
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
- ----------------------------------------------------------------------------------------------------------------------------------
Managed Income Yes Yes Yes Elig. Yes Yes Elig. Elig.
- ----------------------------------------------------------------------------------------------------------------------------------
International Bond Yes Yes Elig. Elig. Elig. Elig. Yes Elig.
- ----------------------------------------------------------------------------------------------------------------------------------
Tax-Free Temp. No No No No No No Yes
- ----------------------------------------------------------------------------------------------------------------------------------
PA Tax-Free Temp. No No No No No No Yes
- ----------------------------------------------------------------------------------------------------------------------------------
OH Tax Free Temp. No No No No No No Yes
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 176
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL LIMITATIONS?
A Portfolio's investment objective may be changed by the Fund's Board
of Trustees without shareholder approval. However, shareholders will be
notified of any such change. No assurance can be provided that a Portfolio
will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). The following descriptions summarize several of the Portfolios'
fundamental investment policies, which are set forth in full in the Statement
of Additional Information.
No Portfolio may:
(1) purchase securities (except U.S. Government Securities) if
more than 5% of its total assets will be invested in the
securities of any one issuer, except that up to 25% of a
Portfolio's total assets may be invested without regard to
this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry; and
(3) in the case of each Municipal Portfolio, invest less than 80%
of its net assets in instruments the interest on which is
exempt from regular Federal income tax or, for each
State-Specific Municipal Portfolios, in AMT Paper, except
during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal
Portfolios. Instead, as a non-fundamental investment restriction, each
State-Specific Municipal Portfolio will not invest in securities (except U.S.
Government securities and related repurchase agreements) that would cause, at
the end of any tax quarter, more than 5% of its total assets to be invested in
securities of any one issuer, except that up to 50% of a Portfolio's total
assets may be invested without regard to this limitation so long as no more
than 25% of the Portfolio's total assets are invested in any one issuer (except
U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment
securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. If the Fund determines that any such
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
INVESTMENT QUALITY. Securities acquired by the Short Government Bond
Portfolio, Intermediate Government Portfolio and Government Income Portfolio
(the "Government Portfolios") will be rated in the highest rating category at
the time of purchase or, if unrated, of comparable
<PAGE> 177
quality as determined by the Portfolios' sub-adviser. Securities acquired by
the other Portfolios will be rated investment grade at the time of purchase
(within the four highest voting categories by S&P, Duff, Fitch or Moody's) or,
if unrated, of comparable quality as determined by a Portfolio's sub-adviser.
Securities rated "Baa" on "BBB" are generally considered to be investment grade
although they have speculative characteristics. The International Bond
Portfolio may also invest up to 5% of its net assets in securities rated below
the investment grade (commonly referred to as "junk bonds") or in comparable
unrated securities. If a security is reduced below the minimum rating that is
permitted for a Portfolio, the Portfolio's sub-adviser will consider whether
the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at
least 80% of the value of its total assets in debt securities. The Government
Portfolios will invest at least 65% of their net assets in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its net assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio
and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios")
and the Tax-Free Income Portfolio (together with the "State-Specific Tax-Free
Portfolios" called the "Tax-Free Portfolios") will invest, during normal market
conditions, at least 80% of their net assets in obligations issued by or on
behalf of states, territories and possessions of the United States, the
District of Columbia and their political sub-divisions, agencies,
instrumentalities and authorities and related tax-exempt derivative securities
("Municipal Obligations"). In addition, each State-Specific Tax-Free Portfolio
intends to invest at least 65% of its net assets in Municipal Obligations of
issuers located in the particular state indicated by its name. The Tax-Free
Income Portfolio intends to invest less than 25% of its net assets in Municipal
Obligations of issuers located in the same state. During temporary defensive
periods each Tax-Free Portfolio may invest without limitation in securities
that are not Municipal Obligations and may hold without limitation uninvested
cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest
primarily in foreign securities and currencies. The Managed Income Portfolio
may invest up to 10% of its total assets in debt securities of foreign issuers
and may hold from time to time various foreign currencies pending their
investment or conversion into U.S. dollars. Investing in securities of foreign
issuers involves considerations not typically associated with investing in
securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Portfolio that invests in foreign securities
will be affected favorably or unfavorably by changes in currency exchange
rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. While the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock
<PAGE> 178
Exchange. Accordingly, a Portfolio's foreign investments may be less liquid
and their prices may be more volatile than comparable investments in securities
in U.S. companies. In addition, there is generally less government supervision
and regulation of securities exchanges, brokers and issuers in foreign
countries than in the United States.
[Foreign investments may include: (a) debt obligations issued or
guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state,
province or municipality; (b) debt obligations of supranational organizations
such as the World Bank, Asian Development Bank, European Investment Bank, and
European Economic Community; (c) debt obligations of foreign banks and bank
holding companies; (d) debt obligations of domestic banks and corporations
issued in foreign currencies; (e) debt obligations denominated in the European
Currency Unit (ECU); (f) foreign corporate debt securities and commercial
paper; and (g) private placements. Such securities may include loan
participations and assignments, convertible securities and zero-coupon
securities.]
[To maintain greater flexibility, the International Bond Portfolio may
invest in instruments which have the characteristics of futures securities.
Such instruments may take a variety of forms, such as debt securities with
interest or principal payments determined by reference to the value of a
currency or commodity at a future point in time. The risks of such investments
could reflect the risks of investing in futures, currencies and securities,
including volatility and illiquidity.]
The expense ratio of the International Bond Portfolio can be expected
to be higher than those of Portfolios investing primarily in domestic
securities. The costs attributable to investing abroad are usually higher for
several reasons, such as higher investment research costs, higher foreign
custody costs, higher commission costs and additional costs arising from delays
in settlements of transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the state or governmental body has no obligation to
make
<PAGE> 179
these payments in future years unless money is appropriated on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
is not yet as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in
private activity bonds the interest on which is an item of tax preferences for
purposes of the Federal alternative minimum tax ("AMT Paper") when added
together with any taxable investments held by the Portfolio. In addition, each
Tax-Free Portfolio may invest 25% or more of its net assets in Municipal
Obligations the interest on which is paid solely from revenues of similar
projects. To the extent a Portfolio's assets are invested in Municipal
Obligations payable from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified
portfolio, and the State-Specific Tax-Free Portfolios are classified as
non-diversified portfolios, under the 1940 Act. Investment returns on a
non-diversified portfolio typically are dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than it would a
diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase at the Portfolio's option specified Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligations
to which the commitment relates. Each Tax-Free Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
The Tax-Free Portfolios may invest in tax-exempt derivative securities
relating to Municipal Obligations, including tender option bonds,
participations, beneficial interest in trust and partnership interest. The
amount of information regarding the financial condition of issuers of Municipal
Obligations may not be as extensive as that which is made available by public
corporations and the secondary market for Municipal Obligations may be less
liquid than that for taxable fixed-income securities. Accordingly, the ability
of a Tax-Free Portfolio to buy and sell tax-exempt securities may, at any
particular time and with respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal and state income tax are rendered by
counsel to the respective issuers and sponsors of the obligations at the time
of issuance. The Fund and its investment adviser and sub-adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative securities, or the bases for such opinions.
[The Ohio Tax-Free Income Portfolio will not trade its securities for
the purpose of seeking profits. For purposes of this policy, the Portfolio may
vary its portfolio securities if (i) there has been an adverse change in a
security's credit rating or in that of its issuer or in the adviser's or
sub-adviser's credit analysis of the security or its issuer; (ii) there has
been, in the opinion of the adviser
<PAGE> 180
and sub-adviser, a deterioration or anticipated deterioration in general
economic or market conditions affecting issuers of Ohio Municipal Obligations,
or a change or anticipated change in interest rates; (iii) adverse changes or
anticipated changes in market conditions or economic or other factors
temporarily affecting the issuers of one or more portfolio securities make
necessary or desirable the sale of such security or securities in anticipation
of the Portfolio's repurchase of the same or comparable securities at a later
date; or (iv) the adviser or sub-adviser engages in temporary defensive
investment strategies.]
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios may
purchase securities that are secured or backed by mortgages as well as other
assets (e.g., automobile loans and credit card receivables). These
mortgage-related and asset-backed securities may be issued by the U.S.
Government, GNMA, FNMA, Federal Home Loan Mortgage Corporation, and private
issuers such as commercial banks, financial companies, finance subsidiaries of
industrial companies, savings and loan associations, mortgage banks and
investment banks.
The Portfolios may acquire several types of mortgage-related
securities, including guaranteed mortgage pass-through certificates, which
provide the holder with a pro rata interest in the underlying mortgages,
adjustable rate mortgage-related securities ("ARMs") and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-related securities. Primarily, these securities do
not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and Federal consumer credit
laws, many of which give debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. A major difference is that
the principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, if a mortgage-related or asset-backed security is purchased at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if one of these
securities is purchased at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will decrease, yield to
maturity. In calculating the average weighted
<PAGE> 181
maturity of a Portfolio, the maturity of mortgage-related and asset-backed
securities will be based on estimates of average life which take prepayments
into account.
Prepayments on mortgage-related and asset-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and
social factors. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Like other fixed income
securities, when interest rates rise the value of a mortgage-related or
asset-backed security generally will decline; however, when interest rates
decline, the value of these securities that have prepayment features may not
increase as much as that of other fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with
their investment objectives, the Portfolios may purchase Treasury receipts and
other "stripped" securities that evidence ownership in either the future
interest payments or the future principal payments on U.S. Government and other
obligations. These participations, which may be issued by the U.S. Government
(or a U.S. Government agency or instrumentality) or by private issuers such as
banks and other institutions, are issued at a discount to their "face value,"
and may include stripped mortgage-backed securities ("SMBS"). Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The International Bond Portfolio also may
purchase "stripped" securities that evidence ownership in the future interest
payments or principal payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool
of mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class receives all of the
principal. However, in some cases, one class will receive some of the interest
and most of the principal while the other class will receive most of the
interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, a Portfolio may
fail to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be extremely volatile in response
to changes in interest rates. The yields on a class of SMBS that receives all
or most of the interest are generally higher than prevailing market yields on
other mortgage-related obligations because their cash flow patterns are also
volatile and there is a greater risk that the initial investment will not be
fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by the
Fund's Board of Trustees if they can be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of a Portfolio's per share net asset value.
Each Portfolio may invest in zero coupon bonds, which are normally
issued at a significant discount from free value and do not provide for
periodic interest payments. Zero coupon bonds may experience greater
volatility in market value than debt obligations which provide for regular
interest payments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios, may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian
<PAGE> 182
counterparts of U.S. corporations, as well as Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer. Bank obligations may
include certificates of deposit, notes, bankers' acceptances and fixed time
deposits. These obligations may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of specific
obligation or by government regulation. The Portfolios may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in
their interest rates, maturities and times of issuance. Obligations of certain
agencies and instrumentalities of the U.S. Government such as the Government
National Mortgage Association are supported by the United States' full faith
and credit; others such as those of the Federal National Mortgage Association
and the Student Loan Marketing Association are supported by the right of the
issuer to borrow from the Treasury; others such as those of the Federal Farm
Credit Banks or the Federal Home Loan Mortgage Corporation are supported only
by the credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter
into interest rate swaps and may purchase or sell interest rate caps and
floors. The Portfolios expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of their
holdings, as a duration management technique or to protect against an increase
in the price of securities a Portfolio anticipates purchasing at a later date.
The Portfolios intend to use these transactions as a hedge and not as a
speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor.
In addition, the International Bond Portfolio may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Portfolio expects to engage in foreign currency
exchange transactions in connection with the purchase and sale of portfolio
securities (transaction hedging) and to protect the value of specific portfolio
positions (position hedging). The Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in that
foreign currency, and may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts (futures contracts). The Portfolio may also
purchase exchange-listed and over-the-counter call and put options on futures
contracts and on foreign currencies, and may write covered call options on up
to 100% of the currencies in its portfolio. In order to protect against
currency fluctuations, the International Bond Portfolio may enter into currency
swaps. Currency swaps involve the exchange of the rights of the Portfolio and
another party to make or receive payments in specified currencies.
<PAGE> 183
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its
investment objective, each Portfolio may write covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or, with
respect to the International Bond Portfolio, cross-hedging. These options may
relate to particular securities, financial instruments, foreign currencies,
securities indices or the yield differential between two securities, and may or
may not be listed on a securities exchange and may or may not be issued by the
Options Clearing Corporation. A Portfolio will not purchase put and call
options where the aggregate premiums on outstanding options exceed 5% of its
net assets at the time of purchase, and will not write options on more than 25%
of the value of its net assets (measured at the time an option is written).
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. In addition, unlisted options are not subject to
the protections afforded purchasers of listed options issued by the Options
Clearing Corporation, which performs the obligations of its members if they
default.
To the extent consistent with its investment objective, each Portfolio
may also invest in futures contracts and options on futures contracts for
hedging purposes or to maintain liquidity. The value of a Portfolio's
contracts may equal or exceed 100% of the Fund's total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately
afterwards the aggregate amount of margin deposits on its existing futures
positions plus the amount of premiums paid for related futures options is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a
stated quantity of a foreign currency. A Portfolio may sell a futures contract
in order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange
fluctuation. A Portfolio may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales
of securities, in the value of the securities to be sold. In addition, a
Portfolio may utilize futures contracts in anticipation of changes in the
composition of its holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases
an option on a futures contracts, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
during the option period. When Portfolio sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with a Portfolio's position in a futures contract
or related option, the Fund will create a segregated account of liquid high
grade assets or will otherwise cover its position in accordance with applicable
SEC requirements.
The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of
the instruments held by a Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) a sub-adviser's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see the Statement of Additional Information.
<PAGE> 184
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Portfolios from registration as a
"commodity pool operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, a Portfolio makes cash
contributions to a deposit fund of the insurance company's general account.
The insurance company then credits to the Portfolio, on a monthly basis,
interest which is based on an index (such as the Salomon Brothers CD Index),
but is guaranteed not to be less than a certain minimum rate. Each Portfolio
does not expect to invest more than 5% of its net assets in GICs at any time
during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase
rated and unrated variable and floating rate instruments. These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The Portfolios may invest up to 10% of their total assets in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Issuers of unrated
variable and floating rate instruments must satisfy the same criteria as set
forth above for a Portfolio. The absence of an active secondary market with
respect to particular variable and floating rate instruments, however, could
make it difficult for the Portfolio to dispose of a variable or floating rate
instrument if the issuer defaulted on its payment obligation or during periods
when the Portfolio is not entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements").
Repurchase agreements are in substance loans. Default by or bankruptcy of the
seller would, however, expose a Portfolio to possible loss because of adverse
market action or delays in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is
authorized to make limited borrowings. If the securities held by a Portfolio
should decline in value while borrowings are outstanding, the net asset value
of the Portfolio's outstanding shares will decline in value by proportionately
more than the decline in value suffered by the Portfolio's securities.
Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios (except the Tax-Free Portfolios) may use reverse
repurchase agreements when it is anticipated that the interest income to be
earned from the investment
<PAGE> 185
of the proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by a Portfolio may decline below the price of the securities the Fund is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid high-grade debt
securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an
additional 5% of its total assets for temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued
by other investment companies within the limits prescribed by the 1940 Act. As
a shareholder of another investment company, a Portfolio 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 Portfolio bears directly in connection
with its own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15%
of the value of its net assets in securities that are illiquid. GICs, variable
and floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered
under the Securities Act of 1933 (the "1933 Act") 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 a Portfolio's sub-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 a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive
opportunities in the mortgage market and to enhance current income, each
Portfolio (except the Tax-Free Portfolios) may enter into dollar roll
transactions. A dollar roll transaction involves a sale by the Portfolio of a
mortgage-backed or other security concurrently with an agreement by the
Portfolio to repurchase a similar security at a later date at an agreed-upon
price. The securities that are repurchased will bear the same interest rate
and stated maturity as those sold, but pools of mortgages collateralizing such
<PAGE> 186
securities may have different prepayment histories than those sold. During the
period between the sale and repurchase, a Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of
the sale will be invested in additional instruments for the Portfolio, and the
income from these investments will generate income for the Portfolio. If such
income does not exceed the income, capital appreciation and gain or loss that
would have been realized on the securities sold as part of the dollar roll, the
use of this technique will diminish the investment performance of a Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that a Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
government securities or other liquid high grade debt obligations having a
value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained.
Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed
upon repurchase price of those securities. If the broker/dealer to whom a
Portfolio sells securities becomes insolvent, the Portfolio's right to purchase
or repurchase securities may be restricted and the instruments which the
Portfolio is required to repurchase may be worth less than an instrument which
the Portfolio originally held when the Portfolio is able to complete the
purchase. Successful use of mortgage dollar rolls may depend upon a
sub-adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities
"against-the-box." A short sale is a transaction in which a Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline. The Portfolios expect to make short sales both as a form of
hedging to offset potential declines in long positions in similar securities
and in order to maintain portfolio flexibility. In a short sale
"against-the-box," at the time of sale, the Portfolio owns or has the immediate
and unconditional right to acquire the identical security at no additional
cost. When selling short "against-the-box," a Portfolio forgoes an opportunity
for capital appreciation in the security.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is
expected that the annual portfolio turnover rate for each Portfolio will not
exceed [ ]. A Portfolio's annual portfolio turnover rate will not, however,
be a factor preventing a sale or purchase when the sub-adviser believes
investment considerations warrant such sale or purchase. Portfolio turnover
may vary greatly from year to year as well as within a particular year. High
portfolio turnover rates will generally result in higher transaction costs to a
Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing
interest rates. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than securities with shorter maturities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS.
The concentration of investments by the State Specific Municipal Portfolios in
State-Specific Obligations raises special investment considerations. In
particular, changes in the economic condition and governmental policies of a
state and its political subdivisions could adversely the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific
Municipal Portfolios invest are
<PAGE> 187
described below. For further information, see "Special Consideration Regarding
State- Specific Obligations" in the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the
principal operating fund of the Commonwealth) experienced deficits in fiscal
1990 and 1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30,
1993 of $698.9 million. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to a surplus of
$64.4 million as of June 30, 1993. Rising unemployment, a relatively high
proportion of persons 65 and older in the Commonwealth and court ordered
increases in healthcare reimbursement rates place increased pressures on the
tax resources of the Commonwealth and its municipalities. The Commonwealth has
sold a substantial amount of bonds over the past several years, but the debt
burden remains moderate. The recession has affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January, but
the Commonwealth is likely to continue to show fiscal restraint.
Ohio. While diversifying more into the service and other
non-manufacturing areas, the economy of Ohio continues to rely in part on
durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result,
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Agriculture is an important segment of the Ohio economy with over
half the State's area devoted to farming and approximately 15% of total
employment in agribusiness. In prior years, the State's overall unemployment
rate was commonly somewhat higher than the national figure. For example, the
reported 1990 average monthly State rate was 5.7%, compared to the national
figure of 5.5%. However, for the last four years the State rates were below
the national rates (5.5% versus 6.1% in 1994). The unemployment rate and its
effects vary among particular geographic areas of the State. There can be no
assurance that future national, regional or state-wide economic difficulties
and the resulting impact on State or local government finances generally will
not adversely affect the market value of Ohio Municipal Obligations held in the
Portfolio or the ability of particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of its Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
ADVISER AND SUB-ADVISERS
The Adviser to theCOMPASS CAPITAL FUNDS is PNC Asset Management Group.
Each of the Portfolios within the Compass Capital Fund Family, except the
International Bond Portfolio, is managed by an experienced portfolio manager
who is a member of PNC Asset Management Group's distinguished fixed income
portfolio management subsidiary, BlackRock Financial Corporation, Inc. The
sub-adviser of the International Bond Portfolio is Morgan Grenfell Investment
Services Limited.
<PAGE> 188
The [eleven] portfolios and their investment sub-advisers and
portfolio managers are as follows:
<TABLE>
<CAPTION>
Compass Capital Portfolio Investment Sub-Adviser Portfolio Manager
- ------------------------- ---------------------- -----------------
<S> <C> <C>
Short Government Bond BlackRock(1) Robert S. Kapito; Vice Chairman of BlackRock since 1988; Portfolio
co-manager since 1995.
Michael P. Lustig; Vice President of BlackRock since 1989; Portfolio
co-manager since 1995.
Scott Amero; Managing Director of BlackRock since 1990; Portfolio
co-manager since 1995.
Intermediate Government BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero; (see above);
Messrs. Kapito, Lustig and Amero have been Portfolio co-managers since
1995.
Intermediate Bond BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero; (see above);
Messrs. Kapito, Lustig and Amero have been Portfolio co-managers since
1995.
Government Income BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero; (see above);
Messrs. Kapito, Lustig and Amero have been Portfolio co-managers since
1995.
Managed Income BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero; (see above);
Messrs. Kapito, Lustig and Amero have been Portfolio co-managers since
1995.
International Bond Morgan Grenfell(2) Martin A. Hall; Director of Morgan Grenfell since 1991; Portfolio
manager since ________.
Tax-Free Income BlackRock(1) Kevin Klingert; portfolio manager at BlackRock since 1991; prior to
joining BlackRock, Assistant Vice President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager since 1995.
</TABLE>
<PAGE> 189
<TABLE>
<S> <C> <C> <C>
Pennsylvania Tax-Free BlackRock(1) Kevin Klingert; (see above); Portfolio manager since 1995.
Ohio Tax-Free BlackRock(1) Kevin Klingert; (see above); Portfolio manager since 1995.
</TABLE>
- -------------------
(1) BlackRock Financial Corporation, Inc. ("BlackRock") has its primary
offices at 345 Park Avenue, New York, New York 10154.
(2) Morgan Grenfell Investment Services Limited ("Morgan Grenfell") has
its primary offices at 20 Finsbury Circus, London ECZM, 1NB England.
PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1835 Market Street, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company. Morgan Grenfell is an indirect
wholly-owned subsidiary of Deutsche Bank, A.G., a German financial services
conglomerate.
For their investment advisory and sub-advisory services, PAMG and the
portfolios' sub-advisers are entitled to fees, computed daily on a
Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth
in the following table. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
<TABLE>
<CAPTION>
ANNUAL CONTRACTUAL FEE RATE
--------------------------------------------------------------------------------
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
---------------- ----------------------------
INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ADVISORY FEE FEE ADVISORY FEE FEE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE DAILY NET ASSETS
- ------------------------
first $1 billion .50% .35% .55% .40%
$1 billion--$2 billion .45 .30 .50 .35
$2 billion--$3 billion .425 .275 .475 .375
greater than $3 billion .40 .25 .45 .30
</TABLE>
For their last fiscal year, the Portfolios paid investment advisory
fees at the following annual rates after voluntary fee waivers: Managed Income
Portfolio .35%; Tax-Free Income Portfolio 0%; Intermediate Government Portfolio
.20%; Ohio Tax-Free Income Portfolio 0%; Pennsylvania Tax-Free Income Portfolio
.27%; Short Government Bond Portfolio ___%; Intermediate Bond Portfolio
.26%; Government Income Portfolio 0%; and International Bond Portfolio _______.
<PAGE> 190
Brokerage transactions for the Portfolios may be directed through
registered broker/dealers who have entered into dealer agreements with the
Fund's distributor, subject to the requirements of best execution.
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania Merchant Group
Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI is entitled to a fee, computed daily and payable monthly, at an annual
rate of .03% of each Portfolio's average daily net assets, and PFPC and PDI are
entitled to receive a combined fee, computed daily and payable monthly, at an
annual rate of .20% of the first $500 million of each Portfolio's average daily
net assets, .18% of the next $500 million of each Portfolio's average daily net
assets, .16% of the next $1 billion of each Portfolio's average daily net
assets and .15% of each Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
SHAREHOLDER SERVICING
The Fund intends to enter into service agreements with institutional
investors ("Institutions") (including PNC Bank, National Association and its
affiliates) which provide that the Institutions will render support services to
their customers who are the beneficial owners of Service Shares. These
services are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of up to .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
Institutions may provide one or more of the following services: processing
purchase and redemption requests from customers and placing orders with the
Fund's transfer agent or the distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of up
to a separate .15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their customers, Institutions may
provide one or more of these additional services to such customers: responding
to customer inquiries relating to the services performed by the Institution and
to customer inquiries concerning their investments in Service Shares; providing
information periodically to customers showing their positions in Service
Shares; and other similar shareholder liaison services. Customers who are
beneficial owners of Service Shares should read this Prospectus in light of the
terms and fees governing their accounts with Institutions.
<PAGE> 191
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in Portfolio shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities. It is
intended that the services provided by Institutions under their service
agreements will not be prohibited under these laws. However, state securities
laws may differ from the interpretations of Federal law on this issue, and
banks and financial institutions may be required to register as dealers
pursuant to state law.
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. Expenses include, but are not limited
to, fees paid to PAMG and the Administrators, transfer agency and custodian
fees, trustee fees, taxes, interest, professional fees, distribution and
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their Shares for distribution under Federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, insurance premiums, the expense
of independent pricing services, and other expenses which are not expressly
assumed by PAMG or the Fund's service providers under their agreements with the
Fund. Any general expenses of the Fund that do not belong to a particular
investment portfolio will be allocated among all investment portfolios by or
under the direction of the Board of Trustees in a manner the Board determines
to be fair and equitable.
HOW ARE SHARES PURCHASED AND REDEEMED?
DISTRIBUTOR
Shares of the Portfolios are offered on a continuous basis by PDI as
distributor (the "Distributor"). PDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits PDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of any portion of the fees paid
by the Fund, past profits or other sources. The Fund is not required or
permitted under the plan to make distribution payments with respect to Service
Shares over and above the investment advisory and other fees it pays for
non-distribution services. The plan merely permits the reallocation of a
portion of these fees to pay for distribution related and shareholder servicing
activities.
<PAGE> 192
PURCHASE OF SHARES
Service Shares are offered without a sales load to Institutions acting
on behalf of their customers, as well as certain persons who were shareholders
of the Compass Capital Group of Funds on January __, 1996, when it was combined
with the Fund. Service Shares will normally be held of record by Institutions
or in the names of nominees of Institutions. Share purchases are normally
effected through a customer's account at an Institution through procedures
established in connection with the requirements of the account. In these
cases, confirmations of Share purchases and redemptions will be sent to the
Institutions. Beneficial ownership of Shares will be recorded by the
Institutions and reflected in the account statements provided by such
Institutions to their customers. Investors wishing to purchase Shares should
contact their Institutions.
Service Shares are sold at their net asset value per Share next
computed after an order is received by PFPC. Orders received by PFPC by 4:00
p.m. (Eastern Time) on a Business Day are priced the same day. A "Business
Day" is any weekday that the New York Stock Exchange (the "NYSE") and the
Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7379. Orders
received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following
Business Day.
Payment for Service Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also,
in the discretion of the Fund, be made in the form of securities that are
permissible investments for the respective Portfolios. For further
information, see the Statement of Additional Information. The minimum initial
investment is [$______]; however, Institutions may set a higher minimum for
their customers. There is no minimum subsequent investment requirement.
The Fund may waive the minimum investment amount and may in its
discretion reject any order for Service Shares.
REDEMPTION OF SHARES
Customers of Institutions may redeem Service Shares in accordance with
the procedures applicable to their accounts with the Institutions. These
procedures will vary according to the type of account and the Institution
involved, and customers should consult their account managers in this regard.
It is the responsibility of Institutions to transmit redemption orders to PFPC
and credit their customers' accounts with redemption proceeds on a timely
basis. In the case of shareholders holding share certificates, the
certificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800)
441-7379. Shares are redeemed at their net asset value per share next
determined after PFPC's receipt of the redemption order. The Fund and its
service providers will not be liable for any loss, liability, cost or expense
for acting upon telephone instructions that are reasonably believed to be
genuine. In attempting to confirm that telephone instructions are genuine, the
Fund may use such procedures as are considered reasonable, including recording
those instructions and requesting information as to account registration (such
as the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
<PAGE> 193
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
[provided that the Fund's custodian is also open for business]. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) [or on a day when the
Fund's custodian is closed] is normally wired in Federal funds on the next
Business Day following redemption [on which the Fund's custodian is open for
business]. The Fund reserves the right to wire redemption proceeds within
seven days after receiving a redemption order if, in the judgment of PAMG, an
earlier payment could adversely affect a Portfolio. No charge for wiring
redemption payments is imposed by the Fund, although Institutions may charge
their customer accounts for redemption services. Information relating to such
redemption services and charges, if any, should be obtained by customers from
their Institutions.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [400 Bellevue Parkway, Wilmington, DE 19809].
The Fund may redeem Service Shares in any Portfolio account if the
account balance drops below [$5,000] as the result of redemption requests and
the shareholder does not increase the balance to at least [$5,000] upon thirty
days' written notice. If a customer has agreed with an Institution to maintain
a minimum balance in his account with the Institution, and the balance in the
account falls below that minimum, the customer may be obligated to redeem all
or part of his or her Shares in the Portfolios to the extent necessary to
maintain the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
Persons who were shareholders of the Compass Capital Group of Funds
which were combined with the Fund on January __, 1996, may also purchase and
redeem Service Shares of the same Portfolio and for the same account in which
they held Shares on that date through the procedures described in this section.
PURCHASES. Purchase orders may be placed through the transfer agent.
The minimum investment is $100. Purchases through the Automatic Investment
Plan described below are subject to a lower purchase minimum. The name of the
Portfolio for which Shares are purchased must appear on the check or [Federal
Reserve Draft.] Investors may also wire Federal funds in connection with the
purchase of Shares. The wire instructions must include the name of the
Portfolio, the name of the account registration, and the shareholder account
number. Before wiring any funds, however, an investor must call the Portfolios
at 1-800-438-5789 in order to confirm the wire instructions. Purchase orders
which are received by the transfer agent, together with payment, before the
close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time)
on any Business Day (as
<PAGE> 194
defined above) are priced according to the net asset value next determined on
that day plus any applicable sales charge.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an
investor in Shares of a Portfolio may arrange for periodic investments in that
Portfolio through automatic deductions from a checking or savings account by
completing the AIP Application Form. The minimum pre-authorized investment
amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their
Shares of the Portfolios at any time by sending a written redemption request in
proper form to Compass Capital Funds c/o PFPC, Inc., P.O. Box 8907, Wilmington,
Delaware 19899-8907.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Shareholders holding share
certificates must send their certificates with the redemption request.
Additional documentary evidence of authority is required by PFPC in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above. This privilege may not be used to redeem Shares in certificated form.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If unable to contact the transfer
agent by telephone, a shareholder may also deliver the redemption request to
the transfer agent by mail at PFPC Inc., P.O. Box 8907, Wilmington, DE
19899-8907.
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described above to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
<PAGE> 195
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably believed to be genuine.
The Portfolios offer a Systematic Withdrawal Plan ("SWP") which may be
used by shareholders who wish to receive regular distributions from their
accounts. Upon commencement of the SWP, the account must have a current value
of $10,000 or more in a Portfolio. Shareholders may elect to receive automatic
cash payments of $100 or more either monthly, every other month, quarterly,
three times a year, semi-annually, or annually. Automatic withdrawals are
normally processed on the 25th day of the applicable month or, if such day is
not a Business Day, on the next Business Day and are paid promptly thereafter.
An investor may utilize the SWP by completing the SWP Application Form.
Shareholders should realize that if withdrawals exceed income
dividends their invested principal in the account will be depleted. Thus,
depending upon the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, their original investment could
be exhausted entirely. To participate in the SWP, shareholders must have their
dividends automatically reinvested and may not hold share certificates.
Shareholders may change or cancel the SWP at any time, upon written notice to
the transfer agent.
HOW IS NET ASSET VALUE CALCULATED?
Net asset value is calculated as of the close of regular trading hours
on the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by dividing
the value of all securities and other assets owned by a Portfolio that are
allocated to a particular class of Shares, less the liabilities charged to that
class, by the number of shares of the class that are outstanding.
Most securities held by a Portfolio are priced based on their market
value as determined by reported sales prices or the mean between their bid and
asked prices. Portfolio securities which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except when an occurrence
subsequent to the time a value was so established is likely to have changed
such value. Securities for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the Portfolio's sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. All
distributions are reinvested at net asset value in the form of additional full
and fractional Shares of the same class of Shares of the relevant Portfolio
unless a shareholder elects otherwise. Such election, or any revocation
thereof, must be made in writing to PFPC, and will become effective with
respect to dividends paid after its receipt by PFPC. The net investment income
of the Managed Income, Tax-Free Income, Intermediate Government,
Intermediate Bond and International Bond Portfolios is declared monthly as
a dividend to
<PAGE> 196
investors who are shareholders of such Portfolio at the close of business on
the day of declaration. [The net investment income of the Pennsylvania
Tax-Free Income, Ohio Tax-Free Income, Government Income and Short Government
Bond Portfolios is declared daily as a dividend to investors who are
shareholders of such Portfolio at, and whose payment for Share purchases are
available to the particular Portfolio in Federal funds by, the close of
business on the day of declaration.] All dividends are paid within ten days
after the end of each month and, in the case of the Pennsylvania Tax-Free
Income, Ohio Tax-Free Income, Government Income and Short Government Bond
Portfolios, within seven days after redemption of all of a shareholder's Shares
in a Portfolio. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by each Portfolio at least annually.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. If a
Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
regardless of whether the distributions are paid in cash or reinvested in
additional Shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds Shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns, and in two circumstances such amounts, while exempt from regular
Federal income tax, are taxable to persons subject to alternative minimum and
environmental taxes. First, "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute an
item of tax preference for corporate and non-corporate taxpayers in determining
alternative minimum and environmental tax liability. Second, "exempt interest
dividends" must be taken into account by corporate taxpayers in determining
certain adjustments for alternative minimum and environmental tax purposes.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its
net investment income which are exempt from the regular Federal income tax,
which constitute an item of tax preference for purposes of the Federal
alternative minimum tax, and which are fully taxable. These percentages will
apply uniformly to all distributions declared from net investment income during
that year, and may differ significantly from the actual percentages for any
particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid the
following January.
<PAGE> 197
An investor considering buying shares of a Portfolio on or just before
the record date of a taxable dividend should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Portfolio Shares depending upon their tax
basis and their price at the time of redemption, transfer or exchange.
Any loss upon the sale or exchange of Shares held for six months or
less will be disallowed for Federal income tax purposes to the extent of any
exempt interest dividends received by the shareholder. For the Ohio Tax-Free
Income Portfolio, the loss will be disallowed for Ohio income tax purposes to
the same extent, even though, for Ohio income tax purposes, some portion of
such dividends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by
the International Bond Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the
value of the Portfolio's total assets at the close of the taxable year in
question consists of stock or securities of foreign corporations, the Portfolio
may elect, for U.S. Federal income tax purposes, to treat certain foreign taxes
paid by it, including generally any withholding taxes and other foreign income
taxes, as paid by its shareholders. The Portfolio intends to make this
election. As a result, the amount of such foreign taxes paid by the Portfolio
will be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder generally will
be entitled either (a) to credit a proportionate amount of such taxes against
U.S. Federal income tax liabilities, or (b) if a shareholder itemizes
deductions, to deduct such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. Except as discussed below, dividends paid by each Portfolio
may be taxable to investors under state or local law as dividend income even
though all or a portion of the dividends may be derived from interest on
obligations which, if realized directly, would be exempt from such income
taxes. In addition, future legislative or administrative changes or court
decisions may materially affect the tax consequences of investing in a
Portfolio. Shareholders who are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships may be subject to
different U.S. Federal income tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder
attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio
from Pennsylvania Municipal Obligations or attributable to insurance proceeds
on account of such interest, is not taxable to individuals, estates or trusts
under the Personal Income Tax imposed by Article III of the Tax Reform Code of
1971 (in the case of insurance proceeds, to the extent they are exempt for
Federal Income Tax purposes); to corporations under the Corporate Net Income
Tax imposed by Article IV of the Tax Reform Code of 1971 (in the case of
insurance proceeds, to the extent they are exempt for Federal Income Tax
purposes); nor to individuals under the Philadelphia School District New Income
Tax ("School District Tax") imposed on Philadelphia resident individuals under
authority of the Act of August 9, 1963, P.L. 640.
Income received by a shareholder attributable to gain on the sale or
other disposition by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania
Municipal Obligations is taxable under the
<PAGE> 198
Personal Income Tax, the Corporate Net Income Tax, and, unless these assets
were held by the Pennsylvania Tax-Free Income Portfolio for more than six
months, the School District Tax.
To the extent that gain on the disposition of a share represents gain
realized on Pennsylvania Municipal Obligations held by the Pennsylvania
Tax-Free Income Portfolio, such gain may be subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a share held for more
than six months is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares,
or interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not
subject to any of the personal property taxes currently in effect in
Pennsylvania to the extent that the Portfolio is comprised of Pennsylvania
Municipal Obligations and Federal obligations (if the interest on such
obligations is exempt from state and local taxation under the laws of the
United States). The taxes referred to include the County Personal Property Tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to
Ohio personal income tax, municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions from the Ohio Tax-Free
Income Portfolio to the extent that such distributions consist of interest on
Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their
subdivisions. Corporations that are subject to the Ohio corporation franchise
tax will not have to include distributions from the Ohio Tax-Free Income
Portfolio in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions
either constitute exempt-interest dividends or consist of interest on Ohio
Municipal Obligations or U.S. Obligations. However, Shares of the Ohio
Tax-Free Income Portfolio will be included in a corporation's net worth base
for purposes of calculating the Ohio corporation franchise tax. Distributions
consisting of gain on the sale, exchange or other disposition of Ohio Municipal
Obligations will not be subject to the Ohio personal income tax, or municipal
or school district income taxes in Ohio and will not be included in the net
income base of the Ohio corporation franchise tax. Distributions attributable
to other sources will be subject to the Ohio personal income tax and the Ohio
corporation franchise tax.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of
<PAGE> 199
Trust authorizes the Board of Trustees to classify and reclassify any unissued
shares into one or more classes of shares. Pursuant to this authority, the
Board of Trustees has authorized the issuance of an unlimited number of shares
in twenty-eight separate investment portfolios. Each Portfolio described in
this prospectus offers five separate classes of shares - Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares.
This prospectus relates only to Service Shares of the nine Portfolios described
herein, each of which is classified as a diversified Portfolio under the 1940
Act.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. In addition, each class of
Investor Shares are sold with different sales charges. Because of these "class
expenses" and sales charges, the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the Portfolio's three classes of
Investor Shares. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan,
automatic withdrawal plan and checkwriting. For further information regarding
the Fund's Institutional and Investor share classes, contact [name and number].
Each share of an investment portfolio has a par value of $.001,
represents an interest in the particular portfolio and is entitled to such
dividends and distributions earned on such portfolio's assets as are declared
in the discretion of the Board of Trustees. The Fund's shareholders are
entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except where otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular class or investment portfolio. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
On January __, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank
holding company.
HOW IS PERFORMANCE CALCULATED?
Total return and yield information for Service Shares of the
Portfolios may be quoted in advertisements and communications to shareholders.
Total return will be calculated on an average annual total return basis for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in a class of Shares over the
measuring period. Total return may also be calculated on an aggregate total
return basis. Aggregate total return reflects the total percentage change in
value over the measuring period. Both methods of calculating total return
assume that dividends and capital gain distributions made by a Portfolio with
respect to a class of Shares are reinvested in Shares of the same class.
The yield of a class of Shares is computed by dividing the Portfolio's
net income per share allocated to that class during a 30-day (or one month)
period by the maximum offering price per
<PAGE> 200
Share on the last day of the period and annualizing the result on a semi-annual
basis. Each Tax-Free Portfolio's "tax-equivalent yield" may also be quoted,
which shows the level of taxable yield needed to produce an after-tax
equivalent to a Portfolio's tax-free yield. This is done by increasing the
Portfolio's yield (calculated above) by the amount necessary to reflect the
payment of Federal and/or state income tax at a stated tax rate.
The performance of a Share class may be compared to the performance
other mutual funds with similar investment objectives and to other relevant
indices or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the total return and/or yield of a class of Shares may be
compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Lehman GMNA Index, the Lehman Index of Baa-rated Corporate
Bonds, the T-Bill Index, the "stocks, bonds and inflation Index" published
annually by Ibbotson Associates and the Lehman Government Corporate Bond Index.
Performance information may also include evaluations of the Portfolios and
their Share classes published by nationally recognized ranking services and
information as reported by financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of a class of Shares of a particular Portfolio, a
Portfolio may provide other information demonstrating hypothetical investment
returns. This information may include, but is not limited to, illustrating the
compounding effects of a dividend in a dividend reinvestment plan or the impact
of tax-deferred investing.
Performance quotations represent past performance and should not be
considered representative of future results. The investment return and
principal value of an investment in a Portfolio will fluctuate so that an
investor's Shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, performance data for a Portfolio
cannot necessarily be used to compare an investment in the Portfolio with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by brokers or other institutions directly to
their customer accounts in connection with investments in a Portfolio will not
be included in the Portfolio's calculations of yield and total return.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, COMPASS CAPITAL FUNDS have other sources of
information regarding each Fund and its portfolio holdings, strategy and
current dividend and yield levels.
<PAGE> 201
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL FUNDS by either using
a toll-free number or through electronic access:
For Performance and Portfolio Management Questions, dial (800) compass
For Information Related to Share Purchase and Redemptions call your investment
adviser or Compass Capital Funds at (800) xxx-xxxx
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) xxx-xxxx
Information is also available on the World Wide Web through the Internet.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing COMPASSFUNDS.COM
<PAGE> 202
APPENDIX
<TABLE>
<CAPTION>
=====================================================================================================================
Compass Capital Performance
--------------- -----------
Fund Benchmark Description
---- --------- -----------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short Merrill 1-3 Year Treasuries with maturities ranging from 1 to 2.99 years
Government Bond Treasury Index
- ---------------------------------------------------------------------------------------------------------------------
Intermediate Lehman Brothers Treasury and agency issues in the Lehman Aggregate, excluding maturities
Government Intermediate above 9.99 years
Government
- ---------------------------------------------------------------------------------------------------------------------
Intermediate Lehman Brothers Treasury, agency and corporate issues in the Lehman Aggregate, excluding
Bond Intermediate maturities above 9.99 years
Gov't/Corp
- ---------------------------------------------------------------------------------------------------------------------
Government Lehman 50% allocation to the mortgage component of the Lehman Aggregate Index and
Income Mortgage/10 Year a 50% allocation to the Merrill Lynch 10 Year Index
Treasury
- ---------------------------------------------------------------------------------------------------------------------
Managed Income Salomon BIG Very similar to the Lehman Aggregate, the Salomon BIG is a market-weighted
index comprised of U.S. Treasury, government-sponsored, investment grade
corporate (Baa3/BBB-or better), mortgage and asset-backed securities.
- Issues comprising the index have an average life of at least 1
year, with no maximum maturity
- Corporate and government-sponsored issues have a minimum face
amount of $100 million to qualify for entry, and a minimum of $75
million face amount to exit
- Treasury and mortgage issues have a minimum face amount of $1
billion for both entry and exit
- Excludes CMOs, ARMs, manufactured homes, nonagency bonds,
buydowns, graduated equity mortgages, project loans and non-
conforming ("jumbo") mortgages
- As of June 1995, the composition of the Index is:
- allocation to Treasury and government securities
- allocation to mortgage-backed securities
allocation to corporate and asset-backed securities
- ---------------------------------------------------------------------------------------------------------------------
International Salomon Non-U.S. FILL IN
Bond Hedged Government
Bond Index
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Income Lehman Municipal All of the bonds in the following Municipal Indices possess the following
Bond Index characteristics:
- A minimum credit rating of Baa3
- Outstanding par value of at least $3 million
- Must be issued as part of a deal of at least $50 million
- Individual bonds must have been issued within the last 5 years
- Remaining maturity of not less than one year
Excludes bonds subject to the alternative minimum tax (AMT), taxable
municipal bonds, and floating-rate or zero coupon municipal bonds
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania Lehman Local GO local general obligation bonds
Tax-Free Income Index
- ---------------------------------------------------------------------------------------------------------------------
Ohio Tax-Free Lehman Local GO local general obligation bonds
Income Index
=====================================================================================================================
</TABLE>
<PAGE> 203
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
[A R T]
THE BOND
PORTFOLIOS
SERVICE SHARES
PROSPECTUS
SHORT GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
MANAGED INCOME PORTFOLIO
TAX-FREE INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
January __, 1996
<PAGE> 204
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(INVESTOR A AND INVESTOR B SHARES OF THE
SHORT GOVERNMENT BOND PORTFOLIO, INTERMEDIATE GOVERNMENT
PORTFOLIO, INTERMEDIATE BOND PORTFOLIO, GOVERNMENT INCOME PORTFOLIO,
MANAGED INCOME PORTFOLIO, CORE BOND PORTFOLIO, INTERNATIONAL BOND PORTFOLIO,
TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA TAX-FREE INCOME PORTFOLIO,
OHIO TAX-FREE INCOME PORTFOLIO AND NEW JERSEY
TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 205
THE BOND PORTFOLIOS
INVESTOR SHARES
The Compass Capital Funds(R) (the "Fund") consist of [twenty-eight]
investment portfolios. This Prospectus describes the Investor Shares of eleven
of those portfolios ("Portfolios"):
. Short Government Bond Portfolio .
. Intermediate Government Portfolio .
. Intermediate Bond Portfolio .
. Core Bond Portfolio .
. Government Income Portfolio .
. Managed Income Portfolio .
. International Bond Portfolio .
. Tax-Free Income Portfolio .
. Pennsylvania Tax-Free Income Portfolio .
. New Jersey Tax-Free Income Portfolio .
. Ohio Tax-Free Income Portfolio .
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January ___, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by calling (800)
_________. The Statement of Additional Information, as supplemented from time
to time, is incorporated by reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE
PORTFOLIOS ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
PROSPECTUS January ___, 1996
<PAGE> 206
INTRODUCING THE BOND PORTFOLIOS OF THE COMPASS CAPITAL BOND FUNDS:
The Bond Portfolios of the COMPASS CAPITAL FUNDS consist of eleven investment
products that provide investors with a broad spectrum of investment
alternatives within the fixed income sector. Seven of these Portfolios invest
in taxable bonds, and four of these Portfolios invest in tax-exempt bonds. A
detailed description of each Portfolio appears on pages ____.
<TABLE>
<CAPTION>
COMPASS CAPITAL FUND PERFORMANCE BENCHMARK LIPPER PEER GROUP
- -------------------- --------------------- -----------------
<S> <C> <C>
Short Gov't Merrill 1-3 Year Treasury Index Short U.S. Government
Intermediate Gov't Lehman Brothers Intermediate Gov't Intermediate U.S. Gov't
Intermediate Bond Lehman Brothers Intermediate Intermediate Gov't/Corp
Gov't/Corp
Core Bond Lehman Aggregate Intermediate Investment Grade Debt
Gov't Income Lehman Mortgage/10 Year Treasury General U.S. Gov't
Managed Income Salomon BIG Corporate Debt A-Rated
International Bond Salomon Non-U.S. Hedged Government General World Income
Bond Index
Tax-Free Lehman Municipal Bond Index General Municipal Debt
PA Tax-Free Lehman Local GO Index PA Municipal Debt
NJ Tax-Free Lehman 10 Year GO NJ Municipal Debt
OH Tax Free Lehman Local GO Index OH Municipal Debt
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc. ("BlackRock") serves
as sub-adviser to each Portfolio except the International Bond Portfolio, which
is sub-advised by Morgan Grenfell Investment Services Limited ("Morgan
Grenfell").
UNDERSTANDING THE COMPASS CAPITAL BONDS FUNDS:
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in fixed
income investing.
CONSIDERING THE RISKS IN BOND INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective. Some or all of the Portfolios may purchase
mortgage-related, asset-backed, foreign and illiquid securities; enter into
repurchase and reverse repurchase agreements and engage in leveraging
techniques; lend portfolio securities to third parties; and enter into futures
contracts and options. Each state-specific tax-free Portfolio concentrates in
the securities of issuers located in a particular state, and is
non-diversified, which means that its performance may be dependent upon the
performance of a smaller number of Securities than the other Portfolios, which
are considered diversified. See "What Additional Investment Policies Apply?"
ASKING THE KEY QUESTIONS
Page
What Are the Expenses of the Portfolios? . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . .
What Are the Differences Among the Portfolios? . . . . . . . . .
What Types of Securities Are in the Portfolios? . . . . . . . . .
What Are the Portfolios' Fundamental Limitations? . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . .
What Pricing Options Are Available to Investors? . . . . . . . .
What Are the Key Considerations in Selecting a Pricing Option? .
How Are Shares Purchased? . . . . . . . . . . . . . . . . . . . .
How Are Shares Redeemed? . . . . . . . . . . . . . . . . . . . .
What Are the Shareholder Features of the Fund? . . . . . . . . .
What Is the Schedule of Sales Charges and Exemptions? . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors?
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . .
[END OF PAGE]
<PAGE> 207
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be
incurred by the Portfolios' Investor Shares for the current fiscal year ending
September 30, 1996. An example based on the summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
GOVERNMENT BOND GOVERNMENT INTERMEDIATE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------- --------------------------------- ----------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge(1)
(as a percentage of
offering price) 4.0% None 1.0% 4.0% None 1.0% 4.0% None 1.0%
Sales Charge on Reinvested
Dividends None None None None None None None None None
Deferred Sales Charge(2) (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower) None 4.0% 1.0% None 4.0% 1.0% None 4.0% 1.0%
ANNUAL FUND OPERATING EXPENSES
for Investor Shares After
Fee Waivers As a
Percentage of Daily Net
Assets
Advisory fees(3) .30% .30% .30% .30% .30% .30% .30% .30% .30%
12b-1 fees(4) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating expenses .72 .72 .72 .72 .72 .72 .72 .72 .72
----- ----- ----- ----- ----- ----- ----- ----- -----
Administration fees(3) .15 .15 .15 .15 .15 .15 .13 .13 .13
Shareholders Servicing Fees .40 .40 .40 .40 .40 .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17 .17 .17 .17 .17 .17
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Portfolio operating
expenses 1.02% 1.77% 1.77% 1.02% 1.77% 1.77% 1.02% 1.77% 1.77%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What is the
Schedule of Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year on
Investor B Shares or after the first year on Investor C Shares. See
"What is the Schedule of Charges and Exemptions?"
(3) Without waivers, advisory fees would be .50%, .50% and .50% and
administration fees would be .23%, .23% and .23%, respectively. PAMG
and the Portfolios' Administrators are under no obligation to waive
fees or reimburse expenses, but have informed the Fund that they
expect to waive fees and reimburse expenses during the current fiscal
year as necessary to maintain the Portfolios' total operating expenses
at the levels set forth in the table. The information in the tables
is based on the advisory and administration fees and other expenses
payable after fee waivers for the fiscal year ended September 30,
1995, as restated to reflect current expenses and fee waivers.
Without waivers, total operating expenses would be: (i) 1.30%, 1.30%
and 1.32%, respectively, for Investor A Shares; and (ii) 2.06%, 2.05%
and 2.28%, respectively, for Investor B Shares; and (iii) 2.06%, 2.05%,
and 2.28%, respectively, for Investor C Shares. The Portfolios do not
expect to incur any 12b-1 fees with respect to Investor A Shares
(otherwise payable at the maximum rate of .10%) during the current
fiscal year.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
<PAGE> 208
<TABLE>
<CAPTION>
CORE BOND GOVERNMENT INCOME MANAGED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------- ----------------------------------- ----------------------------------
INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge(1) (as a
percentage of offering price) 4.5% None 1.0% 4.5% None 1.0%
Sales Charge on Reinvested
Dividends None None None None None None
Deferred Sales Charge(2) (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower) None 4.5% 1.0% None 4.5% 1.0%
ANNUAL FUND OPERATING EXPENSES
for Investor Shares After
Fee Waivers As a
Percentage of Daily Net
Assets
Advisory fees(3) .30% .30% .30% .35% .35% .30%
12b-1 fees(4) .00 .75 .75 .00 .75 .75
Other operating expenses .72 .72 .72 .70 .70 .70
----- ----- ----- ----- ----- -----
Administration fees(3) .15 .15 .15 .12 .12 .12
Service fees .40 .40 .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17 .17 .17
----- ----- ----- ----- ----- -----
Total Portfolio operating expenses 1.02% 1.77% 1.77% 1.05% 1.80% 1.80%
===== ==== ===== ===== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What is the
Schedule of Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year
on Investor B Shares or after the first year on Investor C Shares.
See "What is the Schedule of Charges and Exemptions?"
(3) Without waivers, advisory fees .50%, .50%, and .45% and administration
fees would be .23%, .23% and .23%, respectively. PAMG and the
Portfolios' Administrators are under no obligation to waive fees or
reimburse expenses, but have informed the Fund that they expect to
waive fees and reimburse expenses during the current fiscal year as
necessary to maintain the Portfolios' total operating expenses at the
levels set forth in the table. The information in the tables is based
on the advisory and administration fees and other expenses payable
after fee waivers for the fiscal year ended September 30, 1995, as
restated to reflect current expenses and fee waivers. Without
waivers, total operating expenses would be: (i) __%, 1.30% and 1.31%,
respectively, for Investor A Shares; and (ii) __%, 2.05% and 2.06%,
respectively, for Investor B Shares; and (iii) ___%, 2.05%, and 2.06%,
respectively, for Investor C Shares. The Portfolios do not expect to
incur any 12b-1 fees with respect to Investor A Shares (otherwise
payable at the maximum rate of .10%) during the current fiscal year.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
<PAGE> 209
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------- ----------------------------------- ----------------------------------
INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge(1) (as a
percentage of offering price) 4.0% None 1.0% 4.0% None 1.0% 4.0% None 1.0%
Sales Charge on Reinvested
Dividends None None None None None None None None None
Deferred Sales Charge(2) (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower) None 4.5% 1.0% None 4.0% 1.0% None 4.0% 1.0%
ANNUAL FUND OPERATING EXPENSES
FOR INVESTOR SHARES AFTER
FEE WAIVERS AS A
PERCENTAGE OF DAILY NET
ASSETS
Advisory fees(3) .55% .55% .55% .30% .30% .30% .30% .30% .30%
12b-1 fees(4) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating expenses .90 .90 .90 .72 .72 .72 .72 .72 .72
----- ----- ----- ----- ----- ----- ----- ----- -----
Administration fees(3) .15 .15 .15 .13 .13 .13 .13 .13 .13
Service fees .40 .40 .40 .40 .40 .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17 .17 .17 .17 .17 .17
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Portfolio operating expenses 1.45% 2.20% 2.20% 1.02% 1.77% 1.77% 1.02% 1.77% 1.77%
===== ===== ===== ===== ==== ===== ===== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What is the
Schedule of Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year on
Investor B Shares or after the first year on Investor C Shares.
See "What is the Schedule of Charges and Exemptions?"
(3) Without waivers, advisory fees .55%, .50% and .50% and administration
fees would be .23%, .23% and .23%, respectively. [In addition, the
Expense Summary reflects reimbursements made to the Tax-Free Income
Portfolio by the adviser.] PAMG and the Portfolios' Administrators
are under no obligation to waive fees or reimburse expenses, but have
informed the Fund that they expect to waive fees and reimburse
expenses during the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the
table. The information in the tables is based on the advisory and
administration fees and other expenses payable after fee waivers for
the fiscal year ended September 30, 1995, as restated to reflect
current expenses and fee waivers. Without waivers, total operating
expenses would be: (i) 1.32%, 1.32% and 1.32%, respectively, for
Investor A Shares; and (ii) 2.07%, 2.07% and 2.07%, respectively, for
Investor B Shares; and (iii) 2.07%, 2.07%, and 2.07%, respectively, for
Investor C Shares. The Portfolios do not expect to incur any 12b-1
fees with respect to Investor A Shares (otherwise payable at the
maximum rate of .10%) during the current fiscal year.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
<PAGE> 210
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO
--------------------------------- ---------------------------------
INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge(1) (as a
percentage of offering price) 1.0% 4.0% None 1.0%
Sales Charge on Reinvested
Dividends None None None None
Deferred Sales Charge(2)
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower) 1.0% None 4.0% 1.0%
ANNUAL FUND OPERATING
Expenses for Investor
Shares After Fee Waivers
As a Percentage of Daily
Net Assets
Advisory Fees(3) .30% .30% .30% .30%
12b-1 fees(4) .75 .00 .75 .75
Other operating expenses .72 .72 .72 .72
----- ----- ----- -----
Administration fees(3) .10 .10 .10 .10
Shareholder
Servicing fees .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17
----- ----- ----- -----
Total Portfolio operating expenses 1.77% 1.02% 1.77% 1.77%
===== ===== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What is the
Schedule of Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year
on Investor B Shares or after the first year on Investor C Shares.
See "What is the Schedule of Charges and Exemptions?"
(3) Without waivers, advisory fees .50%, .50% and administration fees
would be .23%, .23%, respectively. PAMG and the Portfolios'
Administrators are under no obligation to waive fees or reimburse
expenses, but have informed the Fund that they expect to waive fees
and reimburse expenses during the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set
forth in the table. The information in the tables is based on the
advisory and administration fees and other expenses payable after fee
waivers for the fiscal year ended September 30, 1995, as restated to
reflect current expenses and fee waivers. Without waivers, total
operating expenses would be: 1.35% for Investor A Shares; 2.10% for
Investor B Shares; and (iii) 2.10% and 2.10%, respectively, for
Investor C Shares. The Portfolios do not expect to incur 12b-1 fees
with respect to Investor A Shares (otherwise payable at the maximum
rate of .10%) during the current fiscal year.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
<PAGE> 211
EXAMPLE
An investor in Investor Shares would pay the following expenses on a
$1,000 investment in Shares of each of the Portfolios, assuming (1) 5% annual
return, and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Short Government Bond Portfolio
A Shares* $ 50 $ 71 $ 94 $ 160
B Shares (Redemption)** 58 88 119 170
B Shares (No Redemption) 18 56 96 170
C Shares 38 65 105 216
Intermediate Government Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 58 88 119 170
B Shares (No Redemption) 18 56 96 170
C Shares 38 65 105 216
Intermediate Bond Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 58 88 119 170
B Shares (No Redemption) 18 56 96 170
C Shares 38 65 105 216
Core Bond Portfolio
C Shares 38 65 105 216
Government Income Portfolio
A Shares* 55 76 99 164
B Shares (Redemption)** 62 93 124 170
B Shares (No Redemption) 18 56 96 170
C Shares 38 65 105 216
Managed Income Portfolio
A Shares* 55 77 100 167
B Shares (Redemption)** 63 94 126 173
B Shares (No Redemption) 18 57 97 173
C Shares 38 66 107 219
International Bond Portfolio
A Shares* 59 89
B Shares (Redemption)** 67 106
B Shares (No Redemption) 22 69
C Shares 42 78
Tax-Free Income Portfolio
A Shares* 55 77 100 164
B Shares (Redemption)** 58 88 119 170
B Shares (No Redemption) 18 56 96 170
C Shares 38 65 105 216
Pennsylvania Tax-Free Income Portfolio
A Shares* 50 70 91 154
B Shares (Redemption)** 58 88 119 167
B Shares (No Redemption) 18 56 96 167
C Shares 38 65 105 216
New Jersey Tax-Free Income Portfolio
C Shares 38 65 105 216
Ohio Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 58 88 119 170
B Shares (No Redemption) 18 56 96 170
C Shares 38 65 105 216
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the
beginning of the period.
** Reflects the deduction of the deferred sales charge.
<PAGE> 212
*** Based on the conversion of the Investor B Shares to Investor A Shares
after [seven] years.
The foregoing Expense Table and Example are intended to assist
investors in understanding the costs and expenses that an investor in the
Portfolios will bear either directly or indirectly. The tables do not reflect
any charges that may be imposed by brokers or other institutions directly on
their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
<PAGE> 213
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference in the Statement of Additional
Information and has been audited by [ ], the Fund's
independent accountants. This financial information should be read together
with those financial statements. For the periods shown, the Short U.S.
Government Portfolio and Core Bond Portfolio offered only one class of shares
to institutional investors, and the New Jersey Tax-Free Income Portfolio and
International Bond Portfolio offered one class of shares to both institutional
and retail investors. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual reports may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus. During the periods shown no Investor C Shares of any of the
Portfolios, and no Investor B Shares of the [name Portfolios] were outstanding.
<PAGE> 214
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
THE SHORT GOVERNMENT BOND PORTFOLIO+
<TABLE>
<CAPTION>
YEAR YEAR JULY 17, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . $ 9.71 $ 9.96 $10.00
------ ------ ------
Net investment income (net of $.014,
$.011 and $.005 respectively, of
interest expense)(**) . . . . . . . . . . . . . . 0.58 0.48 0.51
Net realized and unrealized loss on
investments . . . . . . . . . . . . . . . . . . . 0.13 (0.25) (0.06)
------ ------ ------
Net increase from investment
operations . . . . . . . . . . . . . . . . . . . . 0.71 0.23 0.45
------ ------ ------
Dividends from net investment income . . . . . . . . (0.58) (0.48) (0.49)
Distributions from net realized capital
gains . . . . . . . . . . . . . . . . . . . . . . . (0.01) --- ---
------ ------ ------
Total dividends and distributions . . . . . . . . . (0.59) (0.48) (0.49)
------ ------ ------
Net asset value, end of period . . . . . . . . . . . $ 9.83 $ 9.71 $ 9.96
====== ====== ======
TOTAL INVESTMENT RETURN(***) . . . . . . . . . . . . 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) . . . . . . . . . . . . . . . . . . . . 0.57% 0.57% 0.56%(****)
Net investment income(**) . . . . . . . . . . . . . . 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . $34,236 $36,686 $67,540
Portfolio turnover . . . . . . . . . . . . . . . . . 586% 455% 513%
Net assets, end of period (in thousands) . . . . . . $44,486 $31,265 $51,611
</TABLE>
- --------------------------------------------------------------------------------
+ This Portfolio commenced operations on July 17, 1992 as the Short
Duration Portfolio, a separate investment portfolio (the "Predecessor
Short Government Bond Portfolio") of The BFM Institutional Trust Inc.,
which was organized as a Maryland business corporation. On January
__, 1996, the assets and liabilities of the Predecessor Short
Government Bond Portfolio were transferred to this Portfolio, and were
combined with the assets of a pre-existing portfolio investment
maintained by the Fund.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Short Government Bond
Portfolio waived fees amounting to $102,707 and $110,232 and
reimbursed expenses amounting to $61,195 and $55,582, for the periods
ended June 30, 1995 and June 30, 1994, respectively. For the period
July 17, 1992 through June 30, 1993, the administrator of the
Predecessor Short Bond Portfolio waived fees amounting to $64,580. If
all expenses had been borne, the expense ratios would have been 1.05%,
1.02% and 0.66% for the periods ended June 30, 1995, June 30, 1994 and
June 30, 1993, respectively. The net investment income ratios would
have been 5.60%, 4.25% and 5.22% for the periods ended June 30, 1995,
June 30, 1994 and June 30, 1993, respectively. The net investment
income on a per share basis would have been $0.53, $0.43 and $0.49 for
the periods ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively.
(***) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
Total investment return does not reflect sales load on Investor
Shares.
(****) Annualized.
<PAGE> 215
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT PORTFOLIO
---------------------------------
INVESTOR A SHARES
--------------------
FOR THE
PERIOD
YEAR YEAR YEAR 5/11/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $10.60 $10.46 $10.05
------ ------ ------
Income from investment
operations
Net investment income 0.53 0.54 0.24
Net gain (loss) on
investments (both
realized and unrealized) (0.87) 0.16 0.41
------ ------ ------
Total from investment
operations (0.34) 0.70 0.65
------ ------ ------
Less distributions
Distributions from net
investment income (0.52) (0.54) (0.24)
Distributions from net
realized capital gains (0.10) (0.02) --
------ ------ ------
Total distributions (0.62) (0.56) (0.24)
------ ------ ------
Net asset value at end of
period $ 9.64 $10.60 $10.46
====== ====== ======
Total return (3.36)%(3) 6.84%(3) 6.64%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $8,508 $7,666 $1,484
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.65% 0.76% 0.80%(2)
Before advisory/
administration fee
waivers 1.05% 0.84% 0.80%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers 5.24% 5.19% 5.28%(2)
Before advisory/
administration fee
waivers 4.84% 5.11% 5.28%(2)
Portfolio turnover rate 9% 80% 38%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 216
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE BOND PORTFOLIO
---------------------------
INVESTOR A SHARES
-------------------
FOR THE
PERIOD
YEAR 5/20/94(1)
ENDED THROUGH
9/30/95 9/30/94
------- -------
<S> <C>
Net asset value at beginning
of period $ 9.23
------
Income from investment
operations
Net investment income 0.20
Net gain (loss) on
investments (both
realized and unrealized) (0.17)
------
Total from investment
operations 0.03
------
Less distributions
Distributions from net
investment income (0.21)
Distributions from net
realized capital gains --
------
Total distributions (0.21)
------
Net asset value at end
of period $ 9.05
======
Total return 0.31%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 87
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.85%(2)
Before advisory/
administration fee
waivers 1.28%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers 5.35%(2)
Before advisory/
administration fee
waivers 4.92%(2)
Portfolio turnover rate 92%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 217
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
THE CORE BOND PORTFOLIO+
-----------------------
YEAR YEAR DECEMBER 9, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . $ 9.36 $ 10.37 $ 10.00
------- -------
Net investment income (net of $.004, $.003 and
$.001, respectively, of interest expense)(**) . . . . . . . . . . . . 0.62 0.55 0.32
Net realized and unrealized gains
on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.50 (0.60) 0.37
------ ------- -------
Net (decrease) increase
from investment operations . . . . . . . . . . . . . . . . . . . . . 1.12 (0.05) 0.69
------ ------- -------
Dividends from net investment income . . . . . . . . . . . . . . . . . . (0.62) (0.55) (0.32)
Distributions from net realized capital gains . . . . . . . . . . . . . . (0.01) (0.41)
------ -------
Total dividends and distributions . . . . . . . . . . . . . . . . . (0.63) (0.96) (0.32)
------ ------- -------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . $ 9.85 $ 9.36 $ 10.37
======= ======= =======
TOTAL INVESTMENT RETURN (***) . . . . . . . . . . . . . . . . . . . . . . 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.55% 0.55% 0.55%(****)
Net investment income (**) . . . . . . . . . . . . . . . . . . . . . . . 6.62% 5.61% 5.57%(****)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . . . . . . . . . . . $16,247 $9,702 $6,622
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . 435% 722% 354%
Net assets, end of period (in thousands) . . . . . . . . . . . . . . . . $32,191 $12,507 $7,803
</TABLE>
- -------------------------------------------------------------------------------
+ This Portfolio commenced operations on December 9, 1992 as the Core
Fixed Income Portfolio, a separate investment portfolio (the
"Predecessor Core Bond Portfolio") of The BFM Institutional Trust
Inc., which was organized as a Maryland business corporation. On
January __, 1996, the assets and liabilities of the Predecessor Core
Bond Portfolio were transferred to this Portfolio, which had no prior
operating history.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Core Bond Portfolio waived
fees amounting to $56,894, $34,010 and $24,761 and reimbursed expenses
amounting to $137,364, $137,179 and $0 for the periods ended June 30,
1995, June 30, 1994 and June 30, 1993, respectively. The
administrator of the Predecessor Core Bond Portfolio waived fees
amounting to $32,500 and $3,701 for the periods ended June 30, 1994
and June 30, 1993, respectively. For the period ended June 30, 1993,
the custodian and transfer agent of the Predecessor Core Bond
Portfolio waived fees amounting to $24,272 and $17,283, respectively.
If the Predecessor Core Bond Portfolio had borne all expenses for the
periods ended June 30, 1995, 1994 and 1993, the expense ratios would
have been 1.75%, 2.65% and 2.44%, respectively; the net investment
income ratios would have been 5.43%, 3.51% and 3.68%, respectively;
and the net investment income on a per share basis would have been
$0.51, $0.34 and $0.22, respectively.
(***) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
Total investment return does not reflect sales load on Investor
Shares.
(****) Annualized.
<PAGE> 218
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
GOVERNMENT INCOME PORTFOLIO
INVESTOR A SHARES
----------------------------
FOR THE
PERIOD
12/__/94(1)
THROUGH
9/30/95
Net asset value at beginning
of period
Income from investment
operations
Net investment income
Net gain (loss) on
investments (both
realized and unrealized)
Total from investment
operations
Less distributions
Distributions from net
investment income
Distribution in excess
of net investment income
Distributions from net
realized capital gains
Distributions in excess
of net realized gains
Total distributions
Net asset value at end
of period
Total return
Ratios/Supplemental data
Net assets at end of period
(in thousands)
Ratios of expenses to
average net assets
After advisory/
administration fee waivers
Before advisory/
administration fee waivers
Ratios of net investment
income to average net
assets
After advisory/
administration fee waivers
Before advisory/
administration fee waivers
Portfolio turnover rate
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 219
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
------------------------
INVESTOR A SHARES
------------------------
FOR THE
PERIOD
YEAR YEAR YEAR 2/05/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 11.18 $10.74 $10.40
------- ------ ------
Income from investment
operations
Net investment income 0.57 0.66 0.46
Net gain (loss) on
investments (both
realized and unrealized) (1.19) 0.57 0.34
------- ------ ------
Total from investment
operations (0.62) 1.23 0.80
------- ------ ------
Less distributions
Distributions from net
investment income (0.60) (0.66) (0.46)
Distribution in excess
of net investment income (0.02) -- --
Distributions from net
realized capital gains (0.14) (0.13) --
Distributions in excess
of net realized gains (0.01) -- --
------- ------ ------
Total distributions (0.77) (0.79) (0.46)
------- ------ -----
Net asset value at end
of period $ 9.79 $11.18 $10.74
======= ====== ======
Total return (5.76)%(3) 12.13%(3) 7.86%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $10,921 $7,252 $1,417
Ratios of expenses to
average net assets
After advisory/
administration fee waivers 1.00% 0.84% 0.80%(2)
Before advisory/
administration fee waivers 1.22% 0.88% 0.80%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee waivers 5.66% 6.09% 6.28%(2)
Before advisory/
administration fee waivers 5.44% 6.05% 6.28%(2)
Portfolio turnover rate 61% 72% 56%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 220
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERNATIONAL BOND PORTFOLIO+
-----------------------------
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net asset value at beginning
of period $10.75 $11.76 $10.21 $10.00
------ ------ ------ ------
Income from investment
operations
Net investment income 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both
realized and unrealized) (0.48) 0.46 0.47 0.26
------ ----- ------ ------
Total from investment
operations (0.14) 1.11 0.99 0.57
------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.13) (0.90) (0.30) --
Distributions from net
realized capital gains (0.24) (0.22) (0.14) (0.06)
------ ------ ------ ------
In Excess of Net Realized Gains -- -- -- (0.30)
Total distributions (0.37) 1.12 (0.44) (0.36)
------ ------ ------ ------
Net asset value at end of
period $10.52 $10.75 $10.76 $10.21
====== ====== ====== ======
Total return*** 1.50% 10.24% 9.55% 8.92%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.24% 1.38% 1.30% 1.37%*
Ratios of net investment
income to average net
assets 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 5.96% 6.00% 6.31% 6.75%*
Portfolio turnover rate 130.64% 128.14% 115.25% 110.13%
</TABLE>
- ------------------------------------------
+This Portfolio commenced operations on July 1, 1991 as the Compass
International Fixed Income Fund, a separate investment portfolio (the
"Predecessor International Bond Portfolio") of The Compass Capital Group of
Funds, which was organized as a Massachusetts business trust. On January __,
1996, the assets and liabilities of the Predecessor International Bond
Portfolio were transferred to this Portfolio, which had no prior operating
history.
* Annualized.
** Commenced operations on July 1, 1991.
*** Total return does not reflect sales load.
<PAGE> 221
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
TAX-FREE INCOME PORTFOLIO
-------------------------
INVESTOR A SHARES
-----------------
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 5/14/90(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $11.31 $10.60 $10.33 $ 9.91 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.48 0.55 0.58 0.64 0.25
Net gain (loss) on
investments (both
realized and unrealized) (0.93) 0.83 0.49 0.46 (0.11)
------ ------ ------ ------ ------
Total from investment
operations (0.45) 1.38 1.07 1.10 0.14
------ ------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.48) (0.55) (0.59) (0.66) (0.23)
Distributions from net
realized capital gains (0.34) (0.12) (0.21) (0.02) --
------ ------ ------ ------ ------
Total distributions (0.82) (0.67) (0.80) (0.68) (0.23)
------ ------ ------ ------ ------
Net asset value at end of
period $10.04 $11.31 $10.60 $10.33 $ 9.91
====== ====== ====== ====== ======
Total return (4.19)%(3) 13.48%(3) 10.67%(3) 11.40%(3) 1.40%(3)
Ratios/Supplemental data
Net assets at end of
period (in thousands) $6,972 $7,831 $7,349 $3,510 $4,044
Ratios of expenses to
average net assets
After advisory/
administration fee
waivers 0.95% 0.57% 0.53% 1.00% 1.00%(2)
Before advisory/
administration fee
waivers 2.18% 1.36% 1.67% 1.89% 1.70%(2)
Ratios of net investment
income to average net
assets
After advisory/
administration fee
waivers 4.53% 5.06% 5.56% 6.23% 6.56%(2)
Before advisory/
administration fee
waivers 3.30% 4.27% 4.42% 5.34% 5.86%(2)
Portfolio turnover rate 40% 71% 38% 95% 18%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 222
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
--------------------------------------
INVESTOR A SHARES
-----------------
FOR THE
PERIOD
YEAR YEAR 12/1/92(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning
of period $ 10.70 $ 10.00
------- -------
Income from investment operations
Net investment income 0.52 0.42
Net gain (loss) on investments
(both realized and unrealized) (0.85) 0.73
------- -------
Total from investment
operations (0.33) 1.15
------- -------
Less distributions
Distributions from net
investment income (0.52) (0.42)
Distributions from net realized
capital gains (0.03) (0.03)
------- -------
Total distributions (0.55) (0.45)
------- -------
Net asset value at end of period $ 9.82 $ 10.70
======= =======
Total return (3.06)%(3) 11.69%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $46,563 $35,934
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.41% 0.07%(2)
Before advisory/administration
fee waivers 1.01% 0.95%(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.06% 5.19%(2)
Before advisory/administration
fee waivers 4.46% 4.31%(2)
Portfolio turnover rate 30% 40%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 223
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $10.94 $11.31 $11.30 $10.46 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and unrealized) 0.28 (0.36) 0.04 0.85 0.45
---- ------ ----- ------ ------
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
---- ------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains ---- (0.01) (0.03) -- --
---- ------ ------ ------ ------
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
------ ------ ------ ------ ------
Net asset value at end of
period $11.22 $10.94 $11.31 $11.30 $10.46
====== ====== ====== ====== ======
Total return 4.90% 1.49% 5.18% 13.48% 12.33%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
Portfolio turnover rate 18.47% 28.43% 12.05% 16.09% 0.00%
</TABLE>
- ------------------------------------------
+This Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Bond Fund, a separate investment portfolio (the "Predecessor New
Jersey Tax-Free Income Portfolio") of The Compass Capital Group of Funds, which
was organized as a Massachusetts business trust. On January __, 1996, the
assets and liabilities of the Predecessor New Jersey Tax-Free Income Portfolio
were transferred to this Portfolio, which had no prior operating history.
* Annualized.
** Commenced operations on July 1, 1991.
*** Total return does not reflect sales load.
<PAGE> 224
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
OHIO TAX-FREE INCOME PORTFOLIO
------------------------------
INVESTOR A SHARES
-----------------
FOR THE
PERIOD
YEAR YEAR 12/1/92(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning
of period $10.53 $10.00
------ ------
Income from investment operations
Net investment income 0.53 0.36
Net gain (loss) on
investments (both realized
and unrealized) (0.91) 0.53
------ ------
Total from investment
operations (0.38) 0.89
------ ------
Less distributions
Distributions from net
investment income (0.53) (0.36)
Distributions from net
realized capital gains (0.02) --
------ ------
Total distributions (0.55) (0.36)
------ ------
Net asset value at end of period $ 9.60 $10.53
====== ======
Total return (3.75)%(3) 9.10%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $3,825 $2,386
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.10% 0.07%(2)
Before advisory/administration
fee waivers 1.49% 2.58%(2)
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.18% 4.90%(2)
Before advisory/administration
fee waivers 3.79% 2.39%(2)
Portfolio turnover rate 61% 36%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
<PAGE> 225
WHAT ARE THE PORTFOLIOS?
The COMPASS CAPITAL FUNDS have been structured to include many
different investment styles across the spectrum of fixed income investments so
that investors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of the COMPASS CAPITAL FUNDS consist of eleven
investment products that provide investors with a broad spectrum of investment
alternatives within the fixed income sector. Seven of these portfolios invest
solely in taxable bonds, and four of these portfolios invest in tax exempt
bonds.
In certain investment cycles and over certain holding periods, a fund
that invests in any one of these styles may perform above or below the market.
An investment program that combines these multiple disciplines allows investors
to select from among these various product options in the way that most closely
fits the individual's investment goals and sentiments.
<TABLE>
<CAPTION>
==================================================================================================
Portfolio Investment Objective
--------- --------------------
- --------------------------------------------------------------------------------------------------
<S> <C>
Short Government Bond To seek to realize a rate of return that exceeds the
total return of the Merrill Lynch 1-3 year Treasury
Index.
- --------------------------------------------------------------------------------------------------
Intermediate Government, To seek current income consistent with the preservation
Intermediate Bond, Government of capital.
Income, Managed Income and
International Bond
- --------------------------------------------------------------------------------------------------
Core Bond To realize a total rate of return that exceeds the
total return of the Lehman Brothers Aggregate Index
consistent with the preservation of capital and prudent
investment management.
- --------------------------------------------------------------------------------------------------
Tax-Free Income, Pennsylvania Tax- To seek as high a level of current income exempt from
Free Income, New Jersey Tax-Free Federal income tax and, to the extent possible for each
Income and Ohio Tax-Free Income State-Specific Municipal Portfolio, income tax of the
specific state in which the Portfolio concentrates, as
is consistent with preservation of capital.
==================================================================================================
</TABLE>
<PAGE> 226
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
<TABLE>
<CAPTION>
Portfolio
Characteristics:
- ------------------------------------------------------------------------------------------------------------------
Performance Benchmark* Dollar-Weighted Credit Quality Min
Portfolio Average Concentration Credit Quality
Maturity
(Approximate)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Gov't Bond Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Treasury Index
- ------------------------------------------------------------------------------------------------------------------
Intermediate Gov't Lehman Brothers 5-10 Years Gov't/Agency AAA
Intermediate Gov't
- ------------------------------------------------------------------------------------------------------------------
Intermediate Bond Lehman Brothers 5-10 Years Investment Grade BBB
Intermediate Gov't/Corp Spectrum
- ------------------------------------------------------------------------------------------------------------------
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
- ------------------------------------------------------------------------------------------------------------------
Spectrum
Gov't Income Lehman Mortgage/10 Year 10-15 Years Gov't/Agency AAA
Treasury
- ------------------------------------------------------------------------------------------------------------------
Managed Income Salomon BIG 5-10 Years Investment Grade BBB
Spectrum
- ------------------------------------------------------------------------------------------------------------------
International Bond Salomon Non-U.S. Hedged 5-15 Years Investment Grade Below Investment
Government Bond Index Spectrum Grade
- ------------------------------------------------------------------------------------------------------------------
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Index Spectrum
- ------------------------------------------------------------------------------------------------------------------
PA Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
- ------------------------------------------------------------------------------------------------------------------
NJ Tax-Free Lehman 10 Year GO 10-15 Years Investment Grade BBB
Spectrum
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 227
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
OH Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* For more information on a Portfolio's Benchmark, see the Appendix
at the back of this Prospectus.
<PAGE> 228
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
Yes: The Fund will hold a significant concentration of these securities at all
times.
Elig: The Fund maypurchase these securities, but they may or may not be
a significant holding at a given time.
Temp. The Fund may purchase these securities but under normal market
conditions is not expected to do so
No: The Fund may not purchase these securities.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Treasuries Agencies Agency Non Agency/ Corp. ABS Foreign Municipals
MBS Commercial Securities/
MBS Currency Risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Bond Yes Yes Yes No Elig. Elig. No Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
Intermediate Gov't Yes Yes Yes No Yes Elig. No Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Yes Yes Yes Elig. Yes Yes No Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
Managed Income Yes Yes Yes Elig. Yes Yes Elig. Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
International Bond Yes Yes Elig. Elig. Elig. Elig. Yes Elig.
- -----------------------------------------------------------------------------------------------------------------------------------
Tax-Free Temp. No No No No No No Yes
- -----------------------------------------------------------------------------------------------------------------------------------
PA Tax-Free Temp. No No No No No No Yes
- -----------------------------------------------------------------------------------------------------------------------------------
NJ Tax-Free Temp. No No No No No No Yes
- -----------------------------------------------------------------------------------------------------------------------------------
OH Tax Free Temp. No No No No No No Yes
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 229
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL LIMITATIONS?
A Portfolio's investment objective may be changed by the Fund's Board
of Trustees without shareholder approval. However, shareholders will be
notified of any such change. No assurance can be provided that a Portfolio
will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). The following descriptions summarize several of the Portfolios'
fundamental investment policies, which are set forth in full in the Statement
of Additional Information.
No Portfolio may:
(1) purchase securities (except U.S. Government Securities) if
more than 5% of its total assets will be invested in the
securities of any one issuer, except that up to 25% of a
Portfolio's total assets may be invested without regard to
this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry; and
(3) in the case of each Municipal Portfolio, invest less than 80%
of its net assets in instruments the interest on which is
exempt from regular Federal income tax or, for each
State-Specific Municipal Portfolios, in AMT Paper, except
during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal
Portfolios. Instead, as a non-fundamental investment restriction, each
State-Specific Municipal Portfolio will not invest in securities (except U.S.
Government securities and related repurchase agreements) that would cause, at
the end of any tax quarter, more than 5% of its total assets to be invested in
securities of any one issuer, except that up to 50% of a Portfolio's total
assets may be invested without regard to this limitation so long as no more
than 25% of the Portfolio's total assets are invested in any one issuer (except
U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment
securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. If the Fund determines that any such
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
INVESTMENT QUALITY. Securities acquired by the Short Government Bond
Portfolio, Intermediate Government Portfolio and Government Income Portfolio
(the "Government Portfolios") will be rated in the highest rating category at
the time of purchase or, if unrated, of comparable
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quality as determined by the Portfolios' sub-adviser. Securities acquired by
the other Portfolios will be rated investment grade at the time of purchase
(within the four highest voting categories by S&P, Duff, Fitch or Moody's) or,
if unrated, of comparable quality as determined by a Portfolio's sub-adviser.
Securities rated "Baa" on "BBB" are generally considered to be investment grade
although they have speculative characteristics. The International Bond
Portfolio may also invest up to 5% of its net assets in securities rated below
the investment grade (commonly referred to as "junk bonds") or in comparable
unrated securities. If a security is reduced below the minimum rating that is
permitted for a Portfolio, the Portfolio's sub-adviser will consider whether
the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at
least 80% of the value of its total assets in debt securities. The Government
Portfolios will invest at least 65% of their net assets in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its net assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio
(together with the "State-Specific Tax-Free Portfolios" called the "Tax-Free
Portfolios") will invest, during normal market conditions, at least 80% of
their net assets in obligations issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia and their
political sub-divisions, agencies, instrumentalities and authorities and
related tax-exempt derivative securities ("Municipal Obligations"). In
addition, each State-Specific Tax-Free Portfolio intends to invest at least 65%
of its net assets in Municipal Obligations of issuers located in the particular
state indicated by its name. The Tax-Free Income Portfolio intends to invest
less than 25% of its net assets in Municipal Obligations of issuers located in
the same state. During temporary defensive periods each Tax-Free Portfolio may
invest without limitation in securities that are not Municipal Obligations and
may hold without limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest
primarily in foreign securities and currencies. The Managed Income Portfolio
may invest up to 10% of its total assets in debt securities of foreign issuers
and may hold from time to time various foreign currencies pending their
investment or conversion into U.S. dollars. Investing in securities of foreign
issuers involves considerations not typically associated with investing in
securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Portfolio that invests in foreign securities
will be affected favorably or unfavorably by changes in currency exchange
rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. While the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock
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Exchange. Accordingly, a Portfolio's foreign investments may be less liquid
and their prices may be more volatile than comparable investments in securities
in U.S. companies. In addition, there is generally less government supervision
and regulation of securities exchanges, brokers and issuers in foreign
countries than in the United States.
[Foreign investments may include: (a) debt obligations issued or
guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state,
province or municipality; (b) debt obligations of supranational organizations
such as the World Bank, Asian Development Bank, European Investment Bank, and
European Economic Community; (c) debt obligations of foreign banks and bank
holding companies; (d) debt obligations of domestic banks and corporations
issued in foreign currencies; (e) debt obligations denominated in the European
Currency Unit (ECU); (f) foreign corporate debt securities and commercial
paper; and (g) private placements. Such securities may include loan
participations and assignments, convertible securities and zero-coupon
securities.]
[To maintain greater flexibility, the International Bond Portfolio may
invest in instruments which have the characteristics of futures securities.
Such instruments may take a variety of forms, such as debt securities with
interest or principal payments determined by reference to the value of a
currency or commodity at a future point in time. The risks of such investments
could reflect the risks of investing in futures, currencies and securities,
including volatility and illiquidity.]
The expense ratio of the International Bond Portfolio can be expected
to be higher than those of Portfolios investing primarily in domestic
securities. The costs attributable to investing abroad are usually higher for
several reasons, such as higher investment research costs, higher foreign
custody costs, higher commission costs and additional costs arising from delays
in settlements of transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the state or governmental body has no obligation to
make
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these payments in future years unless money is appropriated on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
is not yet as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in
private activity bonds the interest on which is an item of tax preferences for
purposes of the Federal alternative minimum tax ("AMT Paper") when added
together with any taxable investments held by the Portfolio. In addition, each
Tax-Free Portfolio may invest 25% or more of its net assets in Municipal
Obligations the interest on which is paid solely from revenues of similar
projects. To the extent a Portfolio's assets are invested in Municipal
Obligations payable from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified
portfolio, and the State-Specific Tax-Free Portfolios are classified as
non-diversified portfolios, under the 1940 Act. Investment returns on a
non-diversified portfolio typically are dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than it would a
diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase at the Portfolio's option specified Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligations
to which the commitment relates. Each Tax-Free Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
The Tax-Free Portfolios may invest in tax-exempt derivative securities
relating to Municipal Obligations, including tender option bonds,
participations, beneficial interest in trust and partnership interest. The
amount of information regarding the financial condition of issuers of Municipal
Obligations may not be as extensive as that which is made available by public
corporations and the secondary market for Municipal Obligations may be less
liquid than that for taxable fixed-income securities. Accordingly, the ability
of a Tax-Free Portfolio to buy and sell tax-exempt securities may, at any
particular time and with respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal and state income tax are rendered by
counsel to the respective issuers and sponsors of the obligations at the time
of issuance. The Fund and its investment adviser and sub-adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative securities, or the bases for such opinions.
[The Ohio Tax-Free Income Portfolio will not trade its securities for
the purpose of seeking profits. For purposes of this policy, the Portfolio may
vary its portfolio securities if (i) there has been an adverse change in a
security's credit rating or in that of its issuer or in the adviser's or
sub-adviser's credit analysis of the security or its issuer; (ii) there has
been, in the opinion of the adviser
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and sub-adviser, a deterioration or anticipated deterioration in general
economic or market conditions affecting issuers of Ohio Municipal Obligations,
or a change or anticipated change in interest rates; (iii) adverse changes or
anticipated changes in market conditions or economic or other factors
temporarily affecting the issuers of one or more portfolio securities make
necessary or desirable the sale of such security or securities in anticipation
of the Portfolio's repurchase of the same or comparable securities at a later
date; or (iv) the adviser or sub-adviser engages in temporary defensive
investment strategies.]
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios may
purchase securities that are secured or backed by mortgages as well as other
assets (e.g., automobile loans and credit card receivables). These
mortgage-related and asset-backed securities may be issued by the U.S.
Government, GNMA, FNMA, Federal Home Loan Mortgage Corporation, and private
issuers such as commercial banks, financial companies, finance subsidiaries of
industrial companies, savings and loan associations, mortgage banks and
investment banks.
The Portfolios may acquire several types of mortgage-related
securities, including guaranteed mortgage pass-through certificates, which
provide the holder with a pro rata interest in the underlying mortgages,
adjustable rate mortgage-related securities ("ARMs") and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-related securities. Primarily, these securities do
not have the benefit of the same security interest in the underlying
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and Federal consumer credit
laws, many of which give debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. A major difference is that
the principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, if a mortgage-related or asset-backed security is purchased at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if one of these
securities is purchased at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will decrease, yield to
maturity. In calculating the average weighted
<PAGE> 234
maturity of a Portfolio, the maturity of mortgage-related and asset-backed
securities will be based on estimates of average life which take prepayments
into account.
Prepayments on mortgage-related and asset-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and
social factors. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Like other fixed income
securities, when interest rates rise the value of a mortgage-related or
asset-backed security generally will decline; however, when interest rates
decline, the value of these securities that have prepayment features may not
increase as much as that of other fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with
their investment objectives, the Portfolios may purchase Treasury receipts and
other "stripped" securities that evidence ownership in either the future
interest payments or the future principal payments on U.S. Government and other
obligations. These participations, which may be issued by the U.S. Government
(or a U.S. Government agency or instrumentality) or by private issuers such as
banks and other institutions, are issued at a discount to their "face value,"
and may include stripped mortgage-backed securities ("SMBS"). Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The International Bond Portfolio also may
purchase "stripped" securities that evidence ownership in the future interest
payments or principal payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool
of mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class receives all of the
principal. However, in some cases, one class will receive some of the interest
and most of the principal while the other class will receive most of the
interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, a Portfolio may
fail to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be extremely volatile in response
to changes in interest rates. The yields on a class of SMBS that receives all
or most of the interest are generally higher than prevailing market yields on
other mortgage-related obligations because their cash flow patterns are also
volatile and there is a greater risk that the initial investment will not be
fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by the
Fund's Board of Trustees if they can be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of a Portfolio's per share net asset value.
Each Portfolio may invest in zero coupon bonds, which are normally
issued at a significant discount from free value and do not provide for
periodic interest payments. Zero coupon bonds may experience greater
volatility in market value than debt obligations which provide for regular
interest payments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Portfolios, may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian
<PAGE> 235
counterparts of U.S. corporations, as well as Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer. Bank obligations may
include certificates of deposit, notes, bankers' acceptances and fixed time
deposits. These obligations may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of specific
obligation or by government regulation. The Portfolios may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in
their interest rates, maturities and times of issuance. Obligations of certain
agencies and instrumentalities of the U.S. Government such as the Government
National Mortgage Association are supported by the United States' full faith
and credit; others such as those of the Federal National Mortgage Association
and the Student Loan Marketing Association are supported by the right of the
issuer to borrow from the Treasury; others such as those of the Federal Farm
Credit Banks or the Federal Home Loan Mortgage Corporation are supported only
by the credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter
into interest rate swaps and may purchase or sell interest rate caps and
floors. The Portfolios expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of their
holdings, as a duration management technique or to protect against an increase
in the price of securities a Portfolio anticipates purchasing at a later date.
The Portfolios intend to use these transactions as a hedge and not as a
speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor.
In addition, the International Bond Portfolio may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Portfolio expects to engage in foreign currency
exchange transactions in connection with the purchase and sale of portfolio
securities (transaction hedging) and to protect the value of specific portfolio
positions (position hedging). The Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in that
foreign currency, and may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts (futures contracts). The Portfolio may also
purchase exchange-listed and over-the-counter call and put options on futures
contracts and on foreign currencies, and may write covered call options on up
to 100% of the currencies in its portfolio. In order to protect against
currency fluctuations, the International Bond Portfolio may enter into currency
swaps. Currency swaps involve the exchange of the rights of the Portfolio and
another party to make or receive payments in specified currencies.
<PAGE> 236
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its
investment objective, each Portfolio may write covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or, with
respect to the International Bond Portfolio, cross-hedging. These options may
relate to particular securities, financial instruments, foreign currencies,
securities indices or the yield differential between two securities, and may or
may not be listed on a securities exchange and may or may not be issued by the
Options Clearing Corporation. A Portfolio will not purchase put and call
options where the aggregate premiums on outstanding options exceed 5% of its
net assets at the time of purchase, and will not write options on more than 25%
of the value of its net assets (measured at the time an option is written).
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. In addition, unlisted options are not subject to
the protections afforded purchasers of listed options issued by the Options
Clearing Corporation, which performs the obligations of its members if they
default.
To the extent consistent with its investment objective, each Portfolio
may also invest in futures contracts and options on futures contracts for
hedging purposes or to maintain liquidity. The value of a Portfolio's
contracts may equal or exceed 100% of the Fund's total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately
afterwards the aggregate amount of margin deposits on its existing futures
positions plus the amount of premiums paid for related futures options is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a
stated quantity of a foreign currency. A Portfolio may sell a futures contract
in order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange
fluctuation. A Portfolio may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales
of securities, in the value of the securities to be sold. In addition, a
Portfolio may utilize futures contracts in anticipation of changes in the
composition of its holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases
an option on a futures contracts, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
during the option period. When Portfolio sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with a Portfolio's position in a futures contract
or related option, the Fund will create a segregated account of liquid high
grade assets or will otherwise cover its position in accordance with applicable
SEC requirements.
The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of
the instruments held by a Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) a sub-adviser's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see the Statement of Additional Information.
<PAGE> 237
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Portfolios from registration as a
"commodity pool operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, a Portfolio makes cash
contributions to a deposit fund of the insurance company's general account.
The insurance company then credits to the Portfolio, on a monthly basis,
interest which is based on an index (such as the Salomon Brothers CD Index),
but is guaranteed not to be less than a certain minimum rate. Each Portfolio
does not expect to invest more than 5% of its net assets in GICs at any time
during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase
rated and unrated variable and floating rate instruments. These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The Portfolios may invest up to 10% of their total assets in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Issuers of unrated
variable and floating rate instruments must satisfy the same criteria as set
forth above for a Portfolio. The absence of an active secondary market with
respect to particular variable and floating rate instruments, however, could
make it difficult for the Portfolio to dispose of a variable or floating rate
instrument if the issuer defaulted on its payment obligation or during periods
when the Portfolio is not entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements").
Repurchase agreements are in substance loans. Default by or bankruptcy of the
seller would, however, expose a Portfolio to possible loss because of adverse
market action or delays in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is
authorized to make limited borrowings. If the securities held by a Portfolio
should decline in value while borrowings are outstanding, the net asset value
of the Portfolio's outstanding shares will decline in value by proportionately
more than the decline in value suffered by the Portfolio's securities.
Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios (except the Tax-Free Portfolios) may use reverse
repurchase agreements when it is anticipated that the interest income to be
earned from the investment
<PAGE> 238
of the proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by a Portfolio may decline below the price of the securities the Fund is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid high-grade debt
securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an
additional 5% of its total assets for temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued
by other investment companies within the limits prescribed by the 1940 Act. As
a shareholder of another investment company, a Portfolio 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 Portfolio bears directly in connection
with its own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15%
of the value of its net assets in securities that are illiquid. GICs, variable
and floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered
under the Securities Act of 1933 (the "1933 Act") 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 a Portfolio's sub-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 a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive
opportunities in the mortgage market and to enhance current income, each
Portfolio (except the Tax-Free Portfolios) may enter into dollar roll
transactions. A dollar roll transaction involves a sale by the Portfolio of a
mortgage-backed or other security concurrently with an agreement by the
Portfolio to repurchase a similar security at a later date at an agreed-upon
price. The securities that are repurchased will bear the same interest rate
and stated maturity as those sold, but pools of mortgages collateralizing such
<PAGE> 239
securities may have different prepayment histories than those sold. During the
period between the sale and repurchase, a Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of
the sale will be invested in additional instruments for the Portfolio, and the
income from these investments will generate income for the Portfolio. If such
income does not exceed the income, capital appreciation and gain or loss that
would have been realized on the securities sold as part of the dollar roll, the
use of this technique will diminish the investment performance of a Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that a Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
government securities or other liquid high grade debt obligations having a
value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained.
Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed
upon repurchase price of those securities. If the broker/dealer to whom a
Portfolio sells securities becomes insolvent, the Portfolio's right to purchase
or repurchase securities may be restricted and the instruments which the
Portfolio is required to repurchase may be worth less than an instrument which
the Portfolio originally held when the Portfolio is able to complete the
purchase. Successful use of mortgage dollar rolls may depend upon a
sub-adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities
"against-the-box." A short sale is a transaction in which a Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline. The Portfolios expect to make short sales both as a form of
hedging to offset potential declines in long positions in similar securities
and in order to maintain portfolio flexibility. In a short sale
"against-the-box," at the time of sale, the Portfolio owns or has the immediate
and unconditional right to acquire the identical security at no additional
cost. When selling short "against-the-box," a Portfolio forgoes an opportunity
for capital appreciation in the security.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is
expected that the annual portfolio turnover rate for each Portfolio will not
exceed [ ]. A Portfolio's annual portfolio turnover rate will not, however,
be a factor preventing a sale or purchase when the sub-adviser believes
investment considerations warrant such sale or purchase. Portfolio turnover
may vary greatly from year to year as well as within a particular year. High
portfolio turnover rates will generally result in higher transaction costs to a
Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing
interest rates. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than securities with shorter maturities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS.
The concentration of investments by the State Specific Municipal Portfolios in
State-Specific Obligations raises special investment considerations. In
particular, changes in the economic condition and governmental policies of a
state and its political subdivisions could adversely the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific
Municipal Portfolios invest are
<PAGE> 240
described below. For further information, see "Special Consideration Regarding
State- Specific Obligations" in the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the
principal operating fund of the Commonwealth) experienced deficits in fiscal
1990 and 1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30,
1993 of $698.9 million. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to a surplus of
$64.4 million as of June 30, 1993. Rising unemployment, a relatively high
proportion of persons 65 and older in the Commonwealth and court ordered
increases in healthcare reimbursement rates place increased pressures on the
tax resources of the Commonwealth and its municipalities. The Commonwealth has
sold a substantial amount of bonds over the past several years, but the debt
burden remains moderate. The recession has affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January, but
the Commonwealth is likely to continue to show fiscal restraint.
New Jersey. [To Follow.]
Ohio. While diversifying more into the service and other
non-manufacturing areas, the economy of Ohio continues to rely in part on
durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result,
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Agriculture is an important segment of the Ohio economy with over
half the State's area devoted to farming and approximately 15% of total
employment in agribusiness. In prior years, the State's overall unemployment
rate was commonly somewhat higher than the national figure. For example, the
reported 1990 average monthly State rate was 5.7%, compared to the national
figure of 5.5%. However, for the last four years the State rates were below
the national rates (5.5% versus 6.1% in 1994). The unemployment rate and its
effects vary among particular geographic areas of the State. There can be no
assurance that future national, regional or state-wide economic difficulties
and the resulting impact on State or local government finances generally will
not adversely affect the market value of Ohio Municipal Obligations held in the
Portfolio or the ability of particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of its Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
ADVISER AND SUB-ADVISERS
The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Management
Group. Each of the Portfolios within the Compass Capital Fund Family, except
the International Bond Portfolio, is
<PAGE> 241
managed by an experienced portfolio manager who is a member of one of PNC Asset
Management Group's distinguished fixed income portfolio management subsidiary,
BlackRock Financial Corporation, Inc. The sub-adviser of the International Bond
Portfolio is Morgan Grenfell Investment Services Limited.
The eleven portfolios and their investment sub-advisers and portfolio
managers are as follows:
<TABLE>
<CAPTION>
Compass Capital Portfolio Investment Sub-Adviser Portfolio Manager
- ------------------------- ---------------------- -----------------
<S> <C> <C>
Short Government Bond BlackRock(1) Robert S. Kapito; Vice Chairman of BlackRock since 1988; Portfolio co-
manager since 1995.
Michael P. Lustig; Vice President of BlackRock since 1989; Portfolio co-
manager since 1995.
Scott Amero; Managing Director of BlackRock since 1990; Portfolio co-
manager since 1995.
Intermediate Government BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
Intermediate Bond BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
Core Bond BlackRock(1) Scott Amero (see above); Mr. Amero has been Portfolio manager since
______________.
Government Income BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
Managed Income BlackRock(1) Robert S. Kapito, Michael P. Lustig and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been Portfolio co-managers since 1995.
International Bond Morgan Grenfell(2) Martin A. Hill; Director of Morgan Grenfell since 1991; Portfolio
manager since _______.
</TABLE>
<PAGE> 242
<TABLE>
<S> <C> <C>
Tax-Free Income BlackRock(1) Kevin Klingert; portfolio manager at BlackRock since 1991; prior to
joining BlackRock, Assistant Vice President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager since 1995.
Pennsylvania Tax-Free BlackRock(1) Kevin Klingert (see above); Portfolio manager since 1995.
New Jersey Tax-Free BlackRock(1) Kevin Klingert (see above); Portfolio manager since 1995.
Ohio Tax-Free BlackRock(1) Kevin Klingert (see above); Portfolio manager since 1995.
</TABLE>
- -------------------
(1) BlackRock Financial Corporation, Inc. ("BlackRock") has its primary
offices at 345 Park Avenue, New York, New York 10154.
(2) Morgan Grenfell Investment Services Limited ("Morgan Grenfell") has
its primary offices at 20 Finsbury Circus, London ECZM, 1NB England.
PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1835 Market Street, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company. Morgan Grenfell is an indirect
wholly-owned subsidiary of Deutsche Bank, A.G., a German financial services
conglomerate.
For their investment advisory and sub-advisory services, PAMG and the
portfolios' sub-advisers are entitled to fees, computed daily on a
Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth
in the following table. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
<TABLE>
<CAPTION>
ANNUAL CONTRACTUAL FEE RATE
--------------------------------------------------------------------------
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------ ------------------------------------
INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ADVISORY FEE FEE ADVISORY FEE FEE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE DAILY NET ASSETS
- ------------------------
first $1 billion .50% .35% .55% .40%
$1 billion--$2 billion .45 .30 .50 .35
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .40 .25 .45 .30
</TABLE>
<PAGE> 243
For their last fiscal year, the Portfolios paid investment advisory
fees at the following annual rates after voluntary fee waivers: Managed Income
Portfolio .35%; Tax-Free Income Portfolio 0%; Intermediate Government Portfolio
.20%; Ohio Tax-Free Income Portfolio 0%; Pennsylvania Tax-Free Income Portfolio
.27%; New Jersey Tax-Free Income Portfolio .___%; Short Government Bond
Portfolio .___%; Core Bond Portfolio .___%; Intermediate Bond Portfolio .25%;
Government Income Portfolio 0%; and International Bond Portfolio _______.
Brokerage transactions for the Portfolios may be directed through
registered broker/dealers who have entered into dealer agreements with the
Distributor, subject to the requirements of best execution.
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania Merchant Group
Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI is entitled to a fee, computed daily and payable monthly, at an annual
rate of .03% of each Portfolio's average daily net assets, and PFPC and PDI are
entitled to receive a combined fee, computed daily and payable monthly, at an
annual rate of .20% of the first $500 million of each Portfolio's average daily
net assets, .18% of the next $500 million of each Portfolio's average daily net
assets, .16% of the next $1 billion of each Portfolio's average daily net
assets and .15% of each Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
DISTRIBUTION AND SERVICE PLAN
Under the Fund's Distribution Service Plan, Investor Shares of the
Portfolios bear the expense of payments ("distribution fees") made to PDI, as
the Fund's distributor (the "Distributor") or affiliates of PNC Bank for
distribution and sales support services. The distribution fees will be used
primarily to compensate the Distributor for distribution services and to
compensate the Distributor and PNC Bank affiliates for sales support services
provided in connection with the offering and sale of Investor Shares. The
distribution fees may also be used to reimburse the Distributor and PNC Bank
affiliates for related expenses, including payments to brokers, dealers,
financial institutions and industry professionals ("Service Organizations") for
sales support services and related expenses. Distribution fees payable under
the Plan will not exceed .10% (annualized) of the average daily net asset value
of each Portfolio's outstanding Investor A Shares and .75% (annualized) of the
average daily net asset value of each Portfolio's outstanding Investor B Shares
and Investor C shares.
<PAGE> 244
Payments under the Plan are not tied directly to out-of-pocket expenses and
therefore may be used by the recipients as they choose (for example, to defray
their overhead expenses).
Under the Plan, the Fund intends to enter into service agreements with
Service Organizations (including PNC Bank and its affiliates) with respect to
each class of Investor Shares pursuant to which Service Organizations will
render certain support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder servicing fee of
up to .25% (annualized) of the average daily net asset value of Investor Shares
owned by their customers, Service Organizations will provided general
shareholder liaison services. In consideration for a separate shareholder
processing fee of up to .15% (annualized) of the average daily net asset value
of Investor Shares owned by their customers, Service Organizations will provide
sub-accounting and sub-transfer agency services.
Service Organizations may charge their clients additional fees for
account services. Customers who are beneficial owners of Investor Shares
should read this Prospectus in light of the terms and fees governing their
accounts with Service Organizations.
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. Expenses include, but are not limited
to, fees paid to PAMG and the Administrators, transfer agency and custodian
fees, trustee fees, taxes, interest, professional fees, distribution and
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their Shares for distribution under Federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, insurance premiums, the expense
of independent pricing services, and other expenses which are not expressly
assumed by PAMG or the Fund's service providers under their agreements with the
Fund. Any general expenses of the Fund that do not belong to a particular
investment portfolio will be allocated among all investment portfolios by or
under the direction of the Board of Trustees in a manner the Board determines
to be fair and equitable.
WHAT PRICING OPTIONS ARE AVAILABLE ACROSS THE FUND?
The Bond Portfolios of the Compass Capital Funds offer three different pricing
options to investors in the form of three different share classes. These
options are described below:
A-Shares (Front-End Load)
* One time, front-end sales charge at time of purchase
* No charges or fees at any time for redeeming shares
* Lower on-going expenses
* Free exchanges between other A-shares in the Compass Capital Fund
Family.
A-shares may make sense for investors with a long term perspective who want to
avoid higher expenses and higher on-going fees.
<PAGE> 245
B-Shares (Back-End Load)
* No front-end sales charge at time of purchase
* Contingent deferred sales charge (CDSC) if shares are redeemed,
declining over [7] years, from a high of 4.50%.
* Automatically convert to A-Shares [7] years from purchase.
B-shares may make sense for investors who prefer to pay for professional
investment advice on an ongoing basis (asset-based sales charge) rather than
with a traditional, one-time front-end sales charge.
C Shares (Level Load)
* Low front-end sales charge of 1.00%
* Contingent deferred sales charge (CDSC) of 1.00% if shares are
redeemed within 12 months of purchase
C-shares may make sense for shorter term (relative to both B- and A-shares)
investors who prefer to pay for professional investment advice on an on-going
basis (asset-based sales charge) rather than with a traditional, one-time
front-end sales charge. Such investors may plan to make substantial
redemptions within [7] years of purchase.
The pricing options for each Portfolio are described in the tables below:
<TABLE>
<CAPTION>
A Shares B Shares C Shares
-------- -------- --------
<S> <C> <C> <C>
Maximum Front-End Sales Charge 3.75% 0.00% 1.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
- --------------------
* The Portfolios do not expect to incur any 12b-1 fees with respect to the
Investor A Shares for the current fiscal year.
Investors wishing to purchase or redeem shares of the Funds may do so either by
mailing the investment application attached to this Prospectus along with a
check or by wiring money as specified below.
WHAT ARE THE KEY CONSIDERATIONS IN SELECTING A PRICING OPTION?
In deciding which class of Shares to purchase, investors should
consider the following:
Intended Holding Period. Over time, the cumulative distribution fees
on a Portfolio's Investor B and Investor C Shares will exceed the expense of
the maximum initial sales charge on Investor A Shares. For example, if net
asset value remains constant, the Investor B and Investor C Shares' aggregate
distribution fees would be equal to the Investor A Shares' initial maximum
sales
<PAGE> 246
charge between [___ years] after purchase in the case of each of the
Portfolios. Thereafter, Investor B and Investor C Shares would bear higher
aggregate expenses. Investor B shareholders, however, enjoy the benefit of
permitting all their dollars to work from the time the investments are made,
and Investor C shareholders pay a low initial sales charge. Any positive
investment return on the additional invested amount would partially or wholly
offset the higher annual expenses borne by Investor B and Investor C Shares.
Because the Portfolios' future returns cannot be predicted, however,
there can be no assurance that such a positive return will be achieved.
At the end of [seven] years after the date of purchase, Investor B
Shares will convert automatically to Investor A Shares, based on the relative
net asset values of shares of each class. Investor B Shares acquired through
reinvestment of dividends or distributions are also converted at the earlier of
these dates - [seven] years after the reinvestment date or the date of
conversion of the most recently purchased Investor B Shares that were not
acquired through reinvestment.
Investor B Shares of the Portfolios purchased on or before [date] are
subject to a CDSC of _____% of the lesser of the original purchase price or the
net asset value of Investor B Shares at the time of redemption. This deferred
sales charge is reduced for shares held more than one year. Investor B Shares
of the Portfolios purchased on or before [date] convert to Investor A Shares of
a Portfolio at the end of six years after purchase. For more information about
Investor B Shares purchased before [date] and the deferred sales charge payable
on their redemption, call PFPC at [number].
Investor B shareholders also pay a contingent deferred sales charge if
they redeem during the first [seven] years after purchase, unless a sales
charge waiver applies. Similarly, Investor C shareholders pay a contingent
deferred sales charge if they redeem within the first year after purchase.
Investors expecting to redeem during this period should consider the cost of
the applicable contingent deferred sales charge in addition to the aggregate
annual Investor B and Investor C distribution fees, as compared with the cost
of the applicable initial sales charges applicable to the Investor A Shares.
Unless a reduced sales charge is applied on Investor A Shares, due to the
contingent deferred sales charges that would become payable on redemption of
Investor B Shares, an investor expecting to hold shares of a Portfolio for less
than [___ years] would generally pay lower cumulative expenses by purchasing
Investor C Shares than Investor B Shares. Because of the conversion feature on
Investor B Shares, an investor expecting to hold shares more than [seven years]
would generally pay lower cumulative expenses purchasing Investor B Shares than
by purchasing Investor C Shares.
Reduced Sales Charges. Because of reductions in the front-end sales
charge for purchases of Investor A Shares aggregating $25,000 or more, it may
be advantageous for investors purchasing large quantities of Investor Shares to
purchase Investor A Shares. In any event, the Fund will not accept any
purchase order for [$_______] or more of Investor B Shares. In addition,
because the accumulated higher operating expenses of Investor C Shares may
eventually exceed the amount of the front-end sales charge associated with
Investor A Shares, investors who intend to hold their Investor Shares for an
extended period of time should consider purchasing Investor A Shares.
Waiver of Sales Charges. The entire initial sales charge on Investor
A Shares of a Portfolio may be waived for certain eligible purchasers and these
purchasers' entire purchase price would be
<PAGE> 247
immediately invested in a Portfolio. The contingent deferred sales charge may
be waived upon redemption of certain Investor B Shares and Investor C Shares.
HOW ARE SHARES PURCHASED?
GENERAL
Initial and subsequent purchase orders may be placed through
securities brokers, dealers or financial institutions ("brokers"), or the
Transfer Agent. Generally, individual investors will purchase Investor Shares
through a broker who will then transmit the purchase order directly to the
Transfer Agent.
The minimum investment for the initial purchase of Shares is $500;
there is a $100 minimum for subsequent investments. Purchases through the
Automatic Investment Plan described below are subject to a lower initial
purchase minimum. In addition, the minimum initial investment for employees of
the Fund, the Fund's investment adviser, sub-advisers, distributor or transfer
agent or employees of their affiliates is $100.
When placing purchase orders, investors should specify whether the
order is for Investor A, Investor B or Investor C Shares of a Portfolio. All
share purchase orders that fail to specify a class will automatically be
invested in Investor A Shares.
PURCHASES THROUGH BROKERS
Shares of the Portfolios may be purchased through brokers which have
entered into dealer agreements with the Distributor. Purchase orders for
shares in the Portfolios received by such brokers and transmitted to the
Transfer Agent before the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m. Eastern time) on a Business Day will be effected
at the net asset value determined that day, plus any applicable sales charge.
Payment for an order may be made by the broker in Federal funds or other funds
immediately available to the Portfolios' custodian (the "Custodian") no later
than 4:00 p.m. (Eastern time) on the third Business Day following receipt of
the purchase order.
It is the responsibility of brokers to transmit purchase orders and
payment on a timely basis. If payment is not received within the period
described above, the order will be canceled, notice thereof will be given, and
the broker and its customers will be responsible for any loss to the Fund or
its shareholders.
PURCHASES THROUGH THE TRANSFER AGENT
Investors may also purchase Investor Shares by completing and signing
the Account Application Form and mailing it to the Transfer Agent, together
with a check in at least the minimum initial purchase amount payable to the
Compass Capital Funds. An Account Application Form may be obtained by calling
[number]. The name of the Portfolio for which Shares are purchased must also
appear on the check or [Federal Reserve Draft.] Investors may also wire
Federal funds in connection with the purchase of shares. The wire instructions
must include the name of the Portfolio, the name of the account registration,
and the shareholder account number. Before wiring any funds an investor
<PAGE> 248
must call the Portfolios at 1-800-438-5789 in order to confirm the wire
instructions. Purchase orders which are received by the Transfer Agent,
together with payment, before the close of regular trading hours on the New
York Stock Exchange (currently 4:00 p.m. Eastern time) on any Business Day (as
defined below) are priced according to the net asset value next determined on
that day plus any applicable sales charge.
OTHER PURCHASE INFORMATION
Shares of each Portfolio are sold on a continuous basis by PDI as
distributor. PDI maintains its principal offices at 259 Radnor-Chester Road,
Suite 120, Radnor, Pennsylvania 19087. Purchases may be effected on weekdays
on which both the New York Stock Exchange and the Federal Reserve Bank of
Philadelphia are open for business (a "Business Day"). Payment for orders
which are not received or accepted will be returned after prompt inquiry. The
issuance of shares is recorded on the books of the Fund. Certificates are not
issued for fractional shares. Certificates for Investor A Shares will be
issued only upon request. No certificates will be issued for Investor B or
Investor C Shares. Payments for Shares of a Portfolio may, in the discretion
of the Fund's investment adviser, be made in the form of securities that are
permissible investments for that Portfolio. The Fund reserves the right to
reject any purchase order or to waive the minimum initial investment
requirement.
HOW ARE SHARES REDEEMED?
REDEMPTION
Shareholders may redeem their Shares for cash at any time. A written
redemption request in proper form must be sent directly to the Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for
the contingent deferred sales charge that may be charged with respect to
Investor B and Investor C Shares, there is no charge for a redemption.
Shareholders may also place redemption requests through a broker or other
institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD
INDICATE WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR
INVESTOR C SHARES. If a redeeming shareholder owns both Investor A Shares and
Investor B or Investor C Shares in the same Portfolio, the Investor A Shares
will be redeemed first unless the shareholder indicates otherwise.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Share-holders holding Investor A
Share certificates must send their certificates with the redemption request.
<PAGE> 249
Additional documentary evidence of authority is required by PFPC in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
EXPEDITED REDEMPTIONS
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above. This privilege may not be used to redeem Investor A Shares in
certificated form. During periods of substantial economic or market change,
telephone redemptions may be difficult to complete.
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described above) to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably believed to be genuine.
ACCOUNTS WITH LOW BALANCES
The Fund reserves the right to redeem a shareholder's account in any
Portfolio at any time the net asset value of the account in such Portfolio
falls below the minimum initial investment requirement amount as the result of
a redemption or an exchange request. A shareholder will be notified in writing
that the value of the shareholder's account in a Portfolio is less than the
required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS
The redemption price for Shares is the net asset value per share next
determined after the request for redemption is received in proper form by the
Compass Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907. Proceeds from the redemption of Investor B and Investor C Shares
will be reduced by the amount of any applicable contingent deferred sales
charge. Unless another payment option is used as described above, payment for
redeemed Shares is normally made by check mailed within seven days after
acceptance by PFPC of the request and any other necessary documents in proper
order. Payment may, however, be postponed or the right of redemption suspended
as provided by the rules of the SEC. If the Shares to be redeemed have been
recently purchased by check, the Fund's transfer agent may delay the payment of
redemption
<PAGE> 250
proceeds, which may be a period of up to 15 days after the purchase date,
pending a determination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
The COMPASS CAPITAL FUNDS offer shareholders many special features
which enable an investor to have greater investment flexibility as well as
greater access to information about the Fund throughout the investment period.
Additional information on each of these features is available through
our transfer agent at (800) xxx-xxxx.
EXCHANGE PRIVILEGE
Investor A, Investor B and Investor C Shares of each Portfolio may be
exchanged for shares of the same Class of other portfolios of the Fund, based
on their respective net asset values, subject to any applicable sales charge.
Investor A Shares of a money market portfolio of the Fund that were
(1) acquired through the use of the exchange privilege and (2) can be traced
back to a purchase of shares in one or more investment portfolios of the Fund
for which a sales charge was paid, can be exchanged for Investor A Shares of a
portfolio subject to differential sales charges as applicable.
The exchange of Investor B and Investor C Shares will not be subject
to a CDSC, which will continue to be measured from the date of the original
purchase and will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a
written request to PFPC at the address given above. Shareholders are
automatically provided with telephone exchange privileges when opening an
account, unless they indicate on the Application that they do not wish to use
this privilege. Shareholders holding share certificates are not eligible to
exchange Investor A Shares by phone because share certificates must accompany
all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with PFPC. This form is available from PFPC. Once this
election has been made, the shareholder may simply contact PFPC by telephone at
(800) 441-7762 (in Delaware call collect (302) 791-1194) to request the
exchange. During periods of substantial economic or market change, telephone
exchanges may be difficult to complete and shareholders may have to submit
exchange requests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
broker of record as the account from which shares are exchanged, unless
<PAGE> 251
otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as defined above. In order to
participate in the automatic investment program or establish a systematic
withdrawal plan for the new account, however, an exchanging shareholder must
file a specific written request.
Any share exchange must satisfy the requirements relating to the
minimum initial investment requirement, and must be legally available for sale
in the state of the investor's residence. For Federal income tax purposes, a
share exchange is a taxable event and, accordingly, a capital gain or loss may
be realized. Before making an exchange request, shareholders should consult a
tax or other financial adviser and should consider the investment objective,
policies and restrictions of the investment portfolio into which the
shareholder is making an exchange, as set forth in the applicable prospectus.
Brokers may charge a fee for handing exchanges.
The Fund reserves the right to modify or terminate the exchange
privilege at any time. Notice will be given to shareholders of any material
modification or termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request.
Telephone exchanges may be subject to limitations as to amount or frequency,
and to other restrictions that may be established from time to time to ensure
that exchanges do not operate to the disadvantage of any portfolio or its
shareholders. Exchange orders may also be sent by mail to the shareholder's
broker or to the Transfer Agent at the address set forth in [heading].
AUTOMATIC INVESTMENT PLAN ("AIP")
An investor in Shares of any Portfolio may arrange for periodic
investments in that Portfolio through automatic deductions from a checking or
savings account by completing the AIP Application Form. The minimum
pre-authorized investment amount if $50.
RETIREMENT PLANS
Portfolio Shares may be purchased in conjunction with individual
retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of its
affiliates acts as custodian. For further information as to applications and
annual fees, contact the Distributor. To determine whether the benefits of an
IRA are available and/or appropriate, a shareholder should consult with a tax
adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Portfolios offer a Systematic Withdrawal Plan which may be used by
investors who wish to receive regular distributions from their accounts. Upon
commencement of the SWP, the account must have a current value of $10,000 or
more in a Portfolio. Shareholders may elect to receive automatic cash payments
of $100 or more either monthly, every other month, quarterly, three times a
year, semi-annually, or annually. Automatic withdrawals are normally processed
on the 25th day of the applicable month or, if such day is not a Business Day,
on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form.
<PAGE> 252
Shareholders should realize that if withdrawals exceed income
dividends their invested principal in the account will be depleted. To
participate in the SWP, shareholders must have their dividends automatically
reinvested and may not hold share certificates. Shareholders may change or
cancel the SWP at any time, upon written notice to the Transfer Agent.
Purchases of additional Investor A Shares of the Fund concurrently with
withdrawals may be disadvantageous to investors because of the sales charges
involved, and, therefore, is discouraged. Investor B and Investor C Shares, if
any, that are redeemed in connection with the SWP are still subject to the
applicable CDSC.
WHAT IS THE SCHEDULE OF CHARGES AND EXEMPTIONS?
INVESTOR A AND INVESTOR C SHARES
Investor A Shares are subject to a front-end sales charge determined
in accordance with the following schedule:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
PERCENTAGE CHARGE AS TO DEALERS
OF PERCENTAGE (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
----------------- ----- ----------- ------
<S> <C> <C> <C>
Less than $25,000 3.75% % 3.25%
$25,000 but less than $50,000 3.50 3.00
$50,000 but less than $100,000 3.00 2.50
$100,000 but less than $250,000 2.00 1.50
$250,000 but less than $500,000 1.00 .50
$500,000 and over 0.00 0.00 [0.50]*
</TABLE>
* Placement fees the Distributor may pay to dealers, provided the fees
(including placement fees described below payable to dealers in
connection with investments of redemption proceeds from other
investment companies) do not exceed the aggregate amount of front-end
sales charges, net of dealer reallowances, on Fund shares subject to a
front-end sales charge. Dealers must refund a pro-rata portion of
such fee if the Investor A Shares are redeemed within six months.
Investor C Shares are subject to a front-end sales charge of 1.00% of
the offering price. [The Distributor may pay placement fees to dealers of up
to 0.50% of the offering price on purchase of Investor C Shares. Dealers must
refund a pro-rata portion of this fee if the Investor C Shares are redeemed
within six months.] In addition, Investor C Shares are subject to a deferred
sales charge if redeemed within 12 months of purchase of 1.00% based on the
lesser of the net asset value of the Investor C Shares of the purchase date or
redemption date.
<PAGE> 253
During special promotions, the entire sales charge may be reallowed to
dealers. In addition, certain dealers who enter into an agreement to provide
extra training and information on products, or marketing and related services,
and who increase sales of Shares may also receive additional payments from the
Distributor. Dealers who receive 90% or more of the sales charge may be deemed
to be "underwriters" under the 1933 Act.
SALES CHARGE WAIVERS - INVESTOR A AND INVESTOR C SHARES. The
following persons associated with the Fund, the Distributor, the Fund's
investment adviser, sub-advisers or transfer agent and their affiliates may buy
Investor A and Investor C Shares without paying a sales charge to the extent
permitted by these firms: (a) officers, directors and partners (and their
spouses and minor children); (b) full-time employees and retirees (and their
spouses and minor children); (c) registered representatives of the Distributor
and brokers who have entered into selling agreements with the Distributor; (d)
spouses or children of such persons; and (e) any trust, pension, profit-sharing
or other benefit plan for any of the persons set forth in (a) through (d). The
following persons may also buy Investor A and Investor C Shares without paying
a sales charge: (a) persons investing through an authorized payroll deduction
plan; (b) persons investing through an authorized investment plan for
organizations which operate under Section 501(c)(3) of the Internal Revenue
Code; and (c) registered investment advisers, trust companies and bank trust
departments exercising discretionary investment authority with respect to
amounts to be invested in a Portfolio, provided that the aggregate amount
invested pursuant to this exemption equals at least $250,000. INVESTORS WHO
QUALIFY FOR ANY OF THESE EXEMPTIONS FROM THE SALES CHARGE MUST PURCHASE
INVESTOR A SHARES.
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the
sales charge price. Upon notice to the investor's broker or the Transfer
Agent, purchases of Class A Shares made at any one time by the following
persons may be considered when calculating the sales charge: (a) an
individual, his or her spouse, and their children under the age of 21; (b) a
trustee or fiduciary of a single trust estate or single fiduciary account; or
(c) any organized group which has been in existence for more than six months,
if it is not organized for the purpose of buying redeemable securities of a
registered investment company, and if the purchase is made through a central
administrator, or through a single dealer, or by other means which result in
economy of sales effort or expense. An organized group does not include a
group of individuals whose sole organizational connection is participation as
credit card holders of a company, policyholders of an insurance company,
customers of either a bank or broker/dealer or clients of an investment
adviser. Purchases made by an organized group may include, for example, a
trustee or other fiduciary purchasing for a single fiduciary account or other
employee benefit plan purchases made through a payroll deduction plan.
REDUCED SALES CHARGES - INVESTOR A SHARES
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current
value of an investor's existing Investor A Shares in any of the Portfolios that
are subject to a front-end sales charge may be combined with the amount of the
investor's current purchase in determining the applicable sales charge. IN
ORDER TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION, PREVIOUS PURCHASES OF
INVESTOR A SHARES MUST BE CALLED TO THE ATTENTION OF THE FUND'S TRANSFER AGENT
BY THE INVESTOR AT THE TIME OF THE CURRENT PURCHASE.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a
Portfolio (or Investor A Shares of anther non-money market fund of the Fund), a
shareholder has a one-time right, to be exercised within 45 days, to reinvest
the redemption proceeds without any sales charges. The
<PAGE> 254
Transfer Agent must be notified in writing by the purchaser, or by his or her
broker, at the time the purchase is made of the reinvestment in order to
eliminate a sales charge. An investor should consult a tax adviser concerning
the tax consequences of use of the reinvestment privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Investor A Shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of any other investment
company which were sold with a sales charge or commission. [This does not
include shares of an affiliated mutual fund which were or would be subject to a
contingent deferred sales charge upon redemption.] Such purchases must be made
within 60 days of the redemption, and the Fund must be notified by the investor
in writing, or by his financial institution, at the time the purchase of
Investor A Shares is made. The Distributor will offer to pay dealers a
placement fee of .25% of the net asset value of Investor A Shares purchased by
their clients or customers in this manner, provided the aggregate of such fees
(including placement fees described above payable to dealers in connection with
purchases of Investor A Shares aggregating $500,000 or more) does not exceed
the aggregate amount of sales charges, net of dealer reallowances, on Investor
A Shares subject to a sales charge. Dealers must refund a pro-rata portion of
such fee if the Investor A Shares are redeemed within six months.
LETTER OF INTENT. An investor may qualify for a reduced sales charge
immediately by signing a nonbinding Letter of Intent stating the investor's
intention to invest during the next 13 months a specified amount in Investor A
Shares which, if made at one time, would qualify for a reduced sales charge.
The Letter of Intent may be signed at any time within 90 days after the first
investment to be included in the Letter of Intent. The initial investment must
meet the minimum initial investment requirement and represent at least 5% of
the total intended investment. THE INVESTOR MUST INSTRUCT THE TRANSFER AGENT
UPON MAKING SUBSEQUENT PURCHASES THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF
INTENT. All dividends and capital gains of a Portfolio that are invested in
additional Investor A Shares of the same Portfolio are applied to the Letter of
Intent.
During the term of a Letter of Intent, the Fund's transfer agent will
hold Investor A Shares representing 5% of the indicated amount in escrow for
payment of a higher sales load if the full amount indicated in the Letter of
Intent is not purchased. The escrowed Investor A Shares will be released when
the full amount indicated has been purchased. Any redemptions made during the
13-month period will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month
period, the investor will be required to pay an amount equal to the difference
between the sales charge actually paid and the sales charge the investor would
have had to pay on his or her aggregate purchases if the total of such
purchases had been made at a single time. If remittance is not received within
20 days of the expiration of the 13-month period, PFPC, as attorney-in-fact,
pursuant to the terms of the Letter of Intent, will redeem an appropriate
number of Investor A Shares held in escrow to realize the difference.
QUALIFIED PLANS. The sales charge (as a percentage of the offering
price) payable by qualified employee benefit plans ("Qualified Plans") having
at least 20 employees eligible to participate on purchases of Investor A
Investor Shares of the Portfolios aggregating less than $500,000 will be 1.00%.
No sales charge will apply to purchases by Qualified Plans of Investor A Shares
aggregating $500,000 and above. The sales charge payable by Qualified Plans
having less than 20 employees
<PAGE> 255
eligible to participate on purchases of Investor A Shares of the Portfolios
aggregating less than $100,000 will be 2.50%. The above schedule will apply to
purchases by such Qualified Plans of Investor A Shares aggregating $100,000 and
above.
PURCHASES OF INVESTOR B AND INVESTOR C SHARES
Investor B Shares are subject to a deferred sales charge at the rates
set forth in the chart below if they are redeemed within [seven] years of
purchase. Brokers will receive commissions from the Distributor in connection
with sales of Investor B Shares. These commissions may be different than the
reallowances or placement fees paid to dealers in connection with sales of
Investor A Shares. The deferred sales charge on Investor B Shares is based on
the lesser of the net asset value of the Investor B Shares on the purchase date
or redemption date.
The amount of any contingent deferred sales charge an investor must
pay on Investor B Shares depends on the number of years that elapse between the
purchase date and the date the Shares are redeemed.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
---------------------- ----------------------
<S> <C>
Less than one 4.0%
More than one, but less than two 3.5%
More than two, but less than three 3.0%
More than three, but less than four 2.5%
More than four, but less than five 2.0%
More than five, but less than six 1.0%
More than six, but less than seven 1.0%
After [seven] years None
</TABLE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent
deferred sales charge on Investor B and Investor C Shares is not charged in
connection with: (1) exchanges described in "Investor Programs--Exchange
Privilege;" (2) redemptions made in connection with minimum required
distributions from IRA, 403(b)(7) and Qualified Plan accounts due to the
shareholder reaching age 70 1/2; (3) redemptions in connection with a
shareholder's death or disability (as defined in the Internal Revenue Code)
subsequent to the purchase of Investor B or Investor C Shares; and (4)
involuntary redemptions of Investor B and Investor C Shares in accounts with
low balances as described in "How Are Shares Redeemed?" In addition, no
contingent deferred sales charge is charged on Investor B or Investor C Shares
acquired through the reinvestment of dividends or distributions.
When an investor redeems Investor B Shares or Investor C Shares, the
redemption order is processed to minimize the amount of the contingent deferred
sales charge that will be charged. Investor B and Investor C Shares are
redeemed first from those Shares that are not subject to the deferred sales
load (i.e., Shares that were acquired through reinvestment of dividends or
distributions) and after that from the Shares that have been held the longest.
<PAGE> 256
HOW IS NET ASSET VALUE CALCULATED?
Net asset value is calculated separately for each class of Investor
Shares as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by dividing the value of all securities
and other assets owned by a Portfolio that are allocated to a particular class
of Shares, less the liabilities charged to that class, by the number of shares
of the class that are outstanding.
Most securities held by a Portfolio are priced based on their market
value as determined by reported sales prices or the mean between their bid and
asked prices. Portfolio securities which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except when an occurrence
subsequent to the time a value was so established is likely to have changed
such value. Securities for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the Portfolio's sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. All
distributions are reinvested at net asset value in the form of additional full
and fractional Shares of the same class of Shares of the relevant Portfolio
unless a shareholder elects otherwise. Such election, or any revocation
thereof, must be made in writing to PFPC, and will become effective with
respect to dividends paid after its receipt by PFPC. The net investment income
of the Managed Income, Tax-Free Income, Intermediate Government,
Intermediate Bond, Core Bond and International Bond Portfolios is declared
monthly as a dividend to investors who are Shareholders of such Portfolio at
the close of business on the day of declaration. [The net investment income of
the Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free
Income, Government Income and Short Government Bond Portfolios is declared
daily as a dividend to investors who are Shareholders of such Portfolio at, and
whose payment for Share purchases are available to the particular Portfolio in
Federal funds by, the close of business on the day of declaration.] All
dividends are paid within ten days after the end of each month and, in the case
of the Pennsylvania Tax-Free Income, Ohio Tax-Free Income, Government Income
and Short Government Bond Portfolios, within seven days after redemption of all
of a shareholder's Shares in a Portfolio. Net realized capital gains
(including net short-term capital gains), if any, will be distributed by each
Portfolio at least annually.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. If a
Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
regardless of whether the distributions are paid in cash or reinvested in
additional Shares.
<PAGE> 257
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds Shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns, and in two circumstances such amounts, while exempt from regular
Federal income tax, are taxable to persons subject to alternative minimum and
environmental taxes. First, "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute an
item of tax preference for corporate and non-corporate taxpayers in determining
alternative minimum and environmental tax liability. Second, "exempt interest
dividends" must be taken into account by corporate taxpayers in determining
certain adjustments for alternative minimum and environmental tax purposes.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its
net investment income which are exempt from the regular Federal income tax,
which constitute an item of tax preference for purposes of the Federal
alternative minimum tax, and which are fully taxable. These percentages will
apply uniformly to all distributions declared from net investment income during
that year, and may differ significantly from the actual percentages for any
particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid the
following January.
An investor considering buying shares of a Portfolio on or just before
the record date of a taxable dividend should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Portfolio Shares depending upon their tax
basis and their price at the time of redemption, transfer or exchange.
Generally, a shareholder may include sales charges paid on the purchase of
Shares in their tax basis for the purpose of determining gain or loss on a
redemption, transfer or exchange of such Shares. However, if the shareholder
exchanges the Shares for Shares of another Portfolio within 90 days of purchase
and is able to reduce the sales charges applicable to the new Shares (by virtue
of the Fund's exchange privilege), the amount equal to such reduction may not
be included in the tax basis of the shareholder's exchanged Shares but may be
included (subject to the same limitation) in the tax basis of the new Shares.
Any loss upon the sale or exchange of Shares held for six months or
less will be disallowed for Federal income tax purposes to the extent of any
exempt interest dividends received by the shareholder. For the Ohio Tax-Free
Income Portfolio, the loss will be disallowed for Ohio income tax purposes to
the same extent, even though, for Ohio income tax purposes, some portion of
such dividends actually may have been subject to Ohio income tax.
<PAGE> 258
It is expected that dividends and certain interest income earned by
the International Bond Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the
value of the Portfolio's total assets at the close of the taxable year in
question consists of stock or securities of foreign corporations, the Portfolio
may elect, for U.S. Federal income tax purposes, to treat certain foreign taxes
paid by it, including generally any withholding taxes and other foreign income
taxes, as paid by its shareholders. The Portfolio intends to make this
election. As a result, the amount of such foreign taxes paid by the Portfolio
will be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder generally will
be entitled either (a) to credit a proportionate amount of such taxes against
U.S. Federal income tax liabilities, or (b) if a shareholder itemizes
deductions, to deduct such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. Except as discussed below, dividends paid by each Portfolio
may be taxable to investors under state or local law as dividend income even
though all or a portion of the dividends may be derived from interest on
obligations which, if realized directly, would be exempt from such income
taxes. In addition, future legislative or administrative changes or court
decisions may materially affect the tax consequences of investing in a
Portfolio. Shareholders who are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships may be subject to
different U.S. Federal income tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder
attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio
from Pennsylvania Municipal Obligations or attributable to insurance proceeds
on account of such interest, is not taxable to individuals, estates or trusts
under the Personal Income Tax imposed by Article III of the Tax Reform Code of
1971 (in the case of insurance proceeds, to the extent they are exempt for
Federal Income Tax purposes); to corporations under the Corporate Net Income
Tax imposed by Article IV of the Tax Reform Code of 1971 (in the case of
insurance proceeds, to the extent they are exempt for Federal Income Tax
purposes); nor to individuals under the Philadelphia School District New Income
Tax ("School District Tax") imposed on Philadelphia resident individuals under
authority of the Act of August 9, 1963, P.L. 640.
Income received by a shareholder attributable to gain on the sale or
other disposition by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania
Municipal Obligations is taxable under the Personal Income Tax, the Corporate
Net Income Tax, and, unless these assets were held by the Pennsylvania Tax-Free
Income Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain
realized on Pennsylvania Municipal Obligations held by the Pennsylvania
Tax-Free Income Portfolio, such gain may be subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a share held for more
than six months is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares,
or interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax.)
<PAGE> 259
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not
subject to any of the personal property taxes currently in effect in
Pennsylvania to the extent that the Portfolio is comprised of Pennsylvania
Municipal Obligations and Federal obligations (if the interest on such
obligations is exempt from state and local taxation under the laws of the
United States). The taxes referred to include the County Personal Property Tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as
amended.
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially
all dividends paid by the New Jersey Tax-Free Income Portfolio will not be
subject to New Jersey personal income tax. In accordance with the provisions
of New Jersey law as currently in effect, distributions paid by a "qualified
investment fund" will not be subject to the New Jersey personal income tax to
the extent that the distributions are attributable to income received as
interest or gain from New Jersey State-Specific Obligations, or as interest or
gain from direct U.S. Government obligations. Distributions by a qualified
investment fund that are attributable to most other sources will be subject to
the New Jersey personal income tax. If the New Jersey Tax-Free Income
Portfolio qualifies as a qualified investment fund under New Jersey law, any
gain on the redemption or sale of the Portfolio's shares will not be subject to
the New Jersey personal income tax. To be classified as a qualified investment
fund, at least 80% of the Portfolio's investments must consist of New Jersey
State-Specific Obligations or direct U.S. Government obligations; it must have
no investments other than interest-bearing obligations, obligations issued at a
discount, and cash and cash items (including receivables); and it must satisfy
certain reporting obligations and provide certain information to its
shareholders. Shares of the Portfolio are not subject to property taxation by
New Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to
Ohio personal income tax, municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions from the Ohio Tax-Free
Income Portfolio to the extent that such distributions consist of interest on
Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their
subdivisions. Corporations that are subject to the Ohio corporation franchise
tax will not have to include distributions from the Ohio Tax-Free Income
Portfolio in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions
either constitute exempt-interest dividends or consist of interest on Ohio
Municipal Obligations or U.S. Obligations. However, Shares of the Ohio
Tax-Free Income Portfolio will be included in a corporation's net worth base
for purposes of calculating the Ohio corporation franchise tax. Distributions
consisting of gain on the sale, exchange or other disposition of Ohio Municipal
Obligations will not be subject to the Ohio personal income tax, or municipal
or school district income taxes in Ohio and will not be included in the net
income base of the Ohio corporation
<PAGE> 260
franchise tax. Distributions attributable to other sources will be subject to
the Ohio personal income tax and the Ohio corporation franchise tax.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of Trust authorizes the Board
of Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Board of Trustees has
authorized the issuance of an unlimited number of shares in twenty-eight
separate investment portfolios. Each Portfolio described in this prospectus
offers five separate classes of shares - Institutional Shares, Service Shares,
Investor A Shares, Investor B Shares and Investor C Shares. This prospectus
relates only to Investor Shares of the eleven Portfolios described herein, each
of which is classified as a diversified Portfolio under the 1940 Act.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. In addition, each class of
Investor Shares are sold with different sales charges. Because of these "class
expenses" and sales charges, the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the Portfolio's three classes of
Investor Shares. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan,
automatic withdrawal plan and checkwriting. For further information regarding
the Fund's Institutional and Service share classes, contact [name and number].
Each share of an investment portfolio has a par value of $.001,
represents an interest in the particular portfolio and is entitled to such
dividends and distributions earned on such portfolio's assets as are declared
in the discretion of the Board of Trustees. The Fund's shareholders are
entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except where otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular class or investment portfolio. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
On January __, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank
holding company.
HOW IS PERFORMANCE CALCULATED?
Total return and yield information for each class of Investor Shares
of the Portfolios may be quoted in advertisements and communications to
shareholders. Total return will be calculated on an
<PAGE> 261
average annual total return basis for various periods. Average annual total
return reflects the average annual percentage change in value of an investment
in a class of Shares over the measuring period. Total return may also be
calculated on an aggregate total return basis. Aggregate total return reflects
the total percentage change in value over the measuring period. Both methods
of calculating total return assume that dividends and capital gain
distributions made by a Portfolio with respect to a class of Shares are
reinvested in Shares of the same class, and also reflect the maximum sales load
charged by the Portfolio with respect to a class of Shares. When, however, a
Portfolio compares the total return of a share class to that of other funds or
relevant indices, total return may also be computed without reflecting the
sales load.
The yield of a class of Shares is computed by dividing the Portfolio's
net income per share allocated to that class during a 30-day (or one month)
period by the maximum offering price per Share on the last day of the period
and annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's
"tax-equivalent yield" may also be quoted, which shows the level of taxable
yield needed to produce an after-tax equivalent to a Portfolio's tax-free
yield. This is done by increasing the Portfolio's yield (calculated above) by
the amount necessary to reflect the payment of Federal and/or state income tax
at a stated tax rate.
The performance of a Share class may be compared to the performance
other mutual funds with similar investment objectives and to other relevant
indices or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the total return and/or yield of a class of Shares may be
compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Lehman GMNA Index, the Lehman Index of Baa-rated Corporate
Bonds, the T-Bill Index, the "stocks, bonds and inflation Index" published
annually by Ibbotson Associates and the Lehman Government Corporate Bond Index.
Performance information may also include evaluations of the Portfolios and
their Share classes published by nationally recognized ranking services and
information as reported by financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of a class of Shares of a particular Portfolio, a
Portfolio may provide other information demonstrating hypothetical investment
returns. This information may include, but is not limited to, illustrating the
compounding effects of a dividend in a dividend reinvestment plan or the impact
of tax-deferred investing.
Performance quotations represent past performance and should not be
considered representative of future results. The investment return and
principal value of an investment in a Portfolio will fluctuate so that an
investor's Shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, performance data for a Portfolio
cannot necessarily be used to compare an investment in the Portfolio with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by brokers or other institutions directly to
their customer accounts in connection with investments in a Portfolio will not
be included in the Portfolio's calculations of yield and total return.
<PAGE> 262
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, COMPASS CAPITAL FUNDS have other sources of
information regarding each Fund and its portfolio holdings, strategy and
current dividend and yield levels.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL FUNDS by either using
a toll-free number or through electronic access:
For Performance and Portfolio Management Questions, dial (800) compass
For Information Related to Share Purchase and Redemptions call your investment
adviser or Compass Capital Funds at (800) xxx-xxxx
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) xxx-xxxx
Information is also available on the World Wide Web through the Internet.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing COMPASSFUNDS.COM
<PAGE> 263
APPENDIX
<TABLE>
<CAPTION>
=====================================================================================================================
Compass Capital Performance
--------------- -----------
Fund Benchmark Description
---- --------- -----------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short Merrill 1-3 Year Treasuries with maturities ranging from 1 to 2.99 years
Government Bond Treasury Index
- ---------------------------------------------------------------------------------------------------------------------
Intermediate Lehman Brothers Treasury and agency issues in the Lehman Aggregate, excluding maturities
Government Bond Intermediate above 9.99 years
Government
- ---------------------------------------------------------------------------------------------------------------------
Intermediate Lehman Brothers Treasury, agency and corporate issues in the Lehman Aggregate, excluding
Bond Intermediate maturities above 9.99 years
Gov't/Corp
- ---------------------------------------------------------------------------------------------------------------------
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that meet the following criteria:
- At least $100 million par amount outstanding for entry and exit
- Rated investment grade (at least Baa3) by Moody's or Standard and
Poor's (if not rated by Moody's)
- At least one year at maturity
- Coupon must have a fixed-rate
- Excludes CMOs, ARMs, manufactured homes, nonagency bonds,
buydowns, graduated equity mortgages, project loans and non-
conforming ("jumbo") mortgages
- As of June 1995, the composition of the Lehman Brothers Aggregate
Index is:
- allocation to Treasury and government securities
- allocation to mortgage-backed securities
allocation to corporate and asset-backed securities
- ---------------------------------------------------------------------------------------------------------------------
Government Lehman 50% allocation to the mortgage component of the Lehman Aggregate Index and
Income Mortgage/10 Year a 50% allocation to the Merrill Lynch 10 Year Index
Treasury
- ---------------------------------------------------------------------------------------------------------------------
Managed Income Salomon BIG Very similar to the Lehman Aggregate, the Salomon BIG is a market-weighted
index comprised of U.S. Treasury, government-sponsored, investment grade
corporate (Baa3/BBB-or better), mortgage and asset-backed securities.
- Issues comprising the index have an average life of at least 1
year, with no maximum maturity
- Corporate and government-sponsored issues have a minimum face
amount of $100 million to qualify for entry, and a minimum of $75
million face amount to exit
- Treasury and mortgage issues have a minimum face amount of $1
billion for both entry and exit
- Excludes CMOs, ARMs, manufactured homes, nonagency bonds,
buydowns, graduated equity mortgages, project loans and non-
conforming ("jumbo") mortgages
- As of June 1995, the composition of the Index is:
- allocation to Treasury and government securities
- allocation to mortgage-backed securities
allocation to corporate and asset-backed securities
- ---------------------------------------------------------------------------------------------------------------------
International Salomon Non-U.S. FILL IN
Bond Hedged Government
Bond Index
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Income Lehman Municipal All of the bonds in the following Municipal Indices possess the following
Bond Index characteristics:
- A minimum credit rating of Baa3
- Outstanding par value of at least $3 million
- Must be issued as part of a deal of at least $50 million
- Individual bonds must have been issued within the last 5 years
- Remaining maturity of not less than one year
Excludes bonds subject to the alternative minimum tax (AMT), taxable
municipal bonds, and floating-rate or zero coupon municipal bonds
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania Lehman Local GO local general obligation bonds
Tax-Free Income Index
- ---------------------------------------------------------------------------------------------------------------------
New Jersey Tax- Lehman Local GO local general obligation bonds
Free Income
- ---------------------------------------------------------------------------------------------------------------------
Ohio Tax-Free Lehman Local GO local general obligation bonds
Income Index
=====================================================================================================================
</TABLE>
<PAGE> 264
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
[A R T]
THE BOND
PORTFOLIOS
INVESTOR SHARES
PROSPECTUS
SHORT GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
MANAGED INCOME PORTFOLIO
TAX-FREE INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY MUNICIPAL TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
January __, 1996
<PAGE> 265
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(INSTITUTIONAL SHARES OF THE VALUE EQUITY PORTFOLIO,
GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY PORTFOLIO,
CORE EQUITY PORTFOLIO, SMALL CAP VALUE EQUITY PORTFOLIO,
INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL EMERGING
MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 266
THE EQUITY PORTFOLIOS
INSTITUTIONAL CLASS
The Compass Capital Funds(R) (the "Fund") consist of [twenty-eight]
investment portfolios. This Prospectus describes the Institutional Shares of
eight of those portfolios (the "Portfolios"):
- Value Equity Portfolio -
- Growth Equity Portfolio -
- Small Cap Growth Equity Portfolio -
- Core Equity Portfolio -
- Small Cap Value Equity Portfolio -
- International Equity Portfolio -
- International Emerging Markets Portfolio -
- Balanced Portfolio -
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated January __, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained upon request free of charge from the Fund by
calling (800) ________. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference into this
Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS January __, 1996
1
<PAGE> 267
INTRODUCING THE EQUITY PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Equity Portfolios of the COMPASS CAPITAL FUNDS consist of eight
diversified investment products that provide investors with a broad spectrum of
investment alternatives within the equity sector. Five of these portfolios
invest solely in U.S. stocks, two portfolios invest in non-U.S. international
stocks and one portfolio invests in a combination of U.S. stocks and bonds. A
detailed description of each portfolio appears on pages _____
<TABLE>
<CAPTION>
COMPASS CAPITAL FUND PERFORMANCE BENCHMARK LIPPER PEER GROUP
- -------------------- --------------------- -----------------
<S> <C> <C>
Value Equity Russell 1000 Value Index Growth and Income
Growth Equity Russell 1000 Growth Index Capital Appreciation
Core Equity S&P 500 Index Growth and Income
Small Cap Growth Russell 2000 Growth Index Small Company Growth
Small Cap Value Russell 2000 Index Small Company Growth
International Equity [TBD] International
International Emerging [TBD] Emerging Markets
Markets
Balanced S&P 500 Balanced
Salomon Broad Investment
Grade Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. Provident Capital Management, Inc. ("PCM"), PNC Equity
Advisers Company ("PEAC") and BlackRock Financial Management, Inc.
("BlackRock") serve as sub-advisers to different Portfolios as described in
this Prospectus.
UNDERSTANDING THE COMPASS CAPITAL EQUITY FUNDS
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in equity
investing.
CONSIDERING THE RISKS IN EQUITY INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective. The Portfolios will hold equity securities, and some or
all of the Portfolios may acquire warrants, foreign securities and illiquid
securities; enter into repurchase and reverse repurchase agreements; lend
portfolio securities to third parties; and enter into futures contracts and
options and forward currency exchange contracts. These and the other
investment practices set forth below, and their associated risks, deserve
careful consideration. Certain risks associated with international investments
are heightened because of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies Apply?"
ASKING THE KEY QUESTIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Differences Among the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Investment Limitations? . . . . . . . . . . . . . . . . . . .
How Are Shares Purchased and Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
2
<PAGE> 268
<TABLE>
<CAPTION>
Page
----
<S> <C>
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Purchased and Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . . . . . . . . . . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
[END OF PAGE]
3
<PAGE> 269
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be incurred by
the Portfolios' Institutional Shares for the current fiscal year ending
September 30, 1996 as a percentage of average daily net assets. An example
based on the summary is also shown.
<TABLE>
<CAPTION>
SMALL SMALL INTER-
CAP CAP INTER- NATIONAL
VALUE GROWTH GROWTH CORE VALUE NATIONAL EMERGING
EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY MARKETS BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees(1) .50% .50% .53% .50% .53% .70% 1.15% .50%
Other operating expenses .25 .25 .33 .25 .33 .36 .63 .30
--- --- --- --- --- ---- ---- ---
Administration fees(1) .17 .15 .22 .15 .22 .16 .18 .17
Other expenses(1) .08 .10 .11 .10 .11 .20 .75 .13
--- --- --- --- --- ---- ---- ---
Total Portfolio operating
expenses(1) .75% .75% .86% .75% .86% 1.06% 1.78% .80%
=== === === === === ==== ==== ===
</TABLE>
(1) Without waivers, advisory fees would be .55%, .55%, .55%, .55%, .55%,
.75%, 1.25% and .55% and administration fees would be .23%, .23%,
.23%, .23%, .23%, .23%, .23% and .23%, respectively. PAMG and the
Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers with respect to the particular Portfolios for the fiscal
year ended September 30, 1995, as restated to reflect revised fee
waivers. Without waivers, total operating expenses would be .86%,
.88%, .89%, .88%, .89%, l.18%, 1.93% and .91%, respectively.
4
<PAGE> 270
EXAMPLE
An investor in Institutional Shares would pay the following expenses
on a $1,000 investment assuming (1) 5% annual return, and (2) redemption at the
end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Value Equity $ 8 $24 $42 $ 93
Growth Equity 8 24 42 93
Small Cap Growth Equity 9 27 48 106
Core Equity 8 24 42 93
Small Cap Value Equity 9 27 48 106
International Equity 11 34 58 129
International Emerging Markets 18 56 96 209
Balanced 8 26 44 99
</TABLE>
The foregoing Table and Example are intended to assist investors in
understanding the expenses the Portfolios pay. Investors bear these expenses
since they reduce the income paid by the Portfolios as dividends. The tables
do not reflect any charges that may be imposed by affiliates of the Portfolios'
investment adviser or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS
The following financial information has been derived from the
financial statements incorporated by reference into the Statement of Additional
Information and has been audited by [_______________________], the Fund's
independent accountants. This financial information should be read together
with those financial statements. Further information about the performance of
the Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual reports may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus.
5
<PAGE> 271
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 4/20/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- ----------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 11.68 $ 9.78 $ 10.00
-------- -------- --------
Income from investment operations
Net investment income 0.27 0.22 0.12
Net gain (loss) on investments
(both realized and unrealized) 0.16 1.91 (0.24)
-------- -------- --------
Total from investment
operations 0.43 2.13 (.12)
-------- -------- --------
Less distributions
Distributions from net investment
income (0.27) (0.23) (0.10)
Distributions from net realized
capital gains (0.22) -- --
-------- -------- --------
Total distributions (0.49) (0.23) (0.10)
-------- -------- --------
Net asset value at end of period $ 11.62 $ 11.68 $ 9.78
======== ======== ========
Total return 3.76% 21.92% (1.19)%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $577,996 $432,776 $322,806
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.65% 0.80% 0.85 %(2)
Before advisory/administration
fee waivers 0.81% 0.83% 0.85 %(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.44% 2.07% 2.62 %(2)
Before advisory/administration
fee waivers 2.28% 2.04% 2.62 %(2)
Portfolio turnover rate 11% 11% 13 %
</TABLE>
(1) Commencement of operations.
(2) Annualized.
6
<PAGE> 272
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 11/1/89(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 11.58 $ 9.92 $ 10.28 $ 9.98 $ 10.00
------- -------- ------- ------- -------
Income from investment operations
Net investment income 0.06 0.06 0.21 0.24 0.31
Net gain (loss) on investments (both realized
and unrealized) (1.34) 2.07 0.30 1.51 (0.26)
------- -------- ------- ------- -------
Total from investment operations (1.28) 2.13 0.51 1.75 0.05
------- -------- ------- ------- -------
Less distributions
Distributions from net investment income (0.01) (0.07) (0.37) (0.32) (0.07)
Distributions from capital -- (0.01) --
Distributions from net realized capital gains (0.10) (0.39) (0.50) (1.13) --
------- -------- ------- ------- -------
Total distributions (0.11) (0.47) (0.87) (1.45) (0.07)
------- -------- ------- ------- -------
Net asset value at end of period $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98
======= ======== ======= ======= =======
Total return (11.14)% 22.18% 4.98% 19.47% 0.40%
Ratios/Supplemental data
Net assets at end of period (in thousands) $97,834 $100,049 $58,372 $54,912 $39,790
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.65% 0.81% 0.85% 0.85% 0.85%(2)
Before advisory/administration fee waivers 0.89% 0.87% 0.86% 0.91% 0.88%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 0.62% 0.50% 2.07% 2.59% 2.75%(2)
Before advisory/administration fee waivers 0.38% 0.44% 2.06% 2.53% 2.72%(2)
Portfolio turnover rate 212% 175% 162% 211% 149%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
7
<PAGE> 273
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/14/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $ 10.47 $ 10.00
------- -------
Income from investment operations
Net investment income 0.03 --
Net gain (loss) on investments (both
realized and unrealized) (0.33) 0.47
------- -------
Total from investment operations (0.30) 0.47
------- -------
Less distributions
Distributions from net investment income (0.01) --
Distributions from net realized
capital gains -- --
------- -------
Total distributions (0.01) --
------- -------
Net asset value at end of period $ 10.16 $ 10.47
======= =======
Total return (2.89)% 4.70 %
Ratios/Supplemental data
Net assets at end of period
(in thousands) $65,612 $11,310
Ratios of expenses to average net assets
After advisory/administration
fee waivers 0.48 % 0.73 %(2)
Before advisory/administration
fee waivers 1.04 % 1.42 %(2)
Ratios of net investment income to
average net assets
After advisory/administration
fee waivers 0.45 % (0.11)%(2)
Before advisory/administration
fee waivers (0.10)% (0.80)%(2)
Portfolio turnover rate 89 % 9 %
</TABLE>
(1) Commencement of operations.
(2) Annualized.
8
<PAGE> 274
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/13/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning
of period $ 9.97 $ 10.00
------- -------
Income from investment operations
Net investment income 0.22 0.01
Net gain (loss) on investments
(both realized and unrealized) (0.04) (0.04)
------- -------
Total from investment
operations 0.18 (0.03)
------- -------
Less distributions
Distributions from net
investment income (0.23) --
Distributions from net realized
capital gains -- --
Total distributions (0.23) --
------- -------
Net asset value at end of period $ 9.92 $ 9.97
======= =======
Total return 1.79% (.30)%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $48,123 $69,268
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.65% 0.65 %(2)
Before advisory/administration
fee waivers 0.93% 0.87 %(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.11% 2.17 %(2)
Before advisory/administration
fee waivers 1.82% 1.95 %(2)
Portfolio turnover rate 88% 2 %
</TABLE>
(1) Commencement of operations.
(2) Annualized.
9
<PAGE> 275
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 4/13/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning of period $ 13.08 $ 10.14 $ 10.00
-------- -------- -------
Income from investment operations
Net investment income 0.04 0.04 0.02
Net gain (loss) on investments
(both realized and unrealized) 0.77 3.02 0.13
-------- -------- -------
Total from investment
operations 0.81 3.06 0.15
-------- -------- -------
Less distributions
Distributions from net investment
income (0.02) (0.04) (0.01)
Distributions from net realized
capital gains (0.25) (0.08) --
-------- -------- -------
Total distributions (0.27) (0.12) (0.01)
-------- -------- -------
Net asset value at end of period $ 13.62 $ 13.08 $ 10.14
======== ======== =======
Total return 6.28% 30.36% 1.50%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $168,360 $128,805 $75,045
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.73% 0.83% 0.85%(2)
Before advisory/administration
fee waivers 0.85% 0.87% 0.89%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 0.28% 0.31% 0.51%(2)
Before advisory/administration
fee waivers 0.16% 0.27% 0.47%(2)
Portfolio turnover rate 18% 41% 17%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
10
<PAGE> 276
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 4/27/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning of period $ 12.48 $ 9.87 $ 10.00
-------- -------- -------
Income from investment operations
Net investment income 0.15 0.11 0.11
Net realized gain (loss) on
investments 1.17 2.61 (0.17)
-------- -------- -------
Total from investment
operations 1.32 2.72 (0.06)
-------- -------- -------
Less distributions
Distributions from net investment
income (0.11) (0.11) (0.07)
Distributions from net realized
capital gains (0.25) -- --
-------- -------- -------
Total distributions (0.36) (0.11) (0.07)
-------- -------- -------
Net asset value at end of period $ 13.44 $ 12.48 $ 9.87
======== ======== =======
Total return 10.71% 27.72% (0.61)%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $284,905 $131,052 $60,357
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.95% 1.10% 1.20%(2)
Before advisory/administration
fee waivers 1.14% 1.16% 1.21%(2)
Ratios of net investment income
to average net assets
After advisory/administration fee
waivers 1.27% 1.17% 2.59%(2)
Before advisory/administration fee
waivers 1.08% 1.11% 2.58%(2)
Portfolio turnover rate 37% 31% 15%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
11
<PAGE> 277
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR 6/17/94(1)
ENDED THROUGH
9/30/95 9/30/94
------- -------
<S> <C>
Net asset value at beginning of period $ 10.00
-------
Income from investment operations
Net investment income 0.03
Net gain (loss) on investments
(both realized and unrealized) 0.53
-------
Total from investment operations 0.56
-------
Less distributions
Distributions from net investment income --
Distributions from net realized
capital gains --
-------
Total distributions --
-------
Net asset value at end of period $ 10.56
=======
Total return 5.60%
Ratios/Supplemental data
Net assets at end of period (in thousands) $ 2,511
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.75%(2)
Before advisory/administration fee
waivers 2.73%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 1.19%(2)
Before advisory/administration fee
waivers 0.21%(2)
Portfolio turnover rate 4%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
12
<PAGE> 278
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 5/1/92(1)
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
------- ------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 12.42 $ 11.53 $11.01
------- ------- ------
Income from investment operations
Net investment income 0.38 0.30 0.17
Net realized gain (loss)
on investments (0.39) 1.15 0.51
------- ------- ------
Total from investment
operations (0.01) 1.45 0.68
------- ------- ------
Less distributions
Distributions from net
investment income (0.37) (0.30) (0.16)
Distributions from net realized
capital gains (0.06) (0.26) --
------- ------- ------
Total distributions (0.43) (0.56) (0.16)
------- ------- ------
Net asset value at end of period $ 11.98 $ 12.42 $11.53
======= ======= ======
Total return (0.11)% 12.86% 6.23%
Ratios/Supplemental data
Net assets at end of period (in
thousands) $17,610 $12,928 $2,501
Ratios of expenses to average
net assets
After advisory/administration fee
waivers 0.65 % 0.80% 0.95%(2)
Before advisory/administration fee
waivers 0.91 % 0.98% 1.51%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.16 % 2.89% 3.28%(2)
Before advisory/administration
fee waivers 2.89 % 2.71% 2.72%(2)
Portfolio turnover rate 54 % 32% 36%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
13
<PAGE> 279
WHAT ARE THE PORTFOLIOS?
The COMPASS CAPITAL FUNDS consist of 28 portfolios and have been structured to
include many different investment styles so that investors may participate
across multiple disciplines in order to seek their long-term financial goals.
The Equity Portfolios of the COMPASS CAPITAL FUNDS consist of
eight investment products that provide investors with a broad spectrum of
investment alternatives within the equity sector. Five of these Portfolios
invest solely in U.S. stocks, two Portfolios invest in non-U.S. international
stocks and one Portfolio invests in a combination of U.S. stocks and bonds.
In certain investment cycles and over certain holding periods, an equity fund
that invests according to a "value" style or a "growth" style may perform above
or below the market. An investment program that combines these multiple
disciplines allows investors to select from among these various product options
in the way that most closely fits the individual's investment goals and
sentiments.
INVESTMENT OBJECTIVES EACH OF THE EIGHT COMPASS CAPITAL FUND EQUITY
PORTFOLIOS SEEKS TO PROVIDE
LONG-TERM CAPITAL APPRECIATION.
THE CORE EQUITY AND VALUE EQUITY PORTFOLIOS
PURSUE A SECONDARY OBJECTIVE OF CURRENT
INCOME FROM DIVIDENDS.
THE BALANCED PORTFOLIO PURSUES A SECONDARY
OBJECTIVE OF CURRENT INCOME FROM AN
ALLOCATION TO FIXED INCOME SECURITIES.
TO MEET ITS INVESTMENT OBJECTIVE, EACH
PORTFOLIO EMPLOYS A SPECIFIC INVESTMENT
STYLE, AS DESCRIBED BELOW.
[END OF PAGE]
14
<PAGE> 280
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
<TABLE>
<CAPTION>
Compass Performance
Capital Fund Investment Style Portfolio Emphasis Benchmark
- ------------ ---------------- ------------------ -----------
<S> <C> <C> <C>
Value Equity Pursues equity securities (defined as common Stocks with price/earnings and price/book Russell 1000
stocks or securities convertible into common ratios at time of purchase below average for Value Index
stocks) which the sub-adviser believes are benchmark and capitalization in excess of $1
undervalued. A security's earnings trend billion.
and its dividend growth rate will also be
factors considered in security selection.
Growth Equity Pursues stocks with earnings growth Stocks with growth rate estimates in excess Russell 1000
potential. Emphasizes stocks which the sub- of average for benchmark and capitalization Growth Index
adviser considers to have favorable and in excess of $1 billion.
above-average earnings growth prospects.
Core Equity Combines value and growth style as sub- Similar sector weightings as benchmark, with S&P 500 Index
advisor identifies market opportunity. over- or under-weighting in particular
securities within those sectors.
Small Cap Growth Pursues small cap stocks with earnings Stocks with growth rate estimates in excess Russell 2000
growth potential. Emphasizes small cap of average for benchmark and capitalization Growth Index
stocks which the sub-adviser considers to below $1 billion.
have favorable and above-average earnings
growth prospects.
</TABLE>
15
<PAGE> 281
<TABLE>
<S> <C> <C> <C>
Small Cap Value Pursues small cap stocks which the sub- Stocks with price/earnings and price/book Russell 2000 Index
adviser believes are undervalued. A ratios below average for benchmark and
security's earnings trend and its dividend capitalization below $1 billion.
growth rate will also be factors considered
in security selection.
International Equity Pursues non-dollar denominated stocks of At least two thirds of portfolio assets are [TBD]
issuers in countries included in the MSCI invested in international stocks.
Europe , Australia and the Far East Index
("EAFE"). Within this universe, a value Stocks with price/earnings ratios below
style of investing is employed to select average for a securities' home market or
stocks which the sub-adviser believes are stock exchange.
undervalued. A security's earnings trend
and its dividend growth rate will also be Diversification across countries, industry
factors considered in security selection. groups and companies with investment at all
The sub-adviser will also consider times in at least three foreign countries.
macroeconomic factors such as the prospects
for relative economic growth among certain
foreign countries, expected levels of
inflation, government policies influencing
business conditions and the outlook for
currency relationships.
</TABLE>
16
<PAGE> 282
<TABLE>
<S> <C> <C> <C>
International Pursues non-dollar denominated stocks of At least 65% of portfolio assets [TBD]
Emerging Markets issuers in emerging country markets in stocks of emerging market issuers.
(generally any country considered to be Maximum of 35% of portfolio assets
emerging or developing by the World Bank, may be held in issues of developed
the International Finance Corporation or the nations, including the United
United Nations). Within this universe, a States.
value style of investing is employed to
select stocks which the sub-adviser believes Stocks with price/earnings ratios below
are undervalued. The sub-adviser will also average for a securities' home market or
consider macroeconomic factors such as the stock exchange.
prospects for relative economic growth among
certain foreign countries, expected levels Ordinarily, stocks of issuers in at least
of inflation, government policies three emerging markets will be held.
influencing business conditions and the
outlook for currency relationships.
Balanced Pursues a blend of equity and fixed income Maintains a minimum 25% investment in fixed S&P 500 and
securities to deliver total return through income senior securities. Salomon Broad
capital appreciation and current income. Investment Grade
Index
Equity Portion: Equity Portion:
Combines value and growth style as sub- Similar sector weightings as benchmark, with
adviser identifies market opportunity. over- or under-weighting in particular
securities within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and security Dollar denominated investment grade bonds,
selection across a broad universe of fixed including U.S. Government, mortgage- backed,
income securities. asset-backed and corporate debt securities.
</TABLE>
17
<PAGE> 283
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
EQUITY SECURITIES. During normal market conditions each Portfolio,
except the Balanced Portfolio, will normally invest at least 80% of the value
of its total assets in equity securities. The Portfolios will invest primarily
in equity securities of U.S. issuers, except the International Equity and
International Emerging Markets Portfolios, which will invest primarily in
foreign issuers. Equity securities include common stock and preferred stock
(including convertible preferred stock); bonds, notes and debentures
convertible into common or preferred stock; stock purchase warrants and rights;
equity interests in trusts and partnerships; and depositary receipts of
companies.
FOREIGN SECURITIES. Investing in securities of foreign issuers
involves considerations not typically associated with investing in securities
of companies organized and operated in the United States. Because foreign
securities generally are denominated and pay dividends or interest in foreign
currencies, the value of a Portfolio's assets that are invested in foreign
securities as measured in U.S. dollars will be affected favorably or
unfavorably by changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations.
In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. While the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, a Portfolio's foreign investments may be less liquid and their
prices may be more volatile than comparable investments in securities in U.S.
companies. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
The expense ratios of the International Equity and International
Emerging Markets Portfolios can be expected to be higher than those of
Portfolios investing primarily in domestic securities. The costs attributable
to investing abroad are unusually higher for several reasons, such as the
higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
As stated, the International Emerging Markets Portfolio will invest
its assets in countries with emerging economies or securities markets. These
countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The
Czech Republic, Ecuador, Greece, Hungary, India, Israel, Lebanon, Malaysia,
Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam.
Political and economic structures in many of these countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries may have in the past failed to recognize
private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of
18
<PAGE> 284
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of
investments in these countries and the availability to the Portfolio of
additional investments in emerging market countries. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries. There may be little financial or accounting
information available with respect to issuers located in certain emerging
market countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
ADRS, EDRS AND GDRS. Each Portfolio may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. ADRs typically are issued by an American bank or trust company
and evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or domestic underlying
securities. GDRs are depository receipts structured like global debt issues to
facilitate trading on an international basis. Unsponsored ADR, EDR and GDR
programs are organized independently and without the cooperation of the issuer
of the underlying securities. As a result, available information concerning
the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the
prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such
instruments were sponsored by the issuer.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its
investment objective, each Portfolio may write covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or, with
respect to the International Equity and International Emerging Markets
Portfolios, cross-hedging. These options may relate to particular securities,
financial instruments, foreign currencies, stock or bond indices or the yield
differential between two securities, and may or may not be listed on a
securities exchange and may or may not be issued by the Options Clearing
Corporation. A Portfolio will not purchase put and call options where the
aggregate premiums on outstanding options exceed 5% of its net assets at the
time of purchase, and will not write options on more than 25% of the value of
its net assets (measured at the time an option is written). Options trading is
a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections
afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
The extent consistent with its investment objective, each Portfolio
may also invest in futures contracts and options on futures contracts for
hedging purposes or to maintain liquidity. The value of a Portfolio's
contracts may equal or exceed 100% of the Fund's total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately
afterwards the aggregate amount of margin deposits on its existing futures
positions plus the amount of premiums paid for related futures options is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a
stated quantity of a foreign currency. A Portfolio may sell a futures contract
in order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange
fluctuation. A Portfolio may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales
of securities, in
19
<PAGE> 285
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases
an option on a futures contracts, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
during the option period. When Portfolio sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with a Portfolio's position in a futures contract
or related option, the Fund will create a segregated account of liquid high
grade assets or will otherwise cover its position in accordance with applicable
SEC requirements.
The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of
the instruments held by a Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) a sub-adviser's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see Appendix B in the Statement of Additional
Information.
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Portfolio's from registration as a
"commodity pool operator."
FORWARD CURRENCY EXCHANGE CONTRACTS. The Portfolios may use forward
foreign currency exchange contracts to hedge against movements in the value of
foreign currencies (including the European Currency Unit (ECU)) relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. A forward foreign currency exchange contract involves
an obligation to purchase or sell a specified currency at a future date at a
price set at the time of the contract. Foreign currency exchange contracts do
not eliminate fluctuations in the values of portfolio securities but rather
allow the Portfolio to establish a rate of exchange for a future point in time.
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated
redemption requests, or as a temporary defensive measure if its sub-adviser
determines that market conditions warrant, a Portfolio may also invest without
limitation in short-term U.S. Government obligations, high quality money market
instruments, variable and floating rate instruments and repurchase agreements
as described above. The Balanced Portfolio may also invest in these securities
in furtherance of its investment objective.
High quality money market instruments may include obligations issued
by Canadian corporations and Canadian counterparts of U.S. corporations and
Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. The Portfolios may also purchase U.S. dollar-denominated bank
obligations, such as certificates of deposit, bankers' acceptances and
interest-bearing savings 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. Short-term obligations purchased by a Portfolio will either have
short-term debt ratings at the time of purchase in the top two categories by
one or more unaffiliated nationally recognized statistical rating organizations
("NRSROs") or be issued by issuers with such ratings. Unrated instruments
purchased by a Portfolio will be of comparable quality as determined by its
sub-adviser. Under a repurchase agreement, a Portfolio agrees to purchase debt
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed
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upon time and price. Repurchase agreements are in substance loans. Default by
or bankruptcy of a seller would expose a Portfolio to possible loss because of
adverse market action, expenses and/or delays in connection with the
disposition of the underlying obligations.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. The Portfolios do not intend to engage in when-issued purchases
and forward commitments for speculative purposes but only in furtherance of
their investment objectives.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is
authorized to make limited borrowings. If the securities held by a Portfolio
should decline in value while borrowings are outstanding, the net asset value
of the Portfolio's outstanding shares will decline in value by proportionately
more than the decline in value suffered by the Portfolio's securities.
Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios may use the proceeds of reverse repurchase agreements to
purchase other securities either maturing, or under an agreement to resell, on
a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolios may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by a Portfolio may decline below the price of the securities the Fund is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid high-grade debt
securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
In addition, whenever borrowings exceed 5% of the Portfolio's total assets, the
Portfolio will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their
daily cash positions, the Portfolios may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share (i.e., "money market funds").
The International Equity and International Emerging Markets Portfolios may
purchase shares of investment companies investing primarily in foreign
securities, including so called "country funds." Country funds have portfolios
consisting exclusively of securities of issuers located in one foreign country.
Securities of other investment companies will be acquired within limits
prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory
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fees. These expenses would be in addition to the expenses each bears directly
in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15%
of the value of its net assets in securities that are illiquid. Variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered
under the Securities Act of 1933 (the "1933 Act") 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 or sub-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 a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
SMALL CAP GROWTH EQUITY AND SMALL CAP VALUE PORTFOLIOS. The Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 65% of their total assets in equity securities of smaller-capitalized
organizations (less than $1 billion at the time of purchase) that have limited
product lines, markets and financial resources and are dependent upon a limited
management group.
BALANCED PORTFOLIO. Fixed-income securities purchased by the
Portfolio may include domestic and dollar-denominated foreign debt securities,
including bonds, debentures, notes, equipment lease and trust certificates,
mortgage-related and asset-backed securities, guaranteed investment contracts
(GICs) and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. These securities will be rated at the time of
purchase within the four highest rating groups assigned by Moody's Investors
Service, Inc. ("Moody's") or by Standard & Poor's Corporation ("S&P") or, if
unrated, will be determined at the time of purchase to be of comparable quality
by the sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P,
respectively, are generally considered to be investment grade although they
have speculative characteristics. If a fixed-income security is reduced below
Baa by Moody's or BBB by S&P, the Portfolio's sub-adviser will dispose of the
security in an orderly fashion as soon as practicable. Investments in
securities of foreign issuers will be limited to 5% of the Portfolio's total
assets.
The market value of the Balanced Portfolio's investments in
fixed-income corporate and other securities will change in response to changes
in interest rates and the relative financial strength of each issuer. During
periods of falling interest rates, the values of long-term fixed-income
securities generally rise. Conversely, during periods of rising interest rates
the values of such securities generally decline. Changes in the financial
strength of an issuer or changes in the ratings of any particular security may
also affect the value of these investments.
The Balanced Portfolio may purchase asset-backed securities (i.e.,
securities backed by mortgages, installment sale contracts, credit card
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receivables or other assets). The average life of asset-backed securities
varies with the maturities of the underlying instruments which, in the case of
mortgages, have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as
the result of scheduled principal payments and mortgage prepayments. The rate
of such mortgage prepayments, and hence the life of the certificates, will be
primarily a function of current market rates and current conditions in the
relevant housing markets. The relationship between mortgage prepayment and
interest rates may give some high-yielding mortgage-related securities less
potential for growth in value than conventional bonds with comparable
maturities. In addition, in periods of falling interest rates, the rate of
mortgage prepayment tends to increase. During such periods, the reinvestment
of prepayment proceeds by the Balanced Portfolio will generally be at lower
rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return may be difficult to predict precisely. To the extent that the Balanced
Portfolio purchases mortgage-related or mortgage-backed securities at a
premium, mortgage prepayments (which may be made at any time without penalty)
may result in some loss of the Balanced Portfolio's principal investment to the
extent of premium paid.
Presently there are several types of mortgage-backed securities issued
or guaranteed by U.S. Government agencies, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOS
frequently elect to be taxed as a pass-through entity known as real estate
mortgage investment conduits, or REMICs. CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in many ways. In most cases, however, payments of principal are applied to the
CMO classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are
converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PAC") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
The Balanced Fund may also purchase obligations issued or guaranteed
by the U.S. Government and U.S. Government agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the Government National Mortgage Association, are supported by
the full faith and credit of the U.S. Treasury. Others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the U.S. Treasury; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given
that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Certain U.S. Treasury and agency securities may be held by trusts that issue
participation certificates (such as TIGRs and CATS). The Balanced Portfolio
may purchase these certificates and may also purchase Treasury receipts and
other stripped securities, which represent beneficial ownership interests in
either future interest payments or the future principal payments on U.S.
Government obligations. These instruments are issued at a discount to their
"face value" and may (particularly in the case of stripped mortgage-backed
securities) exhibit greater price volatility than ordinary debt
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securities because of the manner in which their principal and interest are
returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e.,
discount debt obligations that do not make periodic interest payments).
Zero-coupon bonds are subject to greater market fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is
expected that the annual portfolio turnover rate for each Portfolio (including
both the equity and fixed income portions of the Balanced Portfolio) will not
exceed 150%. A Portfolio's annual portfolio turnover rate will not, however,
be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover rates (i.e., over 100%) will generally result in
higher transaction costs to a Portfolio.
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
A Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval. However, shareholders
will be notified of any such change. No assurance can be provided that a
Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). Several of the Portfolios' fundamental investment policies,
which are set forth in full in the Statement of Additional Information, are
summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government
securities and related repurchase agreements) if more
than 5% of its total assets will be invested in the
securities of any one issuer, except that up to 25%
of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) subject to the foregoing 25% exception, purchase more
than 10% of the outstanding voting securities of any
issuer;
(3) invest 25% or more of its total assets in one or more
issuers conducting their principal business
activities in the same industry; and
(4) borrow money in amounts over one-third of the value
of its total assets at the time of such borrowing.
These investment limitations are applied at the time investment
securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. If the Fund determines that any
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
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WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISERS
The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Management Group.
Each of the Funds within the Compass Capital Fund Family is managed by an
experienced portfolio manager who is a member of one of PNC Asset Management
Group's distinguished equity portfolio management subsidiaries.
The eight portfolios and their investment sub-advisers and portfolio
managers are as follows:
<TABLE>
<CAPTION>
Compass Capital Fund Investment Sub-Adviser Portfolio Manager
-------------------- ---------------------- -----------------
<S> <C> <C>
Value Equity PCM(1) Earl J. Gaskins; Vice President of PCM
since 1985; Portfolio manager since
1994.
Benedict E. Capaldi; Vice President of
PCM since 1995; prior to joining PCM,
Senior Vice President and portfolio
manager with Radnor Capital
Management, President of Chestnut Hill
Advisors, Inc. and Managing Director
of Brandywine Asset Management, Inc.;
Portfolio co-manager since 1995.
Growth Equity PEAC(2) Robert K. Urquhart; Managing Director
of PEAC's Large Cap Growth Equity
Investments area since 1995; prior to
joining PEAC, Chief Investment Officer
and partner of Cole Financial
Group,Inc., a partner of Seacliff
Holdings, Inc. and of RCM Capital
Management; Portfolio manager since
1995.
Core Equity PCM(1) Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; portfolio manager with PEAC
during 1995; Portfolio manager since
1995.
Small Cap Value PCM(1) Susan D. Menzies; Vice President of
PCM since 1985; Portfolio manager
since 1994.
</TABLE>
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<TABLE>
<CAPTION>
Compass Capital Fund Investment Sub-Adviser Portfolio Manager
-------------------- ---------------------- -----------------
<S> <C> <C>
Small Cap Growth PEAC(2 William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank from 1986 to
1995; Portfolio manager since its
inception.
International Equity PCM(1) William George Greig; Vice President
of PCM; prior to joining PCM, Managing
Partner of Akamai International,
Investment Director of The Framlington
Group and Research Director with
Pilgrim Baxter & Associates; Portfolio
manager since 1995.
International Emerging PCM(1) William George Greig (see above);
Markets Portfolio manager since its inception.
Balanced PCM and BlackRock(1)(3) Daniel B. Eagan (see above); Portfolio
co-manager since 1994.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since 1995.
Keith T. Anderson; Managing Director
and co-chair of Portfolio Management
Group and Investment Strategy
Committee of BlackRock since 1988;
Portfolio co-manager since 1995.
</TABLE>
___________________
(1) Provident Capital Management, Inc. ("PCM") has its primary offices at
1700 Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1835
Market Street, 15th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary
offices at 345 Park Avenue, New York, New York 10154.
PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1835 Market Street, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services service, PAMG
and the Portfolios' sub-advisers are entitled to fees, computed daily on a
Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth
below. All sub-advisory fees are paid by PAMG, and do not represent an extra
charge to the Portfolios.
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<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for
Each Portfolio Except the International Portfolios
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
- ------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .55% .40%
$1 billion -- $2 billion .50 .35
$2 billion -- $3 billion .475 .325
greater than $3 billion .45 .30
</TABLE>
<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for
the International Equity Portfolio
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
first $1 billion .75% .60%
$1 billion -- $2 billion .70 .55
$2 billion -- $3 billion .675 .525
greater than $3 billion .65 .50
</TABLE>
<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for the
International Emerging Markets Portfolio
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
first $1 billion 1.275% 1.10%
$1 billion -- $2 billion 1.20 1.05
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.10 .95
</TABLE>
Although the advisory fee rate payable by the International Emerging
Markets Portfolio is higher than the rate payable by mutual funds investing in
domestic securities, the Fund believes it is comparable to the rates paid by
many other funds with similar investment objectives and policies and is
appropriate for the Portfolio in light of its investment objective and policies.
For information about the advisory fees the Portfolios expect to pay
for the current fiscal year, see "What Are the Expenses of the Portfolios?" For
their last fiscal year the Portfolios paid investment advisory fees at the
following annual rates after voluntary fee waivers: Value Equity Portfolio
.44%; Growth Equity Portfolio .40%; Small Cap Growth Equity Portfolio .45%; Core
Equity Portfolio .40%; Small Cap Value Equity Portfolio .50%; International
Equity Portfolio .60%; International Emerging Markets Portfolio 1.04%; and
Balanced Portfolio .40%.
Brokerage transactions for the Portfolios may be directed through
registered broker/dealers who have entered into dealer agreements with the
Fund's distributor, subject to the requirements of best execution.
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI")(the "Administrators"), serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania Merchant Group
Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI is entitled to a fee, computed daily and payable monthly, at an annual
rate of .03% of each Portfolio's average daily net assets, and PFPC and PDI are
entitled
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to receive a combined fee, computed daily and payable monthly, at an annual
rate of .20% of the first $500 million of each Portfolio's average daily net
assets, .18% of the next $500 million of each Portfolio's average daily net
assets, .16% of the next $1 billion of each Portfolio's average daily net
assets and .15% of each Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
For information about the operating expenses the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolio?"
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Portfolios' custodian and PFPC serves as their
transfer agent and dividend disbursing agent.
HOW ARE SHARES PURCHASED AND REDEEMED?
DISTRIBUTOR
Shares of each Portfolio are sold on a continuous basis by PDI as
distributor (the "Distributor"). PDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits PDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of any portion of the fees paid
by the Fund, past profits or other sources. The Fund is not required or
permitted under the plan to make distribution payments with respect to
Institutional Shares over and above the investment advisory and other fees it
pays for non-distribution services. The plan merely permits the reallocation
of a portion of these fees to pay for distribution related and shareholder
servicing activities.
PURCHASE OF SHARES
Institutional Shares are offered to institutional investors, including
registered investment advisers with a minimum investment of $500,000 and
individuals with a minimum investment of $2,000,000. Institutional Shares are
sold at their net asset value per share next determined after an order is
received by PFPC as the Fund's transfer agent. A "Business Day" is any weekday
that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of
Philadelphia (the "FRB") are open for business.
Purchase orders for each Portfolio may be placed by telephoning PFPC
at (800) 441-7379. Orders received by PFPC after 4:00 p.m. (Eastern Time) are
priced the following Business Day.
Payment for Institutional Shares must normally be made in Federal
funds or other funds immediately available to the Fund's custodian. Payment
may also, in the discretion of the Fund, be made in the form of securities that
are permissible investments for the respective Portfolios. For further
information, see the Statement of Additional Information. The minimum initial
investment is [$5,000]. There is no minimum subsequent investment.
The Fund may in its discretion waive the minimum investment amounts
and may reject any order for Institutional Shares.
REDEMPTION OF SHARES
Redemption orders for Institutional Shares may be placed by
telephoning PFPC at (800) 441-7379. Institutional Shares are redeemed at their
net asset value per share next determined after PFPC's receipt of the
redemption order. The Fund and its service providers will not be liable for
any loss, liability,
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cost or expense for acting upon telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions
are genuine, the Fund may use such procedures as are considered reasonable,
including recording those instructions and requesting information as to account
registration (such as the name in which an account is registered, the account
number, recent transactions in the account, and the account holder's Social
Security number, address and/or bank).
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
[provided that the Fund's custodian is also open for business]. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) [or on a day when
the Fund's custodian is closed] is normally wired in Federal funds on the next
Business Day following redemption [on which the Fund's custodian is open for
business]. The Fund reserves the right to wire redemption proceeds within
seven days after receiving a redemption order if, in the judgment of the
investment adviser, an earlier payment could adversely affect a Portfolio. No
charge for wiring redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [P.O. Box 8907, Wilmington, DE 19899-8907].
The Fund may redeem Institutional Shares in any Portfolio account if
the account balance drops below [$5,000] as the result of redemption requests
and the shareholder does not increase the balance to at least [$5,000] upon
thirty days' written notice.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
HOW IS NET ASSET VALUE CALCULATED?
Net asset value of the Portfolios' Institutional Shares is determined
as of the close of regular trading hours on the NYSE (currently 4:00 p.m.
Eastern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its Institutional
Shares, less the liabilities charged to the Institutional Shares, by the number
of the Portfolio's outstanding Institutional Shares.
Most securities held by a Portfolio are priced based on their market
value as determined by reported sales prices or the mean between their bid and
asked prices. Portfolio securities which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except when an occurrence
subsequent to the time a value was so established is likely to have changed
such value. Securities for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
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<PAGE> 295
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to
investors who are Shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid within ten days after the end of
each quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by each Portfolio at least annually. The period for
which dividends are payable and the time for payment are subject to change by
the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and
fractional Institutional Shares of the same Portfolio on which the
distributions are paid, unless a shareholder elects to receive distributions in
cash. This election, or any revocation thereof, must be made in writing to
PFPC, and will become effective with respect to distributions paid after its
receipt by PFPC.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as a Portfolio qualifies for this tax treatment, it generally will be relieved
of Federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will pay income or capital gains taxes on
distributions (except distributions that are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds Institutional Shares. All other distributions, to the
extent taxable, are taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends
received deduction allowed to certain corporations only to the extent of the
total qualifying dividends received by a Portfolio from domestic corporations
for a taxable year. Corporate shareholders will have to take into account the
entire amount of any dividend received in determining their business untaxed
reported profits adjustment for Federal alternative minimum and environmental
tax purposes. The dividends received deduction is not available for capital
gain dividends.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying Shares on or just before a dividend
record date should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Institutional Shares depending upon their
tax basis and their price at the time of redemption, transfer or exchange.
Dividends and certain interest income earned by a Portfolio from
foreign securities may be subject to foreign withholding taxes or other taxes.
So long as more than 50% of the value of a Portfolio's total assets at the
close of any
30
<PAGE> 296
taxable year consists of stock or securities of foreign corporations, the
Portfolio may elect, for U.S. federal income tax purposes, to treat certain
foreign taxes paid by it, including generally any withholding taxes and other
foreign income taxes, as paid by its shareholders. It is possible that the
International Equity and International Emerging Markets Portfolios will make
this election in certain years. If a Portfolio makes the election, the amount
of such foreign taxes paid by the Portfolio will be included in its
shareholders' income pro rata (in addition to taxable distributions actually
received by them), and each shareholder will be entitled either (a) to credit
his proportionate amount of such taxes against a shareholder's U.S. Federal
income tax liabilities, or (b) if a shareholder itemizes deductions, to deduct
such proportionate amounts from U.S. Federal taxable income.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. The application of state and local income taxes to investments
in the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals,
foreign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or
administrative changes or court decisions may materially affect the tax
consequences of investing in the Portfolios.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of Trust authorizes the Board
of Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Trustees have authorized
the issuance of an unlimited number of shares in twenty-eight investment
portfolios. Each Portfolio described in this Prospectus offers five separate
classes of shares -- Institutional Shares, Service Shares, Investor A Shares,
Investor B Shares and Investor C Shares. This prospectus relates only to
Institutional Shares of the eight portfolios described herein, each of which is
classified as a diversified portfolio under the 1940 Act.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan for each Share class except
Institutional Shares. In addition, each class of Investor Shares is sold with
different sales charges. Because of these "class expenses" and sales charges,
the performance of a Portfolio's Institutional Shares is expected to be higher
than the performance of the Portfolio's Service Shares, and the performance of
both the Institutional Shares and Service Shares of a Portfolio is expected to
be higher than the performance of the Portfolio's three classes of Investor
Shares. The Fund offers various services and privileges in connection with its
Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan,
automatic withdrawal plan and checkwriting. For further information regarding
the Fund's Service and Investor Share classes, contact [name and number].
Each share of a Portfolio has a par value of $.001, represents an
interest in that Portfolio and is entitled to the dividends and distributions
earned on that Portfolio's assets as are declared in the discretion of the
Board of Trustees. The Fund's shareholders are entitled to one vote for each
full share held and proportionate fractional votes for fractional shares held,
and will vote in the aggregate and not by class, except where otherwise
required by law or as determined by the Board of Trustees. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required
31
<PAGE> 297
under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On January ___, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp.
HOW IS PERFORMANCE CALCULATED?
Performance information for Institutional Shares of the Portfolios may
be quoted in advertisements and communications to shareholders. Total return
will be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the
measuring period. Total return may also be calculated on an aggregate total
return basis for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return assume that dividend and capital gain distributions
made by a Portfolio during the period are reinvested in additional
Institutional Shares.
The yield of Institutional Shares of the Balanced Portfolio is
computed by dividing the net income allocated to an Institutional Share during
a 30-day (or one month) period by the net asset value of an Institutional Share
on the last day of the period and analyzing the result on a semi-annual basis.
The performance of a Portfolio's Institutional Shares may be compared
to the performance of other mutual funds with similar investment objectives and
to relevant indexes, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the performance of a Portfolio's
Institutional Shares may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service, and with the performance of the S&P 500 Index, EAFE, the Dow
Jones Industrial Average, the Dimensional Fund Advisor's Small Cap Index, the
Lehman GMNA Index, the Lehman Index of Baa-rated Corporate Bonds, the T-Bill
Index, the "stocks, bonds and inflation index" published annually by Ibbotson
Associates, the Lipper International Fund Index, the Lehman Government
Corporate Bond Index and the Financial Times World Stock Index. Performance
information may also include evaluations of the Portfolios and their Shares
published by nationally recognized ranking services and information as reported
by financial publications such as Business Week, Fortune, Institutional
Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and The New
York Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or return of Institutional Shares over a particular period of
time, a Portfolio may provide certain other information demonstrating
hypothetical investment returns. This information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan or the impact of tax-deferred investing.
Performance quotations of Shares of a Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in a Portfolio will
fluctuate so that an investor's Institutional Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of a Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Investors should remember that
performance is generally a function of the
32
<PAGE> 298
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions. Any fees charged by affiliates of
the Portfolios' investment adviser or other Institutions directly to their
customer accounts in connection with investments in the Portfolios will not be
included in the Portfolio's calculations of yield and performance.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to
information regarding their investment 24 hours a day, 7 days a week. The
COMPASS CAPITAL FUNDS have an investor information line that can provide such
access.
In addition to account information, COMPASS CAPITAL FUNDS have other sources of
information regarding each Fund and its portfolio holdings, strategy and
current dividend and yield levels.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL FUNDS by either using
a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) compass
For Information Related to Share Purchase and Redemptions call your investment
adviser or Compass Capital Funds at (800) xxx-xxxx
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) xxx-xxxx
Information is also available on the World Wide Web through the Internet.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
33
<PAGE> 299
THE EQUITY
PORTFOLIOS
INSTITUTIONAL
CLASS
PROSPECTUS
VALUE EQUITY PORTFOLIO
GROWTH
EQUITY PORTFOLIO
SMALL CAP GROWTH
EQUITY PORTFOLIO
CORE
EQUITY PORTFOLIO
SMALL CAP VALUE
EQUITY PORTFOLIO
INTERNATIONAL
EQUITY PORTFOLIO
INTERNATIONAL EMERGING
MARKETS PORTFOLIO
BALANCED PORTFOLIO
JANUARY __, 1996
34
<PAGE> 300
[THIS PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE> 301
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(SERVICE SHARES OF THE VALUE EQUITY PORTFOLIO,
GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY PORTFOLIO,
CORE EQUITY PORTFOLIO, SMALL CAP VALUE EQUITY PORTFOLIO,
INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL EMERGING
MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 302
THE EQUITY PORTFOLIOS
SERVICE SHARES
The Compass Capital Funds(R) (the "Fund") consist of [twenty-eight]
investment portfolios. This Prospectus describes the Service Shares of eight
of those portfolios ("Portfolios"):
- Value Equity Portfolio -
- Growth Equity Portfolio -
- Small Cap Growth Equity Portfolio -
- Core Equity Portfolio -
- Small Cap Value Equity Portfolio -
- International Equity Portfolio -
- International Emerging Markets Portfolio -
- Balanced Portfolio -
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January __, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by calling (800)
________. The Statement of Additional Information, as supplemented from time
to time, is incorporated by reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS January ___, 1996
1
<PAGE> 303
INTRODUCING THE EQUITY PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Equity Portfolios of the COMPASS CAPITAL FUNDS consist of eight
diversified investment products that provide investors with a broad spectrum of
investment alternatives within the equity sector. Five of these portfolios
invest solely in U.S. stocks, two portfolios invest in non-U.S. international
stocks and one portfolio invests in a combination of U.S. stocks and bonds. A
detailed description of each portfolio appears on pages _____
<TABLE>
<CAPTION>
COMPASS CAPITAL FUND PERFORMANCE BENCHMARK LIPPER PEER GROUP
- -------------------- --------------------- -----------------
<S> <C> <C>
Value Equity Russell 1000 Value Index Growth and Income
Growth Equity Russell 1000 Growth Index Capital Appreciation
Core Equity S&P 500 Index Growth and Income
Small Cap Growth Russell 2000 Growth Index Small Company Growth
Small Cap Value Russell 2000 Index Small Company Growth
International Equity [TBD] International
International Emerging [TBD] Emerging Markets
Markets
Balanced S&P 500 Balanced
Salomon Broad Investment
Grade Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. Provident Capital Management, Inc. ("PCM"), PNC Equity
Advisers Company ("PEAC") and BlackRock Financial Management, Inc.
("BlackRock") serve as sub-advisers to different Portfolios as described in
this Prospectus.
UNDERSTANDING THE COMPASS CAPITAL EQUITY FUNDS
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in equity
investing.
CONSIDERING THE RISKS IN EQUITY INVESTING
There can be no assurance that any mutual fund will achieve its
investment objective. The Portfolios will hold equity securities, and some or
all of the Portfolios may acquire warrants, foreign securities and illiquid
securities; enter into repurchase and reverse repurchase agreements; lend
portfolio securities to third parties; and enter into futures contracts and
options and forward currency exchange contracts. These and the other
investment practices set forth below, and their associated risks, deserve
careful consideration. Certain risks associated with international investments
are heightened because of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies Apply?"
ASKING THE KEY QUESTIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Differences Among the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . .
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Investment Limitations? . . . . . . . . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
2
<PAGE> 304
<TABLE>
<CAPTION>
Page
----
<S> <C>
How Are Shares Purchased and Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Special Purchase and Redemption Procedures May Apply? . . . . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . . . . . . . . . . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
[End of Page]
3
<PAGE> 305
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be incurred by
Service Shares of the Portfolios for the current fiscal year ending September
30, 1996 as a percentage of average net assets. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
Small Small Inter-
Cap Cap Inter- national
Value Growth Growth Core Value national Emerging
Equity Equity Equity Equity Equity Equity Markets Balanced
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees(1) .50% .50% .53% .50% .53% .70% 1.15% .50%
Other operating expenses .55 .55 .63 .55 .63 .66 .93 .60
---- ---- ---- ---- ---- ---- ---- ----
Administration fees(1) .17 .15 .22 .15 .22 .16 .18 .17
Service fees .15 .15 .15 .15 .15 .15 .15 .15
Other expenses(1) .23 .25 .26 .25 .26 .35 .60 .28
---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio operating
expenses(1) 1.05% 1.05% 1.16% 1.05% 1.16% 1.36% 2.08% 1.10%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(1) Without waivers, advisory fees would be .55%, .55%, .55%, .55%, .55%,
.75%, 1.25% and .55% and administration fees would be .23%, .23%,
.23%, .23%, .23%, .23%, .23% and .23%, respectively. PAMG and the
Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers with respect to the particular Portfolios for the fiscal
year ended September 30, 1995, as restated to reflect revised fee
waivers. Without waivers, total operating expenses would be: 1.16%,
1.18%, 1.19%, 1.18%, 1.19%, 1.48%, 2.23% and 1.21%, respectively.
4
<PAGE> 306
EXAMPLE
An investor in Service Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Value Equity $ 11 $ 33 $ 58 $128
Growth Equity 11 33 58 128
Small Cap Growth Equity 12 37 64 141
Core Equity 11 33 58 128
Small Cap Value Equity 12 37 64 141
International Equity 14 43 74 164
International Emerging Markets 21 65 112 241
Balanced 11 35 61 134
</TABLE>
The foregoing Table and Example are intended to assist investors in
understanding the costs and expenses the Portfolios pay. Investors bear these
expenses since they reduce the income paid by the Portfolios as dividends. The
tables do not reflect any charges that may be imposed by affiliates of the
Portfolios' investment adviser or other institutions directly on their customer
accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference into the Statement of Additional
Information and has been audited by [________________________], the Fund's
independent accountants. This financial information should be read together
with those financial statements. Further information about the performance of
the Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual reports may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus.
5
<PAGE> 307
FINANCIAL HIGHLIGHTS
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning of period $ 11.68 $ 11.21
-------- -------
Income from investment operations
Net investment income 0.25 0.04
Net gain (loss) on investments
(both realized and unrealized) 0.16 0.48
-------- -------
Total from investment operations 0.41 0.52
-------- -------
Less distributions
Distributions from net investment
income (0.25) (0.05)
Distributions from net realized
capital gains (0.22) --
-------- -------
Total distributions (0.47) (0.05)
-------- -------
Net asset value at end of period $ 11.62 $ 11.68
======== =======
Total return 3.51% 4.64%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $105,035 $23,137
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.90% 0.91%(2)
Before advisory/administration
fee waivers 1.06% 0.94%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.24% 2.44%(2)
Before advisory/administration
fee waivers 2.08% 2.41%(2)
Portfolio turnover rate 11% 11%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
6
<PAGE> 308
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/28/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning of period $ 11.57 $10.54
------- ------
Income from investment operations
Net investment income 0.03 --
Net gain (loss) on investments (both realized
and unrealized) (1.32) 1.03
------- ------
Total from investment operations (1.29) 1.03
------- ------
Less distributions
Distributions from net investment income -- --
Distributions from capital -- --
Distributions from net realized capital gains (0.10) --
------- ------
Total distributions (0.10) --
------- ------
Net asset value at end of period $ 10.18 $11.57
======= ======
Total return (11.20)% 9.77%
Ratios/Supplemental data
Net assets at end of period (in thousands) $36,752 $8,606
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.90% 0.89%(2)
Before advisory/administration fee waivers 1.14% 0.95%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 0.51% (0.03)%(2)
Before advisory/administration fee waivers 0.26% (0.09)%(2)
Portfolio turnover rate 212% 175%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
7
<PAGE> 309
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/15/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- -------- ---------
<S> <C> <C> <C>
Net asset value at beginning of period $ 10.47 $ 9.96
------- ------
Income from investment operations
Net investment income 0.01 --
Net gain (loss) on investments
(both realized and unrealized) (0.34) 0.51
------- ------
Total from investment operations (0.33) 0.51
------- ------
Less distributions
Distributions from net investment income -- --
Distributions from net realized
capital gains -- --
------- ------
Total distributions -- --
------- ------
Net asset value at end of period $ 10.14 $10.47
======= ======
Total return (3.12)% 5.12%
Ratios/Supplemental data
Net assets at end of period (in thousands) $22,648 $ 911
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.71% 0.99% (2)
Before advisory/administration fee
waivers 1.27% 1.68% (2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 0.21% (0.34)%(2)
Before advisory/administration fee
waivers (0.34)% (1.03)%(2)
Portfolio turnover rate 89% 9%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
8
<PAGE> 310
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR 9/15/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $ 9.97 $10.00
------- ------
Income from investment operations
Net investment income 0.19 --
Net gain (loss) on investments
(both realized and unrealized) (0.04) (0.03)
------- ------
Total from investment
operations 0.15 (0.03)
------- ------
Less distributions
Distributions from net
investment income (0.20) --
Distributions from net realized
capital gains -- --
------- ------
Total distributions (0.20) --
------- ------
Net asset value at end of period $ 9.92 $ 9.97
======= ======
Total return 1.55% (.30)%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $49,293 $ 704
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.90% 0.90%(2)
Before advisory/administration
fee waivers 1.18% 1.12%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 1.96% 1.92%(2)
Before advisory/administration
fee waivers 1.68% 1.70%(2)
Portfolio turnover rate 88% 2%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
9
<PAGE> 311
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $ 13.08 $ 12.28
------- -------
Income from investment operations
Net investment income -- --
Net gain (loss) on investments
(both realized and unrealized) 0.77 0.80
------- -------
Total from investment operations 0.77 0.80
------- -------
Less distributions
Distributions from net investment
income (0.01) --
Distributions from net realized
capital gains (0.25) --
------- -------
Total distributions (0.26) --
------- -------
Net asset value at end of period $ 13.59 $ 13.08
======= =======
Total return 5.96% 6.51%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $45,372 $21,689
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.98% 0.99%(2)
Before advisory/administration
fee waivers 1.10% 1.03%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 0.03% 0.12%(2)
Before advisory/administration
fee waivers (0.09)% 0.08%(2)
Portfolio turnover rate 18% 41%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
10
<PAGE> 312
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $ 12.47 $ 11.76
------- -------
Income from investment operations
Net investment income 0.14 0.02
Net realized gain (loss) on
investments 1.14 0.69
------- -------
Total from investment
operations 1.28 0.71
------- -------
Less distributions
Distributions from net investment
income (0.09) --
Distributions from net realized
capital gains (0.25) --
------- -------
Total distributions (0.34) --
------- -------
Net asset value at end of period $ 13.41 $ 12.47
======= =======
Total return 10.36% 6.03%
Ratios/Supplemental data
Net assets at end of period
(in thousands) $75,174 $11,985
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.20% 1.18%(2)
Before advisory/administration
fee waivers 1.39% 1.24%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 1.09% 1.01%(2)
Before advisory/administration
fee waivers 0.90% 0.95%(2)
Portfolio turnover rate 37% 31%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
11
<PAGE> 313
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR 6/17/94(1)
ENDED THROUGH
9/30/95 9/30/94
------- -------
<S> <C> <C>
Net asset value at beginning of period $10.00
Income from investment operations
Net investment income 0.02
Net gain (loss) on investments
(both realized and unrealized) 0.53
------
Total from investment operations 0.55
------
Less distributions
Distributions from net investment income --
Distributions from net realized
capital gains --
------
Total distributions --
------
Net asset value at end of period $10.55
======
Total return 5.50%
Ratios/Supplemental data
Net assets at end of period (in thousands) $3,505
Ratios of expenses to average net assets
After advisory/administration fee waivers 2.00%(2)
Before advisory/administration fee waivers 2.98%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 1.10%(2)
Before advisory/administration fee waivers 0.12%(2)
Portfolio turnover rate 4%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
12
<PAGE> 314
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 5/1/89(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
------- ------- -------
<S> <C> <C>
Net asset value at beginning of period $ 12.42 $ 12.05
------- -------
Income from investment operations
Net investment income 0.34 0.06
Net realized gain (loss) on investments (0.38) 0.38
------- -------
Total from investment operations (0.04) 0.44
------- -------
Less distributions
Distributions from net investment income (0.34) (0.07)
Distributions from net realized capital gains (0.06) --
------- -------
Total distributions (0.40) (0.07)
------- -------
Net asset value at end of period $ 11.98 $ 12.42
======= =======
Total return (0.36)% 3.66%
Ratios/Supplemental data
Net assets at end of period (in thousands) $66,024 $15,842
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.90% 0.93%(2)
Before advisory/administration fee waivers 1.16% 1.11%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 2.96% 2.75%(2)
Before advisory/administration fee waivers 2.70% 2.57%(2)
Portfolio turnover rate 54% 32%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
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<PAGE> 315
WHAT ARE THE PORTFOLIOS?
The COMPASS CAPITAL FUNDS consist of [28] portfolios and have been structured to
include many different investment styles so that investors may participate
across multiple disciplines in order to seek their long-term financial goals.
The Equity Portfolios of the COMPASS CAPITAL FUNDS consist of
eight investment products that provide investors with a broad spectrum of
investment alternatives within the equity sector. Five of these Portfolios
invest solely in U.S. stocks, two Portfolios invest in non-U.S. international
stocks and one Portfolio invests in a combination of U.S. stocks and bonds.
In certain investment cycles and over certain holding periods, an equity fund
that invests according to a "value" style or a "growth" style may perform above
or below the market. An investment program that combines these multiple
disciplines allows investors to select from among these various product options
in the way that most closely fits the individual's investment goals and
sentiments.
INVESTMENT OBJECTIVES EACH OF THE EIGHT COMPASS CAPITAL FUND EQUITY
PORTFOLIOS SEEKS TO PROVIDE
LONG-TERM CAPITAL APPRECIATION.
THE CORE EQUITY AND VALUE EQUITY PORTFOLIOS
PURSUE A SECONDARY OBJECTIVE OF CURRENT
INCOME FROM DIVIDENDS.
THE BALANCED PORTFOLIO PURSUES A SECONDARY
OBJECTIVE OF CURRENT INCOME FROM AN
ALLOCATION TO FIXED INCOME SECURITIES.
TO MEET ITS INVESTMENT OBJECTIVE, EACH
PORTFOLIO EMPLOYS A SPECIFIC INVESTMENT
STYLE, AS DESCRIBED BELOW.
[END OF PAGE]
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<PAGE> 316
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
<TABLE>
<CAPTION>
Compass Performance
Capital Fund Investment Style Portfolio Emphasis Benchmark
- ------------ ---------------- ------------------ -----------
<S> <C> <C> <C>
Value Equity Pursues equity securities (defined as common Stocks with price/earnings and price/book Russell 1000 Value
stocks or securities convertible into common ratios at time of purchase below average for Index
stocks) which the sub-adviser believes are benchmark and capitalization in excess of $1
undervalued. A security's earnings trend billion.
and its dividend growth rate will also be
factors considered in security selection.
Growth Equity Pursues stocks with earnings growth Stocks with growth rate estimates in excess Russell 1000
potential. Emphasizes stocks which the sub- of average for benchmark and capitalization Growth Index
adviser considers to have favorable and in excess of $1 billion.
above-average earnings growth prospects.
Core Equity Combines value and growth style as sub- Similar sector weightings as benchmark, with S&P 500 Index
advisor identifies market opportunity. over- or under-weighting in particular
securities within those sectors.
Small Cap Growth Pursues small cap stocks with earnings Stocks with growth rate estimates in excess Russell 2000
growth potential. Emphasizes small cap of average for benchmark and capitalization Growth Index
stocks which the sub-adviser considers to below $1 billion.
have favorable and above-average earnings
growth prospects.
</TABLE>
15
<PAGE> 317
<TABLE>
<S> <C> <C> <C>
Small Cap Value Pursues small cap stocks which the sub- Stocks with price/earnings and price/book Russell 2000 Index
adviser believes are undervalued. A ratios below average for benchmark and
security's earnings trend and its dividend capitalization below $1 billion.
growth rate will also be factors considered
in security selection.
International Equity Pursues non-dollar denominated stocks of At least two thirds of portfolio assets are [TBD]
issuers in countries included in the MSCI invested in international stocks.
Europe, Australia and the Far East Index
("EAFE"). Within this universe, a value Stocks with price/earnings ratios below
style of investing is employed to select average for a securities' home market or
stocks which the sub-adviser believes are stock exchange.
undervalued. A security's earnings trend
and its dividend growth rate will also be Diversification across countries, industry
factors considered in security selection. groups and companies with investment at all
The sub-adviser will also consider times in at least three foreign countries.
macroeconomic factors such as the prospects
for relative economic growth among certain
foreign countries, expected levels of
inflation, government policies influencing
business conditions and the outlook for
currency relationships.
</TABLE>
16
<PAGE> 318
<TABLE>
<S> <C> <C> <C>
International Pursues non-dollar denominated stocks of At least 65% of portfolio assets in stocks [TBD]
Emerging Markets issuers in emerging country markets of emerging market issuers. Maximum of 35%
(generally any country considered to be of portfolio assets may be held in issues of
emerging or developing by the World Bank, developed nations, including the United
the International Finance Corporation or the States.
United Nations). Within this universe, a
value style of investing is employed to Stocks with price/earnings ratios below
select stocks which the sub-adviser believes average for a securities' home market or
are undervalued. The sub-adviser will also stock exchange.
consider macroeconomic factors such as the
prospects for relative economic growth among Ordinarily, stocks of issuers in at least
certain foreign countries, expected levels three emerging markets will be held.
of inflation, government policies
influencing business conditions and the
outlook for currency relationships.
Balanced Pursues a blend of equity and fixed income Maintains a minimum 25% investment in fixed S&P 500 and
securities to deliver total return through income senior securities. Salomon Broad
capital appreciation and current income. Investment Grade
Index
Equity Portion: Equity Portion:
Combines value and growth style as sub- Similar sector weightings as benchmark, with
adviser identifies market opportunity. over- or under-weighting in particular
securities within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and security Dollar denominated investment grade bonds,
selection across a broad universe of fixed including U.S. Government, mortgage- backed,
income securities. asset-backed and corporate debt securities.
</TABLE>
17
<PAGE> 319
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
EQUITY SECURITIES. During normal market conditions each Portfolio,
except the Balanced Portfolio, will normally invest at least 80% of the value
of its total assets in equity securities. The Portfolios will invest primarily
in equity securities of U.S. issuers, except the International Equity and
International Emerging Markets Portfolios, which will invest primarily in
foreign issuers. Equity securities include common stock and preferred stock
(including convertible preferred stock); bonds, notes and debentures
convertible into common or preferred stock; stock purchase warrants and rights;
equity interests in trusts and partnerships; and depositary receipts of
companies.
FOREIGN SECURITIES. Investing in securities of foreign issuers
involves considerations not typically associated with investing in securities
of companies organized and operated in the United States. Because foreign
securities generally are denominated and pay dividends or interest in foreign
currencies, the value of a Portfolio that invests in foreign securities as
measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations.
In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. While the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, a Portfolio's foreign investments may be less liquid and their
prices may be more volatile than comparable investments in securities in U.S.
companies. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
The expense ratios of the International Equity and International
Emerging Markets Portfolios are expected to be higher than those of Portfolios
investing primarily in domestic securities. The costs attributable to
investing abroad are usually higher for several reasons, such as the higher
cost of investment research, higher cost of custody of foreign securities,
higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
As stated, the International Emerging Markets Portfolio will invest
its assets in countries with emerging economies or securities markets. These
countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The
Czech Republic, Ecuador, Greece, Hungary, India, Israel, Lebanon, Malaysia,
Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam.
Political and economic structures in many of these countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries have in the past failed to recognize
private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of
18
<PAGE> 320
investments in these countries and the availability to the Portfolio of
additional investments in emerging market countries. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries. There may be little financial or accounting
information available with respect to issuers located in certain emerging
market countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
The International Equity Portfolio invests primarily in equity
securities of issuers located in countries included in EAFE. Australia,
Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan,
Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden,
Switzerland and the United Kingdom are currently included in EAFE.
ADRS, EDRS AND GDRS. Each Portfolio may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. ADRs typically are issued by an American bank or trust company
and evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or domestic underlying
securities. GDRs are depository receipts structured like global debt issues to
facilitate trading on an international basis. Unsponsored ADR, EDR and GDR
programs are organized independently and without the cooperation of the issuer
of the underlying securities. As a result, available information concerning
the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the
prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such
instruments were sponsored by the issuer.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its
investment objective, each Portfolio may write covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or, with
respect to the International Equity and International Emerging Markets
Portfolios, cross-hedging. These options may relate to particular securities,
financial instruments, foreign currencies, stock or bond indices or the yield
differential between two securities, and may or may not be listed on a
securities exchange and may or may not be issued by the Options Clearing
Corporation. A Portfolio will not purchase put and call options where the
aggregate premiums on outstanding options exceed 5% of its net assets at the
time of purchase, and will not write options on more than 25% of the value of
its net assets (measured at the time an option is written). Options trading is
a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections
afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio
may also invest in futures contracts and options on futures contracts for
hedging purposes or to maintain liquidity. The value of a Portfolio's
contracts may equal or exceed 100% of the Fund's total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately
afterwards the aggregate amount of margin deposits on its existing futures
positions plus the amount of premiums paid for related futures options is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of securities, the cash value of a securities index or a stated
quantity of a foreign currency. A Portfolio may sell a futures contract in
order to
19
<PAGE> 321
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities,
in the value of the securities to be sold. In addition, a Portfolio may
utilize futures contracts in anticipation of changes in the composition of its
holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases
an option on a futures contracts, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
during the option period. When a Portfolio sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with a Portfolio's position in a futures contract
or related option, the Fund will create a segregated account of liquid high
grade assets or will otherwise cover its position in accordance with applicable
SEC requirements.
The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of
the instruments held by a Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) a sub-adviser's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see Appendix B in the Statement of Additional
Information.
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Portfolio's from registration as a
"commodity pool operator."
FORWARD CURRENCY EXCHANGE CONTRACTS. The Portfolios may use forward
foreign currency exchange contracts to hedge against movements in the value of
foreign currencies (including the European Currency Unit (ECU)) relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. A forward foreign currency exchange contract involves
an obligation to purchase or sell a specified currency at a future date at a
price set at the time of the contract. Foreign currency exchange contracts do
not eliminate fluctuations in the values of portfolio securities but rather
allow the Portfolio to establish a rate of exchange for a future point in time.
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated
redemption requests, or as a temporary defensive measure if its sub-adviser
determines that market conditions warrant, a Portfolio may also invest without
limitation in short-term U.S. Government obligations, high quality money market
instruments, variable and floating rate instruments and repurchase agreements.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective.
High quality money market instruments may include obligations issued
by Canadian corporations and Canadian counterparts of U.S. corporations and
Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. The Portfolios may also purchase U.S. dollar-denominated bank
obligations, such as certificates of deposit, bankers' acceptances and
interest-bearing savings 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. Short-term obligations purchased by a Portfolio will either have
short-term debt ratings at the time of purchase in the top two categories by
one or more unaffiliated nationally recognized statistical rating organizations
("NRSROs") or be issued
20
<PAGE> 322
by issuers with such ratings. Unrated instruments purchased by a Portfolio
will be of comparable quality as determined by its sub-adviser. Under a
repurchase agreement, a Portfolio agrees to purchase debt securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price. Repurchase agreements are in substance loans.
Default by or bankruptcy of a seller would expose a Portfolio to possible loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying obligations.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit a Portfolio to lock in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. The Portfolios do not intend to engage in when-issued purchases
and forward commitments for speculative purposes but only in furtherance of
their investment objectives.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is
authorized to make limited borrowings. If the securities held by a Portfolio
should decline in value while borrowings are outstanding, the net asset value
of the Portfolio's outstanding shares will decline in value by proportionately
more than the decline in value suffered by the Portfolio's securities.
Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios may use the proceeds of reverse repurchase agreements to
purchase other securities either maturing, or under an agreement to resell, on
a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolios may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by a Portfolio may decline below the price of the securities the Fund is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid high-grade debt
securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
In addition, whenever borrowings exceed 5% of the Portfolio's total assets, the
Portfolio will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their
daily cash positions, the Portfolios may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share (i.e., "money market funds").
The International Equity and International Emerging Markets Portfolios may
purchase shares of investment companies investing primarily in foreign
securities, including so called "country funds." Country funds have portfolios
consisting exclusively of securities of issuers located in one foreign country.
Securities
21
<PAGE> 323
of other investment companies will be acquired within limits prescribed by the
Investment Company Act of 1940 (the "1940 Act"). As a shareholder of another
investment company, a Portfolio 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 expenses each bears directly
in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15%
of the value of its net assets in securities that are illiquid. Variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered
under the Securities Act of 1933 (the "1933 Act") 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 or sub-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 a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
SMALL CAP GROWTH EQUITY AND SMALL CAP VALUE PORTFOLIOS. The Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 65% of their total assets in equity securities of smaller-capitalized
organizations (less than $1 billion at the time of purchase) that have limited
product lines, markets and financial resources and are dependent upon a limited
management group.
BALANCED PORTFOLIO. Fixed-income securities purchased by the
Portfolio may include domestic and dollar-denominated foreign debt securities,
including bonds, debentures, notes, equipment lease and trust certificates,
mortgage-related and asset-backed securities, guaranteed investment contracts
(GICs) and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. These securities will be rated at the time of
purchase within the four highest rating groups assigned by Moody's Investors
Service, Inc. ("Moody's") or by Standard & Poor's Corporation ("S&P") or, if
unrated, will be determined at the time of purchase to be of comparable quality
by the sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P,
respectively, are generally considered to be investment grade although they
have speculative characteristics. If a fixed-income security is reduced below
Baa by Moody's or BBB by S&P, the Portfolio's sub-adviser will dispose of the
security in an orderly fashion as soon as practicable. Investments in
securities of foreign issuers will be limited to 5% of the Portfolio's total
assets.
The market value of the Balanced Portfolio's investments in
fixed-income corporate and other securities will change in response to changes
in interest rates and the relative financial strength of each issuer. During
periods of falling interest rates, the values of long-term fixed-income
securities generally rise. Conversely, during periods of rising interest rates
the values of such securities generally decline. Changes in the financial
strength of an issuer or
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changes in the ratings of any particular security may also affect the value of
these investments.
The Balanced Portfolio may purchase asset-backed securities (i.e.,
securities backed by mortgages, installment sale contracts, credit card
receivables or other assets). The average life of asset-backed securities
varies with the maturities of the underlying instruments which, in the case of
mortgages, have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as
the result of scheduled principal payments and mortgage prepayments. The rate
of such mortgage prepayments, and hence the life of the certificates, will be
primarily a function of current market rates and current conditions in the
relevant housing markets. The relationship between mortgage prepayment and
interest rates may give some high-yielding mortgage-related securities less
potential for growth in value than conventional bonds with comparable
maturities. In addition, in periods of falling interest rates, the rate of
mortgage prepayment tends to increase. During such periods, the reinvestment
of prepayment proceeds by the Balanced Portfolio will generally be at lower
rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return may be difficult to predict precisely. To the extent that the Balanced
Portfolio purchases mortgage-related or mortgage-backed securities at a
premium, mortgage prepayments (which may be made at any time without penalty)
may result in some loss of the Balanced Portfolio's principal investment to the
extent of premium paid.
Presently there are several types of mortgage-backed securities issued
or guaranteed by U.S. Government agencies, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOS
frequently elect to be taxed as a pass-through entity known as real estate
mortgage investment conduits, or REMICs. CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in many ways. In most cases, however, payments of principal are applied to the
CMO classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are
converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PAC") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
The Balanced Fund may also purchase obligations issued or guaranteed
by the U.S. Government and U.S. Government agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the Government National Mortgage Association, are supported by
the full faith and credit of the U.S. Treasury. Others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the U.S. Treasury; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given
that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Certain U.S. Treasury and agency securities may be held by trusts that issue
participation certificates (such as TIGRs and CATS). The Balanced Portfolio
may purchase these certificates and may also
23
<PAGE> 325
purchase Treasury receipts and other stripped securities, which represent
beneficial ownership interests in either future interest payments or the future
principal payments on U.S. Government obligations. These instruments are
issued at a discount to their "face value" and may (particularly in the case of
stripped mortgage-backed securities) exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e.,
discount debt obligations that do not make periodic interest payments).
Zero-coupon bonds are subject to greater market fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is
expected that the annual portfolio turnover rate for each Portfolio (including
both the equity and fixed income portions of the Balanced Portfolio) will not
exceed 150%. A Portfolio's annual portfolio turnover rate will not, however,
be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover rates (i.e., over 100%) will generally result in
higher transaction costs to a Portfolio.
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
A Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval. However, shareholders
will be notified of any such change. No assurance can be provided that a
Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). Several of the Portfolios' fundamental investment policies,
which are set forth in full in the Statement of Additional Information, are
summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government
securities and related repurchase agreements) if more
than 5% of its total assets will be invested in the
securities of any one issuer, except that up to 25%
of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) subject to the foregoing 25% exception, purchase more
than 10% of the outstanding voting securities of any
issuer;
(3) invest 25% or more of its total assets in one or more
issuers conducting their principal business
activities in the same industry; and
(4) borrow money in amounts over one-third of the value
of its total assets at the time of such borrowing.
These investment limitations are applied at the time investment
securities are purchased.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. If the Fund determines that any
commitment is no
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longer in the best interests of a Portfolio, it will revoke the commitment by
terminating sales of shares of the Portfolio in the state involved.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISERS
The Adviser to the
COMPASS CAPITAL FUNDS is PNC Asset Management Group.
Each of the Funds within the Compass Capital Fund Family is managed by an
experienced portfolio manager who is a member of one of PNC Asset Management
Group's distinguished equity portfolio management subsidiaries.
The eight portfolios and their investment sub-advisers and portfolio
managers are as follows:
<TABLE>
<CAPTION>
Compass Capital Fund Investment Sub-Adviser Portfolio Manager
-------------------- ---------------------- -----------------
<S> <C> <C>
Value Equity PCM(1) Earl J. Gaskins; Vice President of PCM
since 1985; Portfolio manager since
1994.
Benedict E. Capaldi; Vice President of
PCM since 1995; prior to joining PCM,
Senior Vice President and portfolio
manager with Radnor Capital
Management, President of Chestnut Hill
Advisors, Inc. and Managing Director
of Brandywine Asset Management, Inc.;
Portfolio co-manager since 1995.
Growth Equity PEAC(2) Robert K. Urquhart; Managing Director
of PEAC's Large Cap Growth Equity
Investments area since 1995; prior to
joining PEAC, Chief Investment Officer
and partner of Cole Financial
Group,Inc., a partner of Seacliff
Holdings, Inc. and of RCM Capital
Management; Portfolio manager since
1995.
Core Equity PCM(1) Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; portfolio manager with PEAC
during 1995; Portfolio manager since
1995.
</TABLE>
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<PAGE> 327
<TABLE>
<CAPTION>
Compass Capital Fund Investment Sub-Adviser Portfolio Manager
-------------------- ---------------------- -----------------
<S> <C> <C>
Small Cap Value PCM(1 Susan D. Menzies; Vice President of
PCM since 1985; Portfolio manager
since 1994.
Small Cap Growth PEAC(2 William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank from 1986 to
1995; Portfolio manager since its
inception.
International Equity PCM(1) William George Greig; Vice President
of PCM; prior to joining PCM, Managing
Partner of Akamai International,
Investment Director of The Framlington
Group and Research Director with
Pilgrim Baxter & Associates; Portfolio
manager since 1995.
International Emerging PCM(1) William George Greig (see above);
Markets Portfolio manager since its inception.
Balanced PCM and BlackRock(1)(3) Daniel B. Eagan (see above); Portfolio
co-manager since 1994.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since 1995.
Keith T. Anderson; Managing Director
and co-chair of Portfolio Management
Group and Investment Strategy
Committee of BlackRock since 1988;
Portfolio co-manager since 1995.
</TABLE>
___________________
(1) Provident Capital Management, Inc. ("PCM") has its primary offices at
1700 Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1835
Market Street, 15th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary
offices at 345 Park Avenue, New York, New York 10154.
PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1835 Market Street, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services service, PAMG
and the Portfolios' sub-advisers are entitled to fees, computed daily on a
Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth
below. All
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<PAGE> 328
sub-advisory fees are paid by PAMG, and do not represent an extra charge to the
Portfolios.
<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for
Each Portfolio Except the International Portfolios
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
- ------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .55% .40%
$1 billion -- $2 billion .50 .35
$2 billion -- $3 billion .475 .325
greater than $3 billion .45 .30
<CAPTION>
Maximum Annual Contractual Fee Rate for
the International Equity Portfolio
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
first $1 billion .75% .60%
$1 billion -- $2 billion .70 .55
$2 billion -- $3 billion .675 .525
greater than $3 billion .65 .50
<CAPTION>
Maximum Annual Contractual Fee Rate for the
International Emerging Markets Portfolio
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
first $1 billion 1.275% 1.10%
$1 billion -- $2 billion 1.20 1.05
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.10 .95
</TABLE>
Although the advisory fee rate payable by the International Emerging
Markets Portfolio is higher than the rate payable by mutual funds investing in
domestic securities, the Fund believes it is comparable to the rates paid by
many other funds with similar investment objectives and policies and is
appropriate for the Portfolio in light of its investment objective and policies.
For information about the advisory fees the Portfolios expect to pay
for the current fiscal year, see "What Are the Expenses of the Portfolios?" For
their last fiscal year the Portfolios paid investment advisory fees at the
following annual rates after voluntary fee waivers: Value Equity Portfolio
.44%; Growth Equity Portfolio .40%; Small Cap Growth Equity Portfolio .45%; Core
Equity Portfolio .40%; Small Cap Value Equity Portfolio .50%; International
Equity Portfolio .60%; International Emerging Markets Portfolio 1.04%; and
Balanced Portfolio .40%.
Brokerage transactions for the Portfolios may be directed through
registered broker/dealers who have entered into dealer agreements with the
Fund's Distributor, subject to the requirements of best execution.
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania Merchant Group
Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI
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<PAGE> 329
is entitled to a fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and PDI are
entitled to receive a combined fee, computed daily and payable monthly, at an
annual rate of .20% of the first $500 million of each Portfolio's average daily
net assets, .18% of the next $500 million of each Portfolio's average daily net
assets, .16% of the next $1 billion of each Portfolio's average daily net
assets and .15% of each Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
For information about the operating expenses the Portfolios expect to
pay for the current fiscal year, see "What Are the Expenses of the Portfolio?"
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Porfolios' custodian and PFPC serves as their
transfer agent and dividend disbursing agent.
SHAREHOLDER SERVICING
The Fund intends to enter into service agreements with institutional
investors ("Institutions") (including PNC Bank, PNC Bank Ohio and their
affiliates) which provide that the Institutions will render support services to
their customers who are the beneficial owners of Service Shares. These
services are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of up to .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
Institutions may provide one or more of the following services: processing
purchase and redemption requests from customers and placing orders with the
Fund's transfer agent or the distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of up
to a separate .15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their customers, Institutions may
provide one or more of these additional services to such customers: responding
to customer inquiries relating to the services performed by the Institution and
to customer inquiries concerning their investments in Service Shares; providing
information periodically to customers showing their positions in Service
Shares; and other similar shareholder liaison services. Customers who are
beneficial owners of Service Shares should read this Prospectus in light of the
terms and fees governing their accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in Portfolio shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities. It is
intended that the services provided by Institutions under their service
agreements will not be prohibited under these laws. However, state securities
laws may differ from the interpretations of Federal law on this issue, and
banks and financial institutions may be required to register as dealers
pursuant to state law.
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<PAGE> 330
PURCHASE AND REDEMPTION OF SHARES
DISTRIBUTOR
Shares of the Portfolios are offered on a continuous basis by PDI as
distributor.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits PDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of any portion of the fees paid
by the Fund, past profits or other sources. The Fund is not required or
permitted under the plan to make distribution payments with respect to Service
Shares over and above the investment advisory and other fees it pays for
non-distribution services. The plan merely permits the reallocation of a
portion of these fees to pay for distribution related and shareholder servicing
activities.
PURCHASE OF SHARES
Service Shares are offered without a sales load to Institutions acting
on behalf of their customers [, as well as to certain persons who were
shareholders of the Compass Capital Group of Funds on January __ 1996, when it
was combined with the Fund]. Service Shares will normally be held of record by
Institutions or in the names of nominees of Institutions. Share purchases are
normally effected through a customer's account at an Institution through
procedures established in connection with the requirements of the account. In
these cases, confirmations of Share purchases and redemptions will be sent to
the Institutions. Beneficial ownership of Shares will be recorded by the
Institutions and reflected in the account statements provided by such
Institutions to their customers. Investors wishing to purchase Shares should
contact their Institutions.
Service Shares are sold at their net asset value per Share next
computed after an order is received by PFPC. Orders received by PFPC by 4:00
p.m. (Eastern Time) on a Business Day are priced the same day. A "Business
Day" is any weekday that the New York Stock Exchange (the "NYSE") and the
Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7379. Orders
received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following
Business Day.
Payment for Service Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also,
in the discretion of the Fund, be made in the form of securities that are
permissible investments for the respective Portfolios. For further
information, see the Statement of Additional Information. The minimum initial
investment is [$5,000]; however, Institutions may set a higher minimum for
their customers. There is no minimum subsequent investment requirement.
The Fund may in its discretion waive the minimum investment amount and
may reject any order for Service Shares.
REDEMPTION OF SHARES
Customers of Institutions may redeem Service Shares in accordance with
the procedures applicable to their accounts with the Institutions. These
procedures will vary according to the type of account and the Institution
involved, and customers should consult their account managers in this regard.
It is the responsibility of Institutions to transmit redemption orders to PFPC
and credit their customers' accounts with redemption proceeds on a timely
basis. In the case of shareholders holding share certificates, the
certificates must accompany the redemption request.
29
<PAGE> 331
Institutions may place redemption orders by telephoning PFPC at (800)
441-7379. Shares are redeemed at their net asset value per share next
determined after PFPC's receipt of the redemption order. The Fund and its
service providers will not be liable for any loss, liability, cost or expense
for acting upon telephone instructions that are reasonably believed to be
genuine. In attempting to confirm that telephone instructions are genuine, the
Fund may use such procedures as are considered reasonable, including recording
those instructions and requesting information as to account registration (such
as the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
[provided that the Fund's custodian is also open for business]. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) [or on a day when
the Fund's custodian is closed] is normally wired in Federal funds on the next
Business Day following redemption [on which the Fund's custodian is open for
business]. The Fund reserves the right to wire redemption proceeds within
seven days after receiving a redemption order if, in the judgment of PAMG, an
earlier payment could adversely affect a Portfolio. No charge for wiring
redemption payments is imposed by the Fund, although Institutions may charge
their customer accounts for redemption services. Information relating to such
redemption services and charges, if any, should be obtained by customers from
their Institutions.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [400 Bellevue Parkway, Wilmington, DE 19809].
The Fund may redeem Service Shares in any Portfolio account if the
account balance drops below [$5,000] as the result of redemption requests and
the shareholder does not increase the balance to at least [$5,000] upon thirty
days' written notice. If a customer has agreed with an Institution to maintain
a minimum balance in his account with the Institution, and the balance in the
account falls below that minimum, the customer may be obligated to redeem all
or part of his or her Shares in the Portfolios to the extent necessary to
maintain the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
Persons who were shareholders of the Compass Capital Group of Funds
which were combined with the Fund on January __, 1996, may also purchase and
redeem Service Shares of the same Portfolio and for the same account in which
they held Shares on that date through the procedures described in this section.
PURCHASES. Purchase orders may be placed through the transfer agent.
The minimum investment is $100. Purchases through the Automatic Investment
Plan described below are subject to a lower purchase minimum. The name of the
Portfolio for which Shares are purchased must appear on the check or [Federal
Reserve Draft.] Investors may also wire Federal funds in connection with the
purchase of Shares. The wire instructions must include the name of the
Portfolio, the name of the account registration, and the shareholder account
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<PAGE> 332
number. Before wiring any funds, however, an investor must call the Portfolios
at 1-800-438-5789 in order to confirm the wire instructions. Purchase orders
which are received by the transfer agent, together with payment, before the
close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time)
on any Business Day (as defined above) are priced according to the net asset
value next determined on that day plus any applicable sales charge.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an
investor in Shares of a Portfolio may arrange for periodic investments in that
Portfolio through automatic deductions from a checking or savings account by
completing the AIP Application Form. The minimum pre-authorized investment
amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their
Shares of the Portfolios at any time by sending a written redemption request in
proper form to Compass Capital Funds c/o PFPC, Inc., P.O. Box 8907, Wilmington,
Delaware 19899-8907.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Shareholders holding share
certificates must send their certificates with the redemption request.
Additional documentary evidence of authority is required by PFPC in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above. This privilege may not be used to redeem Shares in certificated form.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at [P.O. Box 8907, Wilmington, DE 19899-8907].
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described above to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not
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<PAGE> 333
be liable for any loss, liability, cost or expense for acting upon telephone
instructions reasonably believed to be genuine.
The Portfolios offer a Systematic Withdrawal Plan ("SWP") which may be
used by shareholders who wish to receive regular distributions from their
accounts. Upon commencement of the SWP, the account must have a current value
of $10,000 or more in a Portfolio. Shareholders may elect to receive automatic
cash payments of $100 or more either monthly, every other month, quarterly,
three times a year, semi-annually, or annually. Automatic withdrawals are
normally processed on the 25th day of the applicable month or, if such day is
not a Business Day, on the next Business Day and are paid promptly thereafter.
An investor may utilize the SWP by completing the SWP Application Form.
Shareholders should realize that if withdrawals exceed income
dividends their invested principal in the account will be depleted. Thus,
depending upon the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, their original investment could
be exhausted entirely. To participate in the SWP, shareholders must have their
dividends automatically reinvested and may not hold share certificates.
Shareholders may change or cancel the SWP at any time, upon written notice to
the transfer agent.
HOW IS NET ASSET VALUE CALCULATED?
The net asset value for the Portfolios' Service Share is calculated as
of the close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern
Time) on each Business Day by dividing the value of all securities and other
assets owned by a Portfolio that are allocated to its Service Shares, less the
liabilities charged to the Service Shares, by the number of the Portfolio's
outstanding Service Shares.
Most securities held by a Portfolio are priced based on their market
value as determined by reported sales prices or the mean between their bid and
asked prices. Portfolio securities which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except when an occurrence
subsequent to the time a value was so established is likely to have changed
such value. Securities for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to
investors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid within ten days after the end of
each quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by each Portfolio at least annually. The period for
which dividends are payable and the time for payment are subject to change by
the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and
fractional Service Shares of the same Portfolio on which the distributions are
paid, unless a shareholder elects to receive distributions in cash. This
election, or any revocation thereof, must be made in writing to PFPC, and will
become effective with respect to distributions paid after its receipt by PFPC.
32
<PAGE> 334
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. If a
Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are treated as a return of capital), whether the distributions are paid in
cash or reinvested in additional Shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds Service Shares and whether such gain was reflected in
the price paid for the Shares. All other distributions, to the extent they are
taxable, are taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends
received deduction allowed to certain corporations only to the extent of the
total qualifying dividends received by a Portfolio from domestic corporations
for a taxable year. Corporate shareholders will have to take into account the
entire amount of any dividend received in determining their business untaxed
reported profits adjustment for Federal alternative minimum and environmental
tax purposes. The dividends received deduction is not available for capital
gain dividends.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying Shares on or just before a dividend
record date should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Service Shares depending upon their tax
basis and their price at the time of redemption, transfer or exchange.
Dividends and certain interest income earned by a Portfolio from
foreign securities may be subject to foreign withholding taxes or other taxes.
So long as more than 50% of the value of a Portfolio's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect, for U.S. federal income tax purposes, to
treat certain foreign taxes paid by it, including generally any withholding
taxes and other foreign income taxes, as paid by its shareholders. It is
possible that the International Equity and International Emerging Markets
Portfolios will make this election in certain years. If a Portfolio makes the
election, the amount of such foreign taxes paid by the Portfolio will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
either (a) to credit his proportionate amount of such taxes against a
shareholder's U.S. Federal income tax liabilities, or (b) if a shareholder
itemizes deductions, to deduct such proportionate amounts from U.S. Federal
taxable income.
This is not an exhaustive discussion of applicable tax consequences
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. The application of state and local income taxes to investments
in the Portfolios may differ from the Federal income tax consequences described
33
<PAGE> 335
above. In addition, shareholders who are non-resident alien individuals,
foreign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or
administrative changes or court decisions may materially affect the tax
consequences of investing in the Portfolios.
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January __, 1996 the Fund changed its name from The PNC
Fund to Compass Capital Funds. The Declaration of Trust authorizes the Board
of Trustees to classify and reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Trustees have authorized
the issuance of an unlimited number of shares in twenty-eight investment
portfolios. Each Portfolio described in this Prospectus offers five separate
classes of shares -- Institutional Shares, Service Shares, Investor A Shares,
Investor B Share and Investor C Shares. This prospectus relates only to
Service Shares of the eight portfolios described herein, each of which is
classified as a diversified portfolio under the 1940 Act.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. In addition, each class of
Investor Shares is sold with different sales charges. Because of these "class
expenses" and sales charges, the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the performance of the Portfolio's
three classes of Investor Shares. The Fund offers various services and
privileges in connection with its Investor Shares that are not generally
offered in connection with its Institutional and Service Shares, including an
automatic investment plan, automatic withdrawal plan and checkwriting. For
further information regarding the Fund's Institutional and Investor Share
classes, contact [name and number].
Each share of a Portfolio has a par value of $.001, represents an
interest in that Portfolio and is entitled to the dividends and distributions
earned on that Portfolio's assets as are declared in the discretion of the
Board of Trustees. The Fund's shareholders are entitled to one vote for each
full share held and proportionate fractional votes for fractional shares held,
and will vote in the aggregate and not by class, except where otherwise
required by law or as determined by the Board of Trustees. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
On January ___, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp.
HOW IS PERFORMANCE CALCULATED?
Performance information for Service Shares of the Portfolios may be
quoted in advertisements and communications to shareholders. Total return will
be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Service Shares of a Portfolio over the measuring
period. Total return may also be calculated on an aggregate total return basis
for various periods. Aggregate total return reflects the total percentage
change in value
34
<PAGE> 336
over the measuring period. Both methods of calculating total return assumes
that dividends and capital gain distributions made by a Portfolio during the
period are reinvested in additional Service Shares.
The yield of Service Shares of the Balanced Portfolio is computed by
dividing the net income allocated to a Service Share during a 30-day (or one
month) period by the net asset value of a Service Share on the last day of the
period and annualizing the result on a semi-annual basis.
The performance of a Portfolio's Service Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indexes, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the performance of a Portfolio's
Service Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and to the performance of the S&P 500 Index, EAFE, the Dow Jones
Industrial Average, the Dimensional Fund Advisor's Small Cap Index, the Lehman
GMNA Index, the Lehman Index of Baa-rated Corporate Bonds, the T-Bill Index,
the "stocks, bonds and inflation index" published annually by Ibbotson
Associates, the Lipper International Fund Index, the Lehman Government
Corporate Bond Index and the Financial Times World Stock Index. Performance
information may also include evaluations of the Portfolios and their Shares
published by nationally recognized ranking services, and information as
reported by financial publications such as Business Week, Fortune,
Institutional Investor, Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional
nature.
In addition to providing performance information that demonstrates the
actual yield or return of Service Shares over a particular period of time, a
Portfolio may provide certain other information demonstrating hypothetical
investment returns. This information may include, but is not limited to,
illustrating the compounding effects of a dividend in a dividend reinvestment
plan or the impact of tax-deferred investing.
Performance quotations for Shares of a Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in a Portfolio will
fluctuate so that an investor's Service Shares, when redeemed, may be worth
more or less than their original cost. Since performance will fluctuate,
performance data for Service Shares of a Portfolio cannot necessarily be used
to compare an investment in such Shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Investors should remember that
performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Institutions directly to their customer
accounts in connection with investments in Service Shares will not be included
in the Portfolio performance calculations.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, COMPASS CAPITAL FUNDS have other sources of
information regarding each Fund and its portfolio holdings, strategy and
current dividend and yield levels.
35
<PAGE> 337
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL FUNDS by either using
a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) compass
For Information Related to Share Purchase and Redemptions call your investment
adviser or Compass Capital Funds at (800) xxx-xxxx
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) xxx-xxxx
Information is also available on the World Wide Web through the Internet.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing COMPASSFUNDS.COM
36
<PAGE> 338
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE 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 FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
37
<PAGE> 339
THE EQUITY
PORTFOLIOS
SERVICE SHARES
PROSPECTUS
VALUE EQUITY PORTFOLIO
GROWTH
EQUITY PORTFOLIO
SMALL CAP GROWTH
EQUITY PORTFOLIO
CORE
EQUITY PORTFOLIO
SMALL CAP VALUE
EQUITY PORTFOLIO
INTERNATIONAL
EQUITY PORTFOLIO
INTERNATIONAL EMERGING
MARKETS PORTFOLIO
BALANCED PORTFOLIO
JANUARY ___, 1996
38
<PAGE> 340
THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
(INVESTOR A AND INVESTOR B SHARES OF THE VALUE EQUITY
PORTFOLIO, GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY
PORTFOLIO, CORE EQUITY PORTFOLIO, SMALL CAP VALUE EQUITY PORTFOLIO,
INDEX EQUITY PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL
EMERGING MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C> <C>
PART A PROSPECTUS
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Are The Expenses Of The Portfolios?
3. Condensed Financial Information . . . . . . . . . . . . . . . . . What Are The Portfolios' Financial Highlights?
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; What Are The Portfolios?; What
Additional Investment Policies Apply?; What Are
The Portfolios' Fundamental Investment
Limitations?
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Who Manages The Fund?
5A. Managements Discussion of Fund
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . How Frequently Are Dividends And Distributions
Made To Investors?; How Are Fund Distributions
Taxed?; How Is The Fund Organized?
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . How Are Shares Purchased And Redeemed?; How Is
Net Asset Value Calculated?; How Is The Fund
Organized?
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . How Are Shares Purchased and Redeemed?
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 341
THE EQUITY PORTFOLIOS
INVESTOR SHARES
The Compass Capital Funds(R) (the "Fund") consists of [twenty-eight]
investment portfolios. This Prospectus describes the Investor Shares of nine
of those portfolios ("Portfolios"):
- Value Equity Portfolio -
- Growth Equity Portfolio -
- Small Cap Growth Equity Portfolio -
- Core Equity Portfolio -
- Index Equity Portfolio -
- Small Cap Value Equity Portfolio -
- International Equity Portfolio -
- International Emerging Markets Portfolio -
- Balanced Portfolio -
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information dated January __, 1996 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by calling (800)
__________. The Statement of Additional Information, as supplemented from time
to time, is incorporated by reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND
ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE INDEX EQUITY PORTFOLIO SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN A PORTFOLIO (THE "INDEX MASTER
PORTFOLIO") OF THE DFA INVESTMENT TRUST COMPANY, AND THEIR OPEN-END MANAGEMENT
INVESTMENT COMPANY. THE MASTER PORTFOLIO HAS SUBSTANTIALLY THE SAME
INVESTMENT OBJECTIVE, POLICIES AND LIMITATIONS AS THE INDEX EQUITY PORTFOLIO
AND, EXCEPT AS SPECIFICALLY NOTED, IS ALSO REFERRED TO AS A "PORTFOLIO" IN THIS
PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. FOR
ADDITIONAL INFORMATION, SEE "HOW IS THE FUND ORGANIZED?"
1
<PAGE> 342
This Prospectus describes Investor A Shares and Investor B Shares of
each Portfolio except the Index Equity Portfolio and Investor C Shares of all
Portfolios.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS January ___, 1996
2
<PAGE> 343
INTRODUCING THE EQUITY PORTFOLIOS OF THE COMPASS CAPITAL FUNDS:
The Equity Portfolios of the COMPASS CAPITAL FUNDS consist of nine
diversified investment products that provide investors with a broad spectrum of
investment alternatives within the equity sector. Six of these portfolios
invest solely in U.S. stocks, two portfolios invest in non-U.S. international
stocks and one portfolio invests in a combination of U.S. stocks and bonds. A
detailed description of each portfolio appears on pages _____.
<TABLE>
<CAPTION>
COMPASS CAPITAL FUND PERFORMANCE BENCHMARK LIPPER PEER GROUP
- -------------------- --------------------- -----------------
<S> <C> <C>
Value Equity Russell 1000 Value Index Growth and Income
Growth Equity Russell 1000 Growth Index Capital Appreciation
Core Equity S&P 500 Index Growth and Income
Small Cap Growth Russell 2000 Growth Index Small Company Growth
Small Cap Value Russell 2000 Index Small Company Growth
Index Equity S&P 500 S&P 500 Index
International Equity [TBD] International
International Emerging [TBD] Emerging Markets
Markets
Balanced S&P 500 Balanced
Salomon Broad Investment
Grade Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. Provident Capital Management, Inc. ("PCM"), PNC Equity
Advisers Company ("PEAC") and BlackRock Financial Management, Inc.
("BlackRock") serve as sub-advisers to different Portfolios as described in
this Prospectus. Dimensional Fund Advisors, Inc. ("DFA") serves as investment
adviser to the Index Master Portfolio.
UNDERSTANDING THE COMPASS CAPITAL EQUITY FUNDS
This Prospectus has been crafted to provide detailed, accurate and
comprehensive information on the Compass Capital Funds. We intend this
document to be an effective tool as you explore different directions in equity
investing.
CONSIDERING THE RISKS IN EQUITY INVESTING
There can be no assurance that any mutual fund will achieve its investment
objective. The Portfolios will hold equity securities, and some or all of
the Portfolios may acquire warrants, foreign securities and illiquid securities;
enter into repurchase and reverse repurchase agreements; lend portfolio
securities to third parties; and enter into futures contracts and options and
forward currency exchange contracts. These and the other investment
practices set forth below, and their associated risks, deserve careful
consideration. Certain risks associated with international investments are
heightened because of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies Apply?"
ASKING THE KEY QUESTIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are the Expenses of the Portfolios? . . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Financial Highlights? . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Differences Among the Portfolios? . . . . . . . . . . . . . . . . . . . .
</TABLE>
3
<PAGE> 344
<TABLE>
<S> <C>
What Additional Investment Policies Apply? . . . . . . . . . . . . . . . . . . . . . .
What Are the Portfolios' Fundamental Investment Limitations? . . . . . . . . . . . . .
Who Manages the Fund? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Pricing Options Are Available to Investors? . . . . . . . . . . . . . . . . . . .
What are the Key Considerations in Selecting a Pricing Option? . . . . . . . . . . . .
How Are Shares Purchased? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Are Shares Redeemed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Are the Shareholder Features of the Fund? . . . . . . . . . . . . . . . . . . . .
What Is the Schedule of Sales Charges and Exemptions? . . . . . . . . . . . . . . . . .
How Is Net Asset Value Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . .
How Frequently Are Dividends and Distributions Made to Investors? . . . . . . . . . . .
How Are Fund Distributions Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is the Fund Organized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Can I Get More Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
[END OF PAGE]
4
<PAGE> 345
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
Below is a summary of the annual operating expenses expected to be incurred by
the Portfolios' Investor Shares for the current fiscal year ending September
30, 1996. An example based on the summary is also shown.
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY GROWTH EQUITY GROWTH EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- -------------------------------- ---------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge(1)
(as a percentage of
offering price) 4.5% None 1.0% 4.5% None 1.0% 4.5% None 1.0%
Sales Charge on
Reinvested Dividends None None None None None None None None None
Deferred Sales Charge(2)
(as a percentage of
original purchase
price or redemption
proceeds, whichever
is lower) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
ANNUAL FUND OPERATING
EXPENSES FOR INVESTOR
SHARES AFTER FEE
WAIVERS AS A PERCENTAGE
OF DAILY NET ASSETS
Advisory fees(3) .50% .50% .50% .50% .50% .50% .53% .53% .53%
12b-1 fees(4) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating expenses .72 .72 .72 .72 .72 .72 .80 .80 .80
----- ----- ----- ----- ----- ----- ---- ----- -----
Administration fees(3) .17 .17 .17 .15 .15 .15 .22 .22 .22
Shareholder
Servicing fees .40 .40 .40 .40 .40 .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17 .17 .17 .17 .17 .17
----- ----- ----- ----- ----- ----- ---- ----- -----
Total Portfolio operating
expenses(3) 1.22% 1.97% 1.97% 1.22% 1.97% 1.97% 1.33% 2.08% 2.08%
===== ===== ===== ===== ===== ===== ==== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What Is the
Schedule of Sales Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year on
Investor B Shares or after the first year on Investor C Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) Without waivers, advisory fees would be .55%, .55%, .55%, .55%, .55%,
.55% .55% .55% and .55% and administration fees would be .23%, .23%,
.23%, .23%, .23%, .23%, .23%, .23% and .23%, respectively. PAMG and
the Portfolios' Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the current fiscal year at the levels set
forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers for the fiscal year ended September 30, 1995, as restated
to reflect current expenses and fee waivers. Without waivers, total
operating expenses would be: (i) 1.33% 1.35% and 1.36%, respectively,
for Investor A Shares; (ii) 2.08%, 2.10% and 2.11%, respectively, for
Investor B Shares; and (iii) 2.08%, 2.10% and 2.11%, respectively, for
Investor C Shares. The Portfolios do not expect to incur any 12b-1
fees with respect to Investor A Shares (otherwise payable at the
maximum rate of .10%) during the current fiscal year.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
5
<PAGE> 346
<TABLE>
<CAPTION>
SMALL CAP
CORE EQUITY INDEX EQUITY+ VALUE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- --------------------------- ---------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge(1)
(as a percentage of
offering price) 4.5% None 1.0% 1.0% 4.5% None 1.0%
Sales Charge on
Reinvested Dividends None None None None None None None
Deferred Sales Charge(2)
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower) None 4.5% 1.0% 1.0% None 4.5% 1.0%
ANNUAL FUND OPERATING
EXPENSES FOR INVESTOR
SHARES AFTER FEE WAIVERS
AS A PERCENTAGE OF DAILY
NET ASSETS
Advisory Fees(3)(4) .50% .50% .50% .53% .53% .53%
12b-1 fees(5) .00 .75 .75 .00 .75 .75
Operating expenses of the
Index Master Portfolio N/A N/A N/A N/A N/A N/A
Other operating expenses .72 .72 .72 .80 .80 .80
----- ----- ----- ----- ----- -----
Administration fees(3) .15 .15 .15 .22 .22 .22
Shareholder
Servicing fees .40 .40 .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17 .17 .17
----- ----- ----- ----- ----- -----
Total Portfolio operating
expenses(3) 1.22% 1.97% 1.97% 1.33% 2.08% 2.08%
===== ===== ===== ===== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What Is the
Schedule of Sales Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year on
Investor B Shares or after the first year on Investor C Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) Without waivers, advisory fees would be .55%, .55%, .55%, .025%, .55%,
.55% and .55% and administration fees would be .23%, .23%, .23%, .23%,
.23%, .23%, and .23%, respectively. PAMG and the Portfolios'
Administrators are under no obligation to waive or continue waiving
their fees, but have informed the Fund that they expect to waive fees
as necessary to maintain the Portfolios' total operating expenses
during the current fiscal year at the levels set forth in the table.
The information in the table is based on the advisory fees,
administration fees and other expenses payable after fee waivers for
the fiscal year ended September 30, 1995, as restated to reflect
current expenses and fee waivers. Without waivers, total operating
expenses would be: (i) 1.35% and 1.36%, respectively, for Investor A
Shares; (ii) 2.10% and 2.11%, respectively, for Investor B Shares; and
(iii) 2.10%, ___% and 2.11%, respectively, for Investor C Shares. The
Portfolios do not expect to incur any 12b-1 fees with respect to
Investor A Shares (otherwise payable at the maximum rate of .10%)
during the current fiscal year.
(4) Advisory fees with respect to the Index Equity Portfolio represent
advisory fees of the Index Master Portfolio.
(5) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
+ Includes the operating expenses of the Index Master Portfolio that are
allocable to the Index Equity Porfolio.
6
<PAGE> 347
<TABLE>
<CAPTION>
INTERNATIONAL
INTERNATIONAL EQUITY EMERGING MARKETS BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- -------------------------------- ---------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge(1)
(as a percentage of
offering price) 5.0% None 1.0% 5.0% None 1.0% 4.5% None 1.0%
Sales Charge on Reinvested
Dividends None None None None None None None None None
Deferred Sales Charge(2) (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
ANNUAL FUND OPERATING
EXPENSES FOR INVESTOR
SHARES AFTER FEE WAIVERS
AS A PERCENTAGE OF DAILY
NET ASSETS
Advisory Fees(3) .70% .70% .70% 1.15% 1.15% 1.15% .50% .50% .50%
12b-1 fees(4) .00 .40 .40 .00 .75 .75 .00 .75 .75
Other operating expenses .83 .83 .83 1.10 1.10 1.10 .71 .77 .77
----- ----- ----- ----- ------ ----- ----- ----- -----
Administration fees(3) .16 .16 .16 .18 .18 .18 .17 .17 .17
Shareholder
Servicing fees .40 .40 .40 .40 .40 .40 .40 .40 .40
Other expenses(3) .17 .17 .17 .17 .17 .17 .17 .17 .17
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Portfolio operating
expenses(3) 1.53% 2.28% 2.28% 2.25% 3.00% 3.00% 1.21% 2.02% 2.02%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "What Is the
Schedule of Sales Charges and Exemptions?"
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases for redemptions made in subsequent
years. No deferred sales charge is charged after the [eighth] year on
Investor B Shares or after the first year on Investor C Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) Without waivers, advisory fees would be .75%, .75%, .75%, 1.25%,
1.25%, 1.25%, .55%, .55% and .55% and administration fees would be
.23%, .23%, .23%, .23%, .23%, .23%, .23%, .23% and .23%, respectively.
PAMG and the Portfolios' Administrators are under no obligation to
waive or continue waiving their fees, but have informed the Fund that
they expect to waive fees as necessary to maintain the Portfolios'
total operating expenses during the current fiscal year at the levels
set forth in the table. The information in the table is based on the
advisory fees, administration fees and other expenses payable after
fee waivers for the fiscal year ended September 30, 1995, as restated
to reflect current expenses and fee waivers. Without waivers, total
operating expenses would be: (i) 1.65%, 2.40% and 1.32%,
respectively, for Investor A Shares; (ii) 2.40%, 3.15% and 2.13%,
respectively, for Investor B Shares, and (iii) 2.40%, 3.15% and 2.13%,
respectively, for Investor C Shares. The Portfolios do not expect to
incur any 12b-1 fees with respect to Investor A Shares (otherwise
payable at the maximum rate of .10%) during the current fiscal year.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
7
<PAGE> 348
EQUITY-INVESTOR
EXAMPLE
An investor in Investor Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Value Equity Portfolio
A Shares* $57 $82 $109 $186
B Shares (Redemption)** 65 99 134 191***
B Shares (No Redemption) 20 62 106 191***
C Shares 40 76 115 237
Growth Equity Portfolio
A Shares* 57 82 109 186
B Shares (Redemption)** 65 99 134 191***
B Shares (No Redemption) 20 62 106 191***
C Shares 40 71 115 237
Small Cap Growth Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 140 203***
B Shares (No Redemption) 21 65 112 303***
C Shares 41 75 122 251
Core Equity Portfolio
A Shares* 57 82 109 186
B Shares (Redemption)** 65 99 134 191***
B Shares (No Redemption) 20 62 106 191***
C Shares 40 71 115 237
Index Equity Portfolio
A Shares* 35 50 65 109
B Shares (Redemption)** 44 66 88 128
B Shares (No Redemption) 14 44 77 128
C Shares 34 54 86 176
Small Cap Value Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 140 203***
B Shares (No Redemption) 21 65 112 203***
C Shares 41 75 122 251
International Equity Portfolio
A Shares* 65 96 129 223
B Shares (Redemption)** 73 113 155 224***
B Shares (No Redemption) 23 71 122 224***
C Shares 43 81 131 269
International Emerging Markets Portfolio
A Shares* 72 117 164 296
B Shares (Redemption)** 80 134 190 297***
B Shares (No Redemption) 20 43 158 297***
C Shares 50 102 166 338
Balanced Portfolio
A Shares* 57 82 108 185
B Shares (Redemption)** 66 100 137 194***
B Shares (No Redemption) 21 63 109 194***
C Shares 40 73 118 242
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the
beginning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares
after [eight] years.
The foregoing Table and Example are intended to assist investors in
understanding the costs and expenses (including the Index Equity Portfolio's
8
<PAGE> 349
pro rata share of the Index Master Portfolio's advisory fees and operating
expenses) an investor will bear either directly or indirectly. They do not
reflect any charges that may be imposed by brokers or other institutions
directly on their customer accounts in connection with investments in the
Portfolios.
The Board of Trustees of the Fund believes that the aggregate per
share expenses of the Index Equity Portfolio and the Index Master Portfolio in
which the Index Equity Portfolio's assets are invested will be approximately
equal to the expenses which the Index Equity Portfolio would incur if the Fund
retained the services of an investment adviser for the Index Equity Portfolio
and the assets of the Index Equity Portfolio were invested directly in the type
of securities held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
9
<PAGE> 350
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
The following financial information has been derived from the
financial statements incorporated by reference into the Statement of Additional
Information and has been audited by Coopers & Lybrand, L.L.P., the Fund's
independent accountants. This financial information should be read together
with those financial statements. Further information about the performance of
the Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual reports may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus. During the periods shown no Investor C Shares of the Portfolios
were outstanding. Information concerning the historic investment results of
Investor A and Investor B Shares of the Index Equity Portfolio is intended to
give investors a longer term perspective of its financial history and reflects
the financial experience of that Portfolio prior to its conversion on December
__, 1995 into a Feeder portfolio of the Index Master Portfolio.
10
<PAGE> 351
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 5/02/92(1) _______(1)
ENDED ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/95
------- ------- ------- -------- --------
<S> <C> <C> <C>
Net asset value at beginning of
period $ 11.69 $ 9.78 $10.00
------- ------ ------
Income from investment operations
Net investment income 0.23 0.22 0.12
Net gain (loss) on investments
(both realized and unrealized) 0.15 1.91 (0.24)
------- ------ ------
Total from investment
operations 0.38 2.13 (0.12)
------- ------ ------
Less distributions
Distributions from net investment
income (0.23) (0.22) (0.10)
Distributions from net realized
capital gains (0.22) -- --
------- ------ ------
Total distributions (0.45) (0.22) (0.10)
------- ------ ------
Net asset value at end of period $ 11.62 $11.69 $ 9.78
======= ====== ======
Total return 3.32%(3) 21.95%(3) (1.19)%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $10,412 $4,865 $ 16
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.05% 0.92% 0.85%(2)
Before advisory/administration
fee waivers 1.21% 0.95% 0.85%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.08% 1.96% 2.62%(2)
Before advisory/administration
fee waivers 1.92% 1.93% 2.62%(2)
Portfolio turnover rate 11% 11% 13%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
11
<PAGE> 352
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 5/02/92(1) _______(1)
ENDED ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/95
------- ------- ------- -------- --------
<S> <C> <C> <C>
Net asset value at beginning of period $ 11.57 $ 9.92 $10.09
------- ------ ------
Income from investment operations
Net investment income 0.02 0.02 0.08
Net gain (loss) on investments
(both realized and unrealized) (1.33) 2.10 (0.10)
------- ------ ------
Total from investment operations (1.31) 2.12 (0.02)
------- ------ ------
Less distributions
Distributions from net
investment income -- (0.07) (0.15)
Distributions from capital -- (0.01) --
Distributions from net realized
capital gains (0.10) (0.39) --
------- ------ ------
Total distributions (0.10) (0.47) (0.15)
------- ------ ------
Net asset value at end of period $ 10.16 $11.57 $ 9.92
======= ====== ======
Total return (11.38)%(3) 22.08%(3) (0.17)%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $ 5,049 $2,362 $ 239
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.05% 0.91% 0.85%(2)
Before advisory/administration
fee waivers 1.29% 0.97% 0.86%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 0.29% 0.18% 2.07%(2)
Before advisory/administration
fee waivers 0.05% 0.12% 2.06%(2)
Portfolio turnover rate 212% 175% 162%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
12
<PAGE> 353
FINANCIAL HIGHLIGHTS
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 9/15/93(1) _______(1)
ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/95
------- ------- -------- --------
<S> <C> <C>
Net asset value at beginning of period $10.47 $ 9.96
------ -------
Income from investment operations
Net investment income -- --
Net gain (loss) on investments (both
realized and unrealized) (0.35) 0.51
------ -------
Total from investment operations (0.35) 0.51
------ -------
Less distributions
Distributions from net investment income -- --
Distributions from net realized
capital gains -- --
------ -------
Total distributions -- --
------ -------
Net asset value at end of period $10.12 $ 10.47
====== =======
Total return (3.33)%(3) 5.12%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands) $1,620 $ 41
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.86% 1.13%(2)
Before advisory/administration fee
waivers 1.42% 1.82%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 0.07% (0.48)%(2)
Before advisory/administration fee
waivers (0.49)% (1.17)%(2)
Portfolio turnover rate 89% 9%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
13
<PAGE> 354
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
CORE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 10/13/93(1) _______(1)
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/95
------- ------- --------
<S> <C>
Net asset value at beginning of period $ 9.96
Income from investment operations
Net investment income 0.18
Net gain (loss) on investments (both
realized and unrealized) (0.03)
------
Total from investment operations 0.15
-----
Less distributions
Distributions from net investment income (0.19)
Distributions from net realized capital gains --
-----
Total distributions --
-----
Net asset value at end of period $ 9.92
======
Total return 1.54%(1)
Ratios/Supplemental data
Net assets at end of period (in thousands) $ 601
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.05%(2)
Before advisory/administration fee waivers 1.34%(2)
Ratios of net investment income to
average net assets
After advisory/administration fee waivers 1.89%(2)
Before advisory/administration fee waivers 1.60%(2)
Portfolio turnover rate 88%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
14
<PAGE> 355
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 6/02/92(1) _______(1)
ENDED ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/95
------- ------- ------- -------- --------
<S> <C> <C> <C>
Net asset value at beginning of
period $ 11.02 $10.06 $10.07
------- ------ ------
Income from investment operations
Net investment income 0.25 0.27 0.10
Net gain (loss) on investments
(both realized and unrealized) 0.04 0.96 (0.01)
------- ------ ------
Total from investment
operations 0.29 1.23 0.09)
------- ------ ------
Less distributions
Distributions from net investment
income (0.27) (0.27) (0.10)
Distributions from net realized
capital gains (0.11) -- --
------- ------ ------
Total distributions (0.38) (0.27) (0.10)
------- ------ ------
Net asset value at end of period $ 10.93 $11.02 $10.06
======= ====== ======
Total return 2.66%(3) 12.33%(3) 0.91%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $2,632 $1,263 $ 56
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.55% 0.49% 0.45%(2)
Before advisory/administration
fee waivers 0.92% 0.61% 0.64%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.35% 2.48% 2.85%(2)
Before advisory/administration
fee waivers 1.98% 2.36% 2.66%(2)
Portfolio turnover rate 17% 8% 23%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
15
<PAGE> 356
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 6/02/92(1) 10/03/94(1)
ENDED ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/95
------- ------- ------- -------- --------
<S> <C> <C> <C>
Net asset value at beginning of
period $ 13.07 $10.14 $10.06
------- ------ ------
Income from investment operations
Net investment income (0.01) 0.03 0.02
Net gain (loss) on investments
(both realized and unrealized) 0.77 3.02 0.07)
------- ------ ------
Total from investment
operations 0.76 3.05 0.09
------- ------ ------
Less distributions
Distributions from net investment
income -- (0.04) (0.01)
Distributions from net realized
capital gains (0.25) (0.08) --
------- ------ ------
Total distributions (0.25) (0.12) (0.01)
------- ------ ------
Net asset value at end of period $ 13.58 $13.07 $10.14
======= ====== ======
Total return 5.93%(3) 30.36%(3) 0.89%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $16,884 $9,084 $ 62
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.13% 0.94% 0.85%(2)
Before advisory/administration
fee waivers 1.25% 0.98% 0.89%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers (0.11)% 0.19% 0.51%(2)
Before advisory/administration
fee waivers (0.23)% 0.15% 0.47%(2)
Portfolio turnover rate 18% 41% 17%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
16
<PAGE> 357
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 6/02/92(1) 10/03/94(1)
ENDED ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/95
------- ------- ------- -------- --------
<S> <C> <C> <C>
Net asset value at beginning of
period $ 12.47 $ 9.87 $10.68
------- ------ ------
Income from investment operations
Net investment income 0.12 0.12 0.09
Net gain (loss) on investments
(both realized and unrealized) 1.15 2.59 (0.83)
------- ------ ------
Total from investment
operations 1.27 2.71 (0.74)
------- ------ ------
Less distributions
Distributions from net investment
income (0.09) (0.11) (0.07)
Distributions from net realized
capital gains (0.25) -- --
------- ------ ------
Total distributions (0.34) (0.11) (0.07)
------- ------ ------
Net asset value at end of period $ 13.40 $12.47 $ 9.87
======= ====== ======
Total return 10.24%(3) 27.72%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $14,433 $3,669 $ 58
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.35% 1.25% 1.20%(2)
Before advisory/administration
fee waivers 1.54% 1.31% 1.21%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 0.96% 1.27% 2.59%(2)
Before advisory/administration
fee waivers 0.77% 1.21% 2.58%(2)
Portfolio turnover rate 37% 31% 16%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
17
<PAGE> 358
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
----------------- -----------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 6/17/94(1) _______(1)
ENDED ENDED ENDED
9/30/95 9/30/94 9/30/95
------- ------- --------
<S> <C>
Net asset value at beginning of period $10.00
------
Income from investment operations
Net investment income 0.02
Net gain (loss) on investments
(both realized and unrealized) 0.52
------
Total from investment
operations 0.54
------
Less distributions
Distributions from net investment
income --
Distributions from net realized
capital gains --
------
Total distributions --
------
Net asset value at end of period $10.54
======
Total return 5.40%(3)
Ratios/Supplemental data
Net assets at end of period
(in thousands) $2,857
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 2.15%(2)
Before advisory/administration
fee waivers 3.13%(2)
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 0.74%
Before advisory/administration
fee waivers (0.24)%(2)
Portfolio turnover rate 4%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
18
<PAGE> 359
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE
OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B
----------------- ----------
SHARES
-----------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR 5/14/90(1) 10/03/94(1)
ENDED ENDED ENDED ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90 9/30/95
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $12.42 $11.53 $10.82 $ 9.13 $10.00
----- ----- ----- ----- -----
Income from investment
operations
Net investment income 0.32 0.30 0.34 0.38 0.12
Net realized gain
(loss) on
investments (0.38) 1.14 1.22 1.77 (0.88)
----- ----- ----- ----- -----
Total from
investment
operations (0.06) 1.44 1.56 2.15 (0.76)
----- ----- ----- ----- -----
Less distributions
Distributions from net
investment
income (0.32) (0.29) (0.39) (0.34) (0.11)
Distributions from net
realized capital gains (0.06) (0.26) (0.46) (0.12) --
----- ----- ----- ----- -----
Total distributions (0.38) (0.55) (0.85) (0.46) (0.11)
----- ----- ----- ----- -----
Net asset value at end
of period $11.98 $12.42 $11.53 $10.82 $ 9.13
====== ====== ====== ====== ======
Total return 0.50%(3) 12.80%(3) 15.17%(3) 24.04%(3) (7.64)%(1)
Ratios/Supplemental data
Net assets at end of
period (in thousands) $62,307 $39,529 $8,481 $4,265 $3,960
Ratios of expenses to
average net assets
After advisory/
administration
fee waivers 1.05% 0.91% 0.95% 1.15% 1.15%(2)
Before advisory/
administration
fee waivers 1.31% 1.09% 1.51% 1.86 1.90%(2)
Ratios of net investment
income to
average net assets
After advisory/
administration
fee waivers 2.77% 2.79% 3.28% 3.70% 3.07%(2)
Before advisory/
administration
fee waivers 2.51% 2.61% 2.72% 2.99% 2.32%(2)
Portfolio turnover rate 54% 32% 36% 45% 37%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
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<PAGE> 360
WHAT ARE THE PORTFOLIOS?
The COMPASS CAPITAL FUNDS consist of [28] portfolios and have been structured to
include many different investment styles so that investors may participate
across multiple disciplines in order to seek their long-term financial goals.
The Equity Portfolios of the COMPASS CAPITAL FUNDS consist of nine investment
products that provide investors with a broad spectrum of investment
alternatives within the equity sector. Six of these Portfolios invest solely
in U.S. stocks, two Portfolios invest in non-U.S. international stocks and one
Portfolio invests in a combination of U.S. stocks and bonds.
In certain investment cycles and over certain holding periods, an equity fund
that invests according to a "value" style or a "growth" style may perform above
or below the market. An investment program that combines these multiple
disciplines allows investors to select from among these various product options
in the way that most closely fits the individual's investment goals and
sentiments.
INVESTMENT OBJECTIVES EACH OF THE NINE COMPASS CAPITAL FUND EQUITY
PORTFOLIOS SEEKS TO PROVIDE
LONG-TERM CAPITAL APPRECIATION.
THE CORE EQUITY AND VALUE EQUITY PORTFOLIOS
PURSUE A SECONDARY OBJECTIVE OF CURRENT
INCOME FROM DIVIDENDS.
THE BALANCED PORTFOLIO PURSUES A SECONDARY
OBJECTIVE OF CURRENT INCOME FROM AN
ALLOCATION TO FIXED INCOME SECURITIES.
TO MEET ITS INVESTMENT OBJECTIVE, EACH
PORTFOLIO EMPLOYS A SPECIFIC INVESTMENT
STYLE, AS DESCRIBED BELOW.
[END OF PAGE]
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<PAGE> 361
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
<TABLE>
<CAPTION>
Performance
Compass Capital Fund Investment Style Portfolio Emphasis Benchmark
- -------------------- ---------------- ------------------
<S> <C> <C> <C>
Value Equity Pursues equity securities (defined as common Stocks with price/earnings and price/book Russell 1000
stocks or securities convertible into common ratios at time of purchase below average for Value Index
stocks) which the sub-adviser believes are benchmark and capitalization in excess of $1
undervalued. A security's earnings trend billion.
and its dividend growth rate will also be
factors considered in security selection.
Growth Equity Pursues stocks with earnings growth Stocks with growth rate estimates in excess Russell 1000
potential. Emphasizes stocks which the sub- of average for benchmark and capitalization Growth Index
adviser considers to have favorable and in excess of $1 billion.
above-average earnings growth prospects.
Core Equity Combines value and growth style as sub- Similar sector weightings as benchmark, with S&P 500 Index
advisor identifies market opportunity. over- or under-weighting in particular
securities within those sectors.
Small Cap Growth Pursues small cap stocks with earnings Stocks with growth rate estimates in excess Russell 2000
growth potential. Emphasizes small cap of average for benchmark and capitalization Growth Index
stocks which the sub-adviser considers to below $1 billion.
have favorable and above-average earnings
growth prospects.
</TABLE>
21
<PAGE> 362
<TABLE>
<S> <C> <C> <C>
Small Cap Value Pursues small cap stocks which the sub- Stocks with price/earnings and price/book Russell
adviser believes are undervalued. A ratios below average for benchmark and 2000 Index
security's earnings trend and its dividend capitalization below $1 billion.
growth rate will also be factors considered
in security selection.
Index Equity Invests all of its assets in the U.S. Large The Index Master Portfolio holds S&P 500
Company Series (the "Index Master substantially all the stocks of the S&P 500
Portfolio") of The DFA Investment Trust Index in approximately the same proportions
Company. The Index Master Portfolio in turn as they are represented in the Index.
uses a passive investment style that pursues
the replication of the S&P 500 Index return.
International Equity Pursues non-dollar denominated stocks of At least two thirds of portfolio assets are [TBD]
issuers in countries included in the MSCI invested in international stocks.
Europe , Australia and the Far East Index
("EAFE"). Within this universe, a value Stocks with price/earnings ratios below
style of investing is employed to select average for a securities' home market or
stocks which the sub-adviser believes are stock exchange.
undervalued. A security's earnings trend
and its dividend growth rate will also be Diversification across countries, industry
factors considered in security selection. groups and companies with investment at all
The sub-adviser will also consider times in at least three foreign countries.
macroeconomic factors such as the prospects
for relative economic growth among certain
foreign countries, expected levels of
inflation, government policies influencing
business conditions and the outlook for
currency relationships.
</TABLE>
22
<PAGE> 363
<TABLE>
<S> <C> <C> <C>
International Pursues non-dollar denominated stocks of At least 65% of portfolio assets in stocks [TBD]
Emerging Markets issuers in emerging country markets of emerging market issuers. Maximum of 35%
(generally any country considered to be of portfolio assets may be held in issues of
emerging or developing by the World Bank, developed nations, including the United
the International Finance Corporation or the States.
United Nations). Within this universe, a
value style of investing is employed to Stocks with price/earnings ratios below
select stocks which the sub-adviser believes average for a securities' home market or
are undervalued. The sub-adviser will also stock exchange.
consider macroeconomic factors such as the
prospects for relative economic growth among Ordinarily, stocks of issuers in at least
certain foreign countries, expected levels three emerging markets will be held.
of inflation, government policies
influencing business conditions and the
outlook for currency relationships.
Balanced Pursues a blend of equity and fixed income Maintains a minimum 25% investment in fixed S&P 500 and
securities to deliver total return through income senior securities. Salomon Broad
capital appreciation and current income. Investment Grade
Index
Equity Portion: Equity Portion:
Combines value and growth style as sub- Similar sector weightings as benchmark, with
adviser identifies market opportunity. over- or under-weighting in particular
securities within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and security Dollar denominated investment grade bonds,
selection across a broad universe of fixed including U.S. Government, mortgage- backed,
income securities. asset-backed and corporate debt securities.
</TABLE>
23
<PAGE> 364
WHAT ADDITIONAL INVESTMENT POLICIES APPLY?
The discussion below applies to each of the Portfolios.
EQUITY SECURITIES. During normal market conditions each Portfolio,
except the Balanced Portfolio, will normally invest at least 80% of the value
of its total assets in equity securities. The Portfolios will invest primarily
in equity securities of U.S. issuers, except the International Equity and
International Emerging Markets Portfolios, which will invest primarily in
foreign issuers. Equity securities include common stock and preferred stock
(including convertible preferred stock); bonds, notes and debentures
convertible into common or preferred stock; stock purchase warrants and rights;
equity interests in trusts and partnerships; and depositary receipts of
companies.
FOREIGN SECURITIES. Investing in securities of foreign issuers
involves considerations not typically associated with investing in securities
of companies organized and operated in the United States. Because foreign
securities generally are denominated and pay dividends or interest in foreign
currencies, the value of a Portfolio that invests in foreign securities as
measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations.
In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. While the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, a Portfolio's foreign investments may be less liquid and their
prices may be more volatile than comparable investments in securities in U.S.
companies. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
The expense ratios of the International Equity and International
Emerging Markets Portfolios are expected to be higher than those of Portfolios
investing primarily in domestic securities. The costs attributable to
investing abroad are usually higher for several reasons, such as the higher
cost of investment research, higher cost of custody of foreign securities,
higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
As stated, the International Emerging Markets Portfolio will invest
its assets in countries with emerging economies or securities markets. These
countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The
Czech Republic, Ecuador, Greece, Hungary, India, Israel, Lebanon, Malaysia,
Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam.
Political and economic structures in many of these countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries have in the past failed to recognize
24
<PAGE> 365
private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of investments in these countries and the availability to the Portfolio of
additional investments in emerging market countries. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries. There may be little financial or accounting
information available with respect to issuers located in certain emerging
market countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
The International Equity Portfolio invests primarily in equity
securities of issuers located in countries included in EAFE. Australia,
Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan,
Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden,
Switzerland and the United Kingdom are currently included in EAFE.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master
Portfolio) may invest in both sponsored and unsponsored American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository
Receipts ("GDRs") and other similar global instruments. ADRs typically are
issued by an American bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. EDRs, which are
sometimes referred to as Continental Depository Receipts, are receipts issued
in Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities. GDRs are
depository receipts structured like global debt issues to facilitate trading on
an international basis. Unsponsored ADR, EDR and GDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not
be as current as for sponsored ADRs, EDRs and GDRs, and the prices of
unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments
were sponsored by the issuer.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its
investment objective, each Portfolio (other than the Index Master Portfolio)
may write covered call options, buy put options, buy call options and write
secured put options for the purpose of hedging or earning additional income,
which may be deemed speculative or, with respect to the International Equity
and International Emerging Markets Portfolios, cross-hedging. These options
may relate to particular securities, financial instruments, foreign currencies,
stock or bond indices or the yield differential between two securities, and may
or may not be listed on a securities exchange and may or may not be issued by
the Options Clearing Corporation. A Portfolio will not purchase put and call
options where the aggregate premiums on outstanding options exceed 5% of its
net assets at the time of purchase, and will not write options on more than 25%
of the value of its net assets (measured at the time an option is written).
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. In addition, unlisted options are not subject to
the protections afforded purchasers of listed options issued by the Options
Clearing Corporation, which performs the obligations of its members if they
default.
To the extent consistent with its investment objective, each Portfolio
may also invest in futures contracts and options on futures contracts for
hedging purposes or to maintain liquidity. The value of a Portfolio's
contracts may equal or exceed 100% of the Fund's total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately
25
<PAGE> 366
afterwards the aggregate amount of margin deposits on its existing futures
positions plus the amount of premiums paid for related futures options is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of securities, the cash value of a securities index or a stated
quantity of a foreign currency. A Portfolio may sell a futures contract in
order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange
fluctuation. A Portfolio may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales
of securities, in the value of the securities to be sold. In addition, a
Portfolio may utilize futures contracts in anticipation of changes in the
composition of its holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases
an option on a futures contracts, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
during the option period. When a Portfolio sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with a Portfolio's position in a futures contract
or related option, the Fund will create a segregated account of liquid high
grade assets or will otherwise cover its position in accordance with applicable
SEC requirements.
The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of
the instruments held by a Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) a sub-adviser's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see Appendix B in the Statement of Additional
Information.
The Fund intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Portfolio's from registration as a
"commodity pool operator."
FORWARD CURRENCY EXCHANGE CONTRACTS. The Portfolios (other than the
Index Master Portfolio) may use forward foreign currency exchange contracts to
hedge against movements in the value of foreign currencies (including the
European Currency Unit (ECU)) relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. A
forward foreign currency exchange contract involves an obligation to purchase
or sell a specified currency at a future date at a price set at the time of the
contract. Foreign currency exchange contracts do not eliminate fluctuations in
the values of portfolio securities but rather allow the Portfolio to establish
a rate of exchange for a future point in time.
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated
redemption requests, or as a temporary defensive measure if its sub-adviser
determines that market conditions warrant, a Portfolio may also invest without
limitation in short-term U.S. Government obligations, high quality money
market instruments, variable and floating rate instruments (other than the
Index Master Portfolio) and repurchase agreements. The Balanced Portfolio may
also invest in these securities in furtherance of its investment objective.
26
<PAGE> 367
High quality money market instruments may include obligations issued
by Canadian corporations and Canadian counterparts of U.S. corporations and
Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. The Portfolios may also purchase U.S. dollar-denominated bank
obligations, such as certificates of deposit, bankers' acceptances and
interest-bearing savings 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. Short-term obligations purchased by a Portfolio will either have
short-term debt ratings at the time of purchase in the top two categories by
one or more unaffiliated nationally recognized statistical rating organizations
("NRSROs") or be issued by issuers with such ratings. Unrated instruments
purchased by a Portfolio will be of comparable quality as determined by its
sub-adviser. Under a repurchase agreement, a Portfolio agrees to purchase debt
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price. Repurchase agreements are in
substance loans. Default by or bankruptcy of a seller would expose a Portfolio
to possible loss because of adverse market action, expenses and/or delays in
connection with the disposition of the underlying obligations.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other
than the Index Master Portfolio) may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis.
These transactions involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), and permit a Portfolio to lock in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the price or yield obtained in a transaction
may be less favorable than the price or yield available in the market when the
securities delivery takes place. Each Portfolio's when-issued purchases and
forward commitments are not expected to exceed 25% of the value of its total
assets absent unusual market conditions. The Portfolios do not intend to
engage in when-issued purchases and forward commitments for speculative
purposes but only in furtherance of their investment objectives.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is
authorized to make limited borrowings. If the securities held by a Portfolio
should decline in value while borrowings are outstanding, the net asset value
of the Portfolio's outstanding shares will decline in value by proportionately
more than the decline in value suffered by the Portfolio's securities.
Borrowings may be made by each Portfolio (other than the Index Master
Portfolio) through reverse repurchase agreements under which a Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolios
may use the proceeds of reverse repurchase agreements to purchase other
securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolios may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by a Portfolio may decline below the price of the securities the Fund is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid high-grade debt
securities having a value at least equal to the repurchase price.
27
<PAGE> 368
A Portfolio's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its
total assets. In addition, whenever borrowings exceed 5% of the Portfolio's
total assets, the Portfolio will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their
daily cash positions, the Portfolios may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share (i.e., "money market funds").
The International Equity and International Emerging Markets Portfolios may
purchase shares of investment companies investing primarily in foreign
securities, including so called "country funds." Country funds have portfolios
consisting exclusively of securities of issuers located in one foreign country.
The Index Equity Portfolio may also invest in SPDRs and shares of other
investment companies that are structured to seek a similar correlation to the
performance of the S&P 500 Index. Securities of other investment companies
will be acquired within limits prescribed by the Investment Company Act of 1940
(the "1940 Act"). As a shareholder of another investment company, a Portfolio
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 expenses each bears directly in connection with its own
operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, cash equivalents, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15%
(10% with respect to the Index Master Portfolio) of the value of its net assets
in securities that are illiquid. Variable and floating rate instruments that
cannot be disposed of within seven days, and repurchase agreements and time
deposits that do not provide for payment within seven days after notice,
without taking a reduced price, are subject to this 15% limit. Each Portfolio
may purchase securities which are not registered under the Securities Act of
1933 (the "1933 Act") 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 or sub-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 a Portfolio during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities.
SMALL CAP GROWTH EQUITY AND SMALL CAP VALUE
PORTFOLIOS. The Small Cap Growth Equity Portfolio and Small Cap Value
Equity Portfolio will invest at least 65% of their total assets in equity
securities of smaller-capitalized organizations (less than $1 billion at the
time of purchase) that have limited product lines, markets and financial
resources and are dependent upon a limited management group.
INDEX MASTER PORTFOLIO. During normal market conditions the Index
Master Portfolio (in which all of the assets of the Index Equity
Portfolio are invested) will invest at least 95% of the value of its total
assets in securities included in the S&P 500 Index. The Index Master Portfolio
is not actively managed (through the use of economic, financial or market
analysis), and adverse performance will ordinarily not result in the
elimination of a stock from the Index Master
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<PAGE> 369
Portfolio. The Index Master Portfolio will remain fully invested in common
stocks even when stock prices are generally falling. The Index Master
Portfolio's adviser believes that over time and under normal market
conditions, the correlation between the performance of the Index Master
Portfolio and the S&P 500 Index is expected to be at least 0.95. Brokerage
costs, fees, operating expenses and tracking error among other things may cause
the Index Master Portfolio's total return to be lower than the S&P 500 Index's.
The Index Master Portfolio's adviser shall monitor tracking accuracy, and the
Board will determine what actions should be taken if tracking accuracy is not
maintained.
BALANCED PORTFOLIO. Fixed-income securities purchased by the
Portfolio may include domestic and dollar-denominated foreign debt securities,
including bonds, debentures, notes, equipment lease and trust certificates,
mortgage-related and asset-backed securities, guaranteed investment contracts
(GICs) and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. These securities will be rated at the time of
purchase within the four highest rating groups assigned by Moody's Investors
Service, Inc. ("Moody's") or by Standard & Poor's Corporation ("S&P") or, if
unrated, will be determined at the time of purchase to be of comparable quality
by the sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P,
respectively, are generally considered to be investment grade although they
have speculative characteristics. If a fixed-income security is reduced below
Baa by Moody's or BBB by S&P, the Portfolio's sub-adviser will dispose of the
security in an orderly fashion as soon as practicable. Investments in
securities of foreign issuers will be limited to 5% of the Portfolio's total
assets.
The market value of the Balanced Portfolio's investments in
fixed-income corporate and other securities will change in response to changes
in interest rates and the relative financial strength of each issuer. During
periods of falling interest rates, the values of long-term fixed-income
securities generally rise. Conversely, during periods of rising interest rates
the values of such securities generally decline. Changes in the financial
strength of an issuer or changes in the ratings of any particular security may
also affect the value of these investments.
The Balanced Portfolio may purchase asset-backed securities (i.e.,
securities backed by mortgages, installment sale contracts, credit card
receivables or other assets). The average life of asset-backed securities
varies with the maturities of the underlying instruments which, in the case of
mortgages, have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as
the result of scheduled principal payments and mortgage prepayments. The rate
of such mortgage prepayments, and hence the life of the certificates, will be
primarily a function of current market rates and current conditions in the
relevant housing markets. The relationship between mortgage prepayment and
interest rates may give some high-yielding mortgage-related securities less
potential for growth in value than conventional bonds with comparable
maturities. In addition, in periods of falling interest rates, the rate of
mortgage prepayment tends to increase. During such periods, the reinvestment
of prepayment proceeds by the Balanced Portfolio will generally be at lower
rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return may be difficult to predict precisely. To the extent that the Balanced
Portfolio purchases mortgage-related or mortgage-backed securities at a
premium, mortgage prepayments (which may be made at any time without penalty)
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<PAGE> 370
may result in some loss of the Balanced Portfolio's principal investment to the
extent of premium paid.
Presently there are several types of mortgage-backed securities issued
or guaranteed by U.S. Government agencies, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOS
frequently elect to be taxed as a pass-through entity known as real estate
mortgage investment conduits, or REMICs. CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in many ways. In most cases, however, payments of principal are applied to the
CMO classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are
converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PAC") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
The Balanced Fund may also purchase obligations issued or guaranteed
by the U.S. Government and U.S. Government agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the Government National Mortgage Association, are supported by
the full faith and credit of the U.S. Treasury. Others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the U.S. Treasury; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given
that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Certain U.S. Treasury and agency securities may be held by trusts that issue
participation certificates (such as TIGRs and CATS). The Balanced Portfolio
may purchase these certificates and may also purchase Treasury receipts and
other stripped securities, which represent beneficial ownership interests in
either future interest payments or the future principal payments on U.S.
Government obligations. These instruments are issued at a discount to their
"face value" and may (particularly in the case of stripped mortgage-backed
securities) exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e.,
discount debt obligations that do not make periodic interest payments).
Zero-coupon bonds are subject to greater market fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is
expected that the annual portfolio turnover rate for each Portfolio (including
both the equity and fixed income portions of the Balanced Portfolio) and for
the Index Master Portfolio will not exceed 150%. A Portfolio's annual
portfolio turnover rate will not, however, be a factor preventing a sale or
purchase when the adviser or sub-adviser believes investment considerations
warrant such sale or purchase. Portfolio turnover may vary greatly from year
to year as well as within a particular year. High portfolio turnover rates
(i.e.,
30
<PAGE> 371
over 100%) will generally result in higher transaction costs to a Portfolio.
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
A Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval. However, shareholders
will be notified of any such change. No assurance can be provided that a
Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment
limitations that may be changed only with the approval of a "majority of the
outstanding shares of a Portfolio" (as defined in the Statement of Additional
Information). Several of the Portfolios' fundamental investment policies,
which are set forth in full in the Statement of Additional Information, are
summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government
securities and related repurchase agreements) if more
than 5% of its total assets will be invested in the
securities of any one issuer, except that up to 25%
of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) subject to the foregoing 25% exception (other than
with respect to the Index Master Portfolio), purchase
more than 10% of the outstanding voting securities of
any issuer;
(3) invest 25% or more of its total assets in one or more
issuers conducting their principal business
activities in the same industry; and
(4) borrow money in amounts over one-third of the value
of its total assets at the time of such borrowing.
These investment limitations are applied at the time investment
securities are purchased. Notwithstanding the investment limitations, the
Index Equity Portfolio may invest all of its assets in shares of an open-end
management investment company with substantially the same investment objective,
policies and limitations of that Portfolio.
In order to permit the sale of its shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. If the Fund determines that any
commitment is no longer in the best interests of a Portfolio, it will revoke
the commitment by terminating sales of shares of the Portfolio in the state
involved.
WHO MANAGES THE FUND?
BOARD OF TRUSTEES
The business and affairs of the Fund and of The DFA Investment Trust
Company (in which the assets of the Fund's Index Equity Portfolio are invested)
are managed under the direction of their separate Boards of Trustees. The
Statement of Additional Information contains the name of each trustee and
certain background information.
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<PAGE> 372
ADVISER AND SUB-ADVISERS
The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Management Group
("PAMG"). Each of the Funds within the Compass Capital Fund Family (other than
the Index Equity Portfolio which has no investment adviser) is managed by an
experienced portfolio manager who is a member of one of PAMG's distinguished
equity portfolio management subsidiaries.
The portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
Compass Capital Fund Investment Sub-Adviser Portfolio Manager
-------------------- ---------------------- -----------------
<S> <C> <C>
Value Equity PCM(1) Earl J. Gaskins; Vice President of PCM
since 1985; Portfolio co-manager since
1994.
Benedict E. Capaldi; Vice President of
PCM since 1995; prior to joining PCM,
Senior Vice President and portfolio
manager with Radnor Capital
Management, President of Chestnut Hill
Advisors, Inc. and Managing Director
of Brandywine Asset Management, Inc.;
Portfolio co-manager since 1995.
Growth Equity PEAC(2) Robert K. Urquhart; Managing Director
of PEAC's Large Cap Growth Equity
Investments area since 1995; prior to
joining PEAC, Chief Investment Officer
and partner of Cole Financial
Group,Inc., a partner of Seacliff
Holdings, Inc. and of RCM Capital
Management; Portfolio manager since
1995.
Core Equity PCM(1) Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; portfolio manager with PEAC
during 1995; Portfolio manager since
1995.
Small Cap Value PCM(1) Susan D. Menzies; Vice President of
PCM since 1985; Portfolio manager
since 1994.
</TABLE>
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<PAGE> 373
<TABLE>
<CAPTION>
Compass Capital Fund Investment Sub-Adviser Portfolio Manager
-------------------- ---------------------- -----------------
<S> <C> <C>
Small Cap Growth PEAC(2) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank from 1986 to
1995; Portfolio manager since its
inception.
International Equity PCM(1) William George Greig; Vice President
of PCM; prior to joining PCM, Managing
Partner of Akamai International,
Investment Director of The Framlington
Group and Research Director with
Pilgrim Baxter & Associates; Portfolio
manager since 1995.
International Emerging Markets PCM(1) William George Greig (see above);
Portfolio manager since its inception.
Balanced PCM and BlackRock(1)(3) Daniel B. Eagan (see above); Portfolio
co-manager since 1994.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since 1995.
Keith T. Anderson; Managing Director
and co-chair of Portfolio Management
Group and Investment Strategy
Committee of BlackRock since 1988;
Portfolio co-manager since 1995.
</TABLE>
- -----------------
(1) Provident Capital Management, Inc. ("PCM") has its primary offices at
1700 Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1835
Market Street, 15th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary
offices at 345 Park Avenue, New York, New York 10154.
PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1835 Market Street, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services, PAMG and the
Portfolios' sub-advisers are entitled to fees, computed daily on a
Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth
below.
33
<PAGE> 374
All sub-advisory fees are paid by PAMG, and do not represent an extra charge to
the Portfolios.
<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for
---------------------------------------
Each Portfolio Except the International Portfolios
--------------------------------------------------
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
- ------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .55% .40%
$1 billion -- $2 billion .50 .35
$2 billion -- $3 billion .475 .325
greater than $3 billion .45 .30
</TABLE>
<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for
----------------------------------------
the International Equity Portfolio
----------------------------------
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
first $1 billion .75% .60%
$1 billion -- $2 billion .70 .55
$2 billion -- $3 billion .675 .525
greater than $3 billion .65 .50
</TABLE>
<TABLE>
<CAPTION>
Maximum Annual Contractual Fee Rate for the
--------------------------------------------
International Emerging Markets Portfolio
-----------------------------------------
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
first $1 billion 1.275% 1.10%
$1 billion -- $2 billion 1.20 1.05
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.10 .95
</TABLE>
Although the advisory fee rate payable by the International Emerging
Markets Portfolio is higher than the rate payable by mutual funds investing in
domestic securities, the Fund believes it is comparable to the rates paid by
many other funds with similar investment objectives and policies and is
appropriate for the Portfolio in light of its investment objective and policies.
For information about the advisory fees the Portfolios expect to pay
for the current fiscal year, see "What Are the Expenses of the Portfolios?"
For their last fiscal year the Portfolios paid investment advisory fees
at the following annual rates after voluntary fee waivers: Value Equity
Portfolio .44%; Growth Equity Portfolio .40%; Small Cap Growth Equity Portfolio
.45%; Core Equity Portfolio .40%; Index Equity Portfolio .05%; Small Cap Value
Equity Portfolio .50%; International Equity Portfolio .60%; International
Emerging Markets Portfolio 1.04%; and Balanced Portfolio .40%.
Brokerage transactions for the Portfolios may be directed through
registered broker/dealers who have entered into dealer agreements with the
Fund's distributor, subject to the requirements of best execution.
ADVISER TO INDEX MASTER PORTFOLIO
Dimensional Fund Advisors, Inc. ("DFA"), located at 1299 Ocean Avenue,
11th Floor, Santa Monica, CA 90401, serves as investment adviser to the Index
Master Portfolio.
DFA was organized in May 1981 and is engaged in the business of
providing investment management services to institutional investors. DFA's
assets under management totalled approximately $__ billion at _______, 1995.
David G. Booth and Rex A. Sinquefield, both of whom are trustees and officers
of The DFA Investment Trust Company and directors and officers of DFA,
34
<PAGE> 375
together own approximately 55% of DFA's outstanding stock and may be deemed
controlling persons of DFA.
For the services provided to the Index Master Portfolio and expenses
assumed under the advisory agreement, DFA is entitled to receive a fee at the
annual rate of .025% of the Index Master Portfolio's average daily net assets.
For the Index Master Portfolio's fiscal year ended November 30, 1995, DFA
received a fee for its investment advisory services which, on an annual basis,
equaled ___% of the Index Master Portfolio's average daily net assets.
ADMINISTRATORS
Compass Capital Group, Inc. ("CCGI"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") (the "Administrators") serve as the Fund's
co-administrators. CCGI and PFPC are indirect wholly-owned subsidiaries of PNC
Bank Corp. A majority of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania Merchant Group
Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
CCGI is entitled to a fee, computed daily and payable monthly, at an annual
rate of .03% of each Portfolio's average daily net assets, and PFPC and PDI are
entitled to receive a combined fee, computed daily and payable monthly, at an
annual rate of .20% of the first $500 million of each Portfolio's average daily
net assets, .18% of the next $500 million of each Portfolio's average daily net
assets, .16% of the next $1 billion of each Portfolio's average daily net
assets and .15% of each Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive some or all of their
administration fees from a Portfolio. PFPC also serves as the administrator,
dividend disbursing and transfer agent to the Index Master Portfolio,
for which PFPC is entitled to compensation at the annual rate of .015% of the
Index Master Portfolio's average daily net assets.
For information about the operating expenses the Portfolio's expect to
pay for the current fiscal year, see "What Are to Expenses of the Portfolios?"
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Portfolios' custodian and PFPC serves as their
transfer agent and dividend disbursing agent.
DISTRIBUTION AND SERVICE PLAN
Under the Fund's Distribution and Service Plan, Investor Shares of the
Portfolios bear the expense of payments ("distribution fees") made to PDI, as
the Fund's distributor (the "Distributor") or affiliates of PNC Bank for
distribution and sales support services. The distribution fees will be used
primarily to compensate the Distributor for distribution services and to
compensate the Distributor and PNC Bank affiliates for sales support services
provided in connection with the offering and sale of Investor Shares. The
distribution fees may also be used to reimburse the Distributor and PNC Bank
affiliates for related expenses, including payments to brokers, dealers,
financial institutions and industry professionals ("Service Organizations") for
sales support services and related expenses. Distribution fees payable under
the Plan will not exceed .10% (annualized) of the average daily net asset value
of each Portfolio's outstanding Investor A Shares and .75%
35
<PAGE> 376
(annualized) of the average daily net asset value of each Portfolio's
outstanding Investor B Shares and Investor C Shares. Payments under the Plan
are not tied directly to out-of-pocket expenses and therefore may be used by
the recipients as they choose (for example, to defray their overhead expenses).
Under the Plan, the Fund intends to enter into service agreements with
Service Organizations (including PNC Bank and its affiliates) with respect to
each class of Investor Shares pursuant to which Service Organizations will
render certain support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder servicing fee of
up to .25% (annualized) of the average daily net asset value of Investor Shares
owned by their customers, Service Organizations will provided general
shareholder liaison services. In consideration for a separate shareholder
processing fee of up to .15% (annualized) of the average daily net asset value
of Investor Shares owned by their customers, Service Organizations will provide
sub-accounting and sub-transfer agency services.
Service Organizations may charge their clients additional fees for
account services. Customers who are beneficial owners of Investor Shares
should read this Prospectus in light of the terms and fees governing their
accounts with Service Organizations.
WHAT PRICING OPTIONS ARE AVAILABLE TO INVESTORS?
The Equity and Balanced Portfolios of the Compass Capital Funds offer three
different pricing options to investors in the form of three different share
classes. These options are described below:
A-Shares (Front-End Load)
* One time, front-end sales charge at time of purchase
* No charges or fees at any time for redeeming shares
* Lower on-going expenses
* Free exchanges between other A-shares in the Compass Capital Fund
Family.
A-shares may make sense for investors with a long term perspective who want to
avoid higher on-going fees.
B-Shares (Back-End Load)
* No front-end sales charge at time of purchase
* Contingent deferred sales charge (CDSC) if shares are redeemed,
declining over 6-8 years, depending on the Portfolio, from a high of
3.00%-5.00%, depending on the Portfolio.
* Automatically convert to A-Shares eight years from purchase.
B-shares may make sense for investors who prefer to pay for professional
investment advice on an ongoing basis (asset-based sales charge) rather than
with a traditional, one-time front-end sales charge.
C Shares (Level Load)
* Low front-end sales charge of 1.00%
* Contingent deferred sales charge (CDSC) of 1.00% if shares are
redeemed within 12 months of purchase
C-shares may make sense for shorter term (relative to both B- and A-shares)
investors who prefer to pay for professional investment advice on an on-going
basis (asset-based sales charge) rather than with a traditional, one-time
front-end sales charge. Such investors may plan to make substantial
redemptions within 6 to 8 years of purchase.
36
<PAGE> 377
The pricing options for each Portfolio are described in the tables below:
Value Equity, Growth Equity, Core Equity, Small Cap Growth, Small Cap Value,
Balanced:
<TABLE>
<CAPTION>
A Shares B Shares C Shares
-------- -------- --------
<S> <C> <C> <C>
Maximum Front-End Sales Charge 4.50% 0.00% 1.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
International Equity, International Emerging Markets:
<TABLE>
<CAPTION>
A Shares B Shares C Shares
-------- -------- --------
<S> <C> <C> <C>
Maximum Front-End Sales Charge 5.00% 0.00% 1.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
Index Equity
<TABLE>
<CAPTION>
C Shares
--------
<S> <C>
Maximum Front-End Sales Charge 1.00%
12b-1 Fee 0.75%
CDSC (Redemption Charge) 1.00%
(If redeemed within 12
months of purchase)
</TABLE>
- ---------------------
* The Portfolios do not expect to incur any 12b-1 fees with respect to
Investor A Shares during the current fiscal year.
Investors wishing to purchase or redeem shares of the Funds may do so either by
mailing the investment application attached to this Prospectus along with a
check or by wiring money as specified below.
WHAT ARE THE KEY CONSIDERATIONS IN SELECTING A PRICING OPTION?
In deciding which class of Shares to purchase, investors should
consider the following:
Intended Holding Period. Over time, the cumulative distribution fees
on a Portfolio's Investor B and Investor C Shares will exceed the expense of
the maximum initial sales charge on Investor A Shares. For example, if net
asset value remains constant, the Investor B and Investor C Shares' aggregate
distribution fees would be equal to the Investor A Shares' initial maximum
sales charge between [______ years] after purchase. Thereafter, Investor B and
Investor C Shares would bear higher aggregate expenses. Investor B
shareholders, however, enjoy the benefit of permitting all their dollars to
37
<PAGE> 378
work from the time the investments are made, and Investor C shareholders pay a
low initial sales charge. Any positive investment return on the additional
invested amount would partially or wholly offset the higher annual expenses
borne by Investor B and Investor C Shares.
Because the Portfolios' future returns cannot be predicted, however,
there can be no assurance that such a positive return will be achieved.
At the end of [eight] years after the date of purchase, Investor B
Shares will convert automatically to Investor A Shares, based on the relative
net asset values of shares of each class. Investor B Shares acquired through
reinvestment of dividends or distributions are also converted at the earlier of
these dates - eight years after the reinvestment date or the date of conversion
of the most recently purchased Investor B Shares that were not acquired through
reinvestment.
Investor B Shares of the Portfolios purchased on or before [date] are
subject to a CDSC of 4.50% of the lesser of the original purchase price or the
net asset value of Investor B Shares at the time of redemption. This deferred
sales charge is reduced for shares held more than one year. Investor B Shares
of the Portfolios purchased on or before [date] convert to Investor A Shares of
a Portfolio at the end of six years after purchase. For more information about
Investor B Shares purchased before [date] and the deferred sales charge payable
on their redemption, call PFPC at [number].
Investor B shareholders also pay a contingent deferred sales charge if
they redeem during the first [eight] years after purchase, unless a sales
charge waiver applies. Similarly, Investor C shareholders pay a contingent
deferred sales charge if they redeem within the first year after purchase.
Investors expecting to redeem during this period should consider the cost of
the applicable contingent deferred sales charge in addition to the aggregate
annual Investor B and Investor C distribution fees, as compared with the cost
of the applicable initial sales charges applicable to the Investor A Shares.
Unless a reduced sales charge is applied on Investor A Shares, due to the
contingent deferred sales charges that would become payable on redemption of
Investor B Shares, an investor expecting to hold shares of a Portfolio for less
than [___ years] would generally pay lower cumulative expenses by purchasing
Investor C Shares than Investor B Shares. Because of the conversion feature on
Investor B Shares, an investor expecting to hold shares more than [eight years]
would generally pay lower cumulative expenses purchasing Investor B Shares than
by purchasing Investor C Shares.
Reduced Sales Charges. Because of reductions in the front-end sales
charge for purchases of Investor A Shares aggregating $25,000 or more, it may
be advantageous for investors purchasing large quantities of Investor Shares to
purchase Investor A Shares. In any event, the Fund will not accept any
purchase order for [$______] or more of Investor B Shares. In addition,
because the accumulated higher operating expenses of Investor C Shares may
eventually exceed the amount of the front-end sales charge associated with
Investor A Shares, investors who intend to hold their Investor Shares for an
extended period of time should consider purchasing Investor A Shares.
Waiver of Sales Charges. The entire initial sales charge on Investor
A and Investor C Shares of a Portfolio may be waived for certain eligible
purchasers allowing their entire purchase price to be immediately invested in
a Portfolio. The contingent deferred sales charge may be waived upon
redemption of certain Investor B and Investor C Shares.
38
<PAGE> 379
HOW ARE SHARES PURCHASED?
GENERAL
Initial and subsequent purchase orders may be placed through
securities brokers, dealers or financial institutions ("brokers"), or the
Transfer Agent. Generally, individual investors will purchase Investor Shares
through a broker who will then transmit the purchase order directly to the
Transfer Agent.
The minimum investment for the initial purchase of Shares is $500;
there is a $100 minimum for subsequent investments. Purchases through the
Automatic Investment Plan described below are subject to a lower initial
purchase minimum. In addition, the minimum initial investment for employees of
the Fund, the Fund's investment adviser, sub-advisers, distributor or transfer
agent or employees of their affiliates is $100.
When placing purchase orders, investors should specify whether the
order is for Investor A, Investor B or Investor C Shares of a Portfolio. All
share purchase orders that fail to specify a class will automatically be
invested in Class A Shares.
PURCHASES THROUGH BROKERS
Shares may be purchased through brokers which have entered into dealer
agreements with the Distributor. Purchase orders received by a broker and
transmitted to the Transfer Agent before the close of regular trading on the
New York Stock Exchange (currently 4:00 p.m. Eastern time) on a Business Day
will be effected at the net asset value determined that day, plus any
applicable shares charge. Payment for an order may be made by the broker in
Federal funds or other funds immediately available to the Portfolios' custodian
(the "Custodian") no later than 4:00 p.m. (Eastern time) on the third Business
Day following receipt of the purchase order.
It is the responsibility of brokers to transmit purchase orders and
payment on a timely basis. If payment is not received within the period
described above, the order will be canceled, notice thereof will be given, and
the broker and its customers will be responsible for any loss to the Fund or
its shareholders. Orders of less than $500 may be mailed by a broker to the
Transfer Agent.
PURCHASES THROUGH THE TRANSFER AGENT
Investors may also purchase Investor Shares by completing and signing
the Account Application Form and mailing it to the Transfer Agent, together
with a check in at least the minimum initial purchase amount payable to the
Compass Capital Funds. An Account Application Form may be obtained by calling
[number]. The name of the Portfolio for which Shares are purchased must also
appear on the check or [Federal Reserve Draft.] Investors may also wire
Federal funds in connection with the purchase of shares. The wire instructions
must include the name of the Portfolio, the name of the account registration,
and the shareholder account number. Before wiring any funds, an investor must
call the Portfolios at 1-800-438-5789 in order to confirm the wire
instructions. Purchase orders which are received by the Transfer Agent,
together with payment, before the close of regular trading hours on the New
York Stock Exchange (currently 4:00 p.m. Eastern time) on any Business Day (as
defined below) are priced at the net asset value next determined on that day
plus any applicable sales charge.
39
<PAGE> 380
OTHER PURCHASE INFORMATION
Shares of each Portfolio are sold on a continuous basis by PDI as
distributor (the "Distributor"). PDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Purchases may be
effected on weekdays on which both the New York Stock Exchange and the Federal
Reserve Bank of Philadelphia are open for business (a "Business Day"). Payment
for orders which are not received or accepted will be returned after prompt
inquiry. The issuance of shares is recorded on the Fund. Certificates are not
issued for fractional shares. Certificates for Investor A Shares will be
issued only upon request. No certificates will be issued for Investor B or
Investor C Shares. Payments for Shares of a Portfolio may, in the discretion
of the Fund's investment adviser, be made in the form of securities that are
permissible investments for that Portfolio. The Fund reserves the right to
reject any purchase order or to waive the minimum initial investment
requirement.
HOW ARE SHARES REDEEMED?
REDEMPTION
Shareholders may redeem their Shares for cash at any time. A written
redemption request in proper form must be sent directly to the Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for
the contingent deferred sales charge that may be charged with respect to
Investor B and Investor C Shares, there is no charge for a redemption.
Shareholders may also place redemption requests through a broker or other
institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD
INDICATE WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR
INVESTOR C SHARES. If a redeeming shareholder owns both Investor A Shares and
Investor B or Investor C Shares in the same Portfolio, the Investor A Shares
will be redeemed first unless the shareholder indicates otherwise.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Shareholders holding Investor A
Share certificates must send their certificates with the redemption request.
Additional documentary evidence of authority is required by PFPC in the event
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
EXPEDITED REDEMPTIONS
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is
40
<PAGE> 381
$500, while the minimum amount that may be wired is $10,000. The Fund reserves
the right to change these minimums or to terminate these redemption privileges.
If the proceeds of a redemption would exceed $25,000, the redemption request
must be in writing and will be subject to the signature guarantee requirement
described above. This privilege may not be used to redeem Investor A Shares in
certificated form. During periods of substantial economic or market change,
telephone redemptions may be difficult to complete.
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described above to the Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably believed to be genuine.
ACCOUNTS WITH LOW BALANCES
The Fund reserves the right to redeem a shareholder's account in any
Portfolio at any time the net asset value of the account in such Portfolio
falls below the minimum initial investment requirement amount as the result of
a redemption or an exchange request. A shareholder will be notified in writing
that the value of the shareholder's account in a Portfolio is less than the
required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS
The redemption price for Shares is the net asset value per share of
the Portfolio next determined after the request for redemption is received in
proper form by the Compass Capital Funds c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907. Proceeds from the redemption of Investor B and Investor C
Shares will be reduced by the amount of any applicable contingent deferred
sales charge. Unless another payment option is used as described above,
payment for redeemed Shares is normally made by check mailed within seven days
after acceptance by PFPC of the request and any other necessary documents in
proper order. Payment may, however, be postponed or the right of redemption
suspended as provided by the rules of the SEC. If the Shares to be redeemed
have been recently purchased by check, the Fund's transfer agent may delay the
payment of redemption proceeds, which may be a period of up to 15 days after
the purchase date, pending a determination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date
of payment upon redemption for such periods as are permitted under the 1940
Act, and may redeem Shares involuntarily or make payment for redemption in
securities or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
The COMPASS CAPITAL FUNDS offer shareholders many special features
which enable an investor to have greater investment flexibility as well as
greater access to information about the Fund throughout the investment period.
41
<PAGE> 382
Additional information on each of these features is available through
our transfer agent at (800) xxx-xxxx.
EXCHANGE PRIVILEGE
Investor A, B and C Shares of each Portfolio may be exchanged for
shares of the same Class of other portfolios of the Fund, based on their
respective net asset values, subject to any applicable sales charge.
Investor A Shares of a money market portfolios of the Fund that were
(1) acquired through the use of the exchange privilege and (2) can be traced
back to a purchase of shares in one or more investment portfolios of the Fund
for which a sales charge was paid, can be exchanged for Investor A Shares of a
portfolio subject to differential sales charges as applicable.
The exchange of Investor B and Investor C Shares will not be subject
to a CDSC, which will continue to be measured from the date of the original
purchase and will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a
written request to PFPC at the address given above. Shareholders are
automatically provided with telephone exchange privileges when opening an
account, unless they indicate on the Application that they do not wish to use
this privilege. Shareholders holding share certificates are not eligible to
exchange Investor A Shares by phone because share certificates must accompany
all exchange requests. To add this feature to an existing account that
previously did not provide this option, a Telephone Exchange Authorization Form
must be filed with PFPC. This form is available from PFPC. Once this election
has been made, the shareholder may simply contact PFPC by telephone at (800)
441-7762 (in Delaware call collect (302) 791-1194) to request the exchange.
During periods of substantial economic or market change, telephone exchanges
may be difficult to complete and shareholders may have to submit exchange
requests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
broker of record as the account from which shares are exchanged, unless
otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as defined above. In order to
participate in the automatic investment program or establish a systematic
withdrawal plan for the new account, however, an exchanging shareholder must
file a specific written request.
Any share exchange must satisfy the requirements relating to the
minimum initial investment requirement, and must be legally available for sale
in the state of the investor's residence. For Federal income tax purposes, a
share exchange is a taxable event and, accordingly, a capital gain or loss may
be realized. Before making an exchange request, shareholders should consult a
tax or other financial adviser and should consider the investment objective,
policies and restrictions of the investment portfolio into which the
shareholder is making an exchange, as set forth in the applicable prospectus.
Brokers may charge a fee for handing exchanges.
The Fund reserves the right to modify or terminate the exchange
privilege at any time. Notice will be given to shareholders of any material
modification or termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request.
Telephone exchanges may be subject to limitations as to amount or frequency,
and to other restrictions that may be established from time to time to ensure
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<PAGE> 383
that exchanges do not operate to the disadvantage of any portfolio or its
shareholders. Exchange orders may also be sent by mail to the shareholder's
broker or to the Transfer Agent at the address set forth in [heading].
AUTOMATIC INVESTMENT PLAN ("AIP")
An investor in Shares of any Portfolio may arrange for periodic
investments in that Portfolio through automatic deductions from a checking or
savings account by completing the AIP Application Form. The minimum
pre-authorized investment amount if $50.
RETIREMENT PLANS
Portfolio Shares may be purchased in conjunction with individual
retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of its
affiliates acts as custodian. For further information as to applications and
annual fees, contact the Distributor. To determine whether the benefits of an
IRA are available and/or appropriate, a shareholder should consult with a tax
adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
The Portfolios offer a Systematic Withdrawal Plan which may be used by
investors who wish to receive regular distributions from their accounts. Upon
commencement of the SWP, the account must have a current value of $10,000 or
more in a Portfolio. Shareholders may elect to receive automatic cash payments
of $100 or more either monthly, every other month, quarterly, three times a
year, semi-annually, or annually. Automatic withdrawals are normally processed
on the 25th day of the applicable month or, if such day is not a Business Day,
on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form.
Shareholders should realize that if withdrawals exceed income
dividends their invested principal in the account will be depleted. To
participate in the SWP, shareholders must have their dividends automatically
reinvested and may not hold share certificates. Shareholders may change or
cancel the SWP at any time, upon written notice to the Transfer Agent.
Purchases of additional Investor A Shares of the Fund concurrently with
withdrawals may be disadvantageous to investors because of the sales charges
involved, and, therefore, is discouraged. Investor B and Investor C Shares, if
any, that are redeemed in connection with the SWP are still subject to the
applicable CDSC.
WHAT IS THE SCHEDULE OF SALES CHARGES AND EXEMPTIONS?
INVESTOR A AND INVESTOR C SHARES
Investor A Shares are subject to a front-end sales charge determined
in accordance with the following schedule:
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<PAGE> 384
ALL PORTFOLIOS EXCEPT INTERNATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES PLACEMENT FEES
CHARGE AS SALES TO DEALERS
% OF CHARGE AS (AS % OF
AMOUNT OF TRANSACTION OFFERING % OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
----------------- ----- ----------- ------
<S> <C> <C> <C>
Less than $25,000 4.50% % 4.00%
$25,000 but less than $50,000 4.25 3.75
$50,000 but less than $100,000 4.00 3.50
$100,000 but less than $250,000 3.50 3.00
$250,000 but less than $500,000 2.50 2.00
$500,000 but less than $1,000,000 1.50 1.00
$1,000,000 and over 0.00 0.00 [0.50]*
</TABLE>
INTERNATIONAL EQUITY AND EMERGING MARKETS PORTFOLIOS
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES PLACEMENT FEES
CHARGE AS SALES TO DEALERS
% OF CHARGE AS (AS % OF
AMOUNT OF TRANSACTION OFFERING % OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
----------------- ----- ----------- ------
<S> <C> <C> <C>
Less than $25,000 5.00% % 4.50%
$25,000 but less than $50,000 4.75 4.25
$50,000 but less than $100,000 4.50 4.00
$100,000 but less than $250,000 4.00 3.50
$250,000 but less than $500,000 3.00 2.50
$500,000 but less than $1,000,000 2.00 1.50
$1,000,000 and over 0.00 0.00 [0.50]*
</TABLE>
* Placement fees the Distributor may pay to dealers, provided the fees
(including placement fees described below payable to dealers in
connection with investments of redemption proceeds from other
investment companies) do not exceed the aggregate amount of front-end
sales charges, net of dealer reallowances, on Fund shares subject to a
front-end sales charge. Dealers must refund a pro-rata portion of
such fee if the Investor A Shares are redeemed within six months.
Investor C Shares are subject to a front-end sales charge of 1.00% of
the offering price. [The Distributor may pay placement fees to dealers of up
to 1.00% of the offering price on purchases of Investor C Shares. Dealers must
refund a pro-rata portion of this fee if the Investor C Shares are redeemed
within six months.] In addition, Investor C Shares are subject to a deferred
sales charge if redeemed within twelve months of purchase of 1.00% based on the
lesser of the net asset value of the Class C Shares on the purchase date or
redemption date.
During special promotions, the entire sales charge may be reallowed to
dealers. In addition, certain dealers who enter into an agreement to provide
extra training and information on products, or marketing and related services,
and who increase sales of Shares may also receive additional payments from the
Distributor. Dealers who receive 90% or more of the sales charge may be deemed
to be "underwriters" under the 1933 Act.
SALES CHARGE WAIVERS - INVESTOR A AND INVESTOR C SHARES. The
following persons associated with the Fund, the Distributor, the Fund's
investment adviser, sub-advisers or transfer agent and their affiliates may buy
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<PAGE> 385
Investor A and Investor C Shares without paying a sales charge to the extent
permitted by these firms: (a) officers, directors and partners (and their
spouses and minor children); (b) full-time employees and retirees (and their
spouses and minor children); (c) spouses or children of such persons; and (d)
any trust, pension, profit-sharing or other benefit plan for any of the
persons set forth in (a) through (c). The following persons may also buy
Investor A and Investor C Shares without paying a sales charge: (a) persons
investing through an authorized payroll deduction plan; (b) persons investing
through an authorized investment plan for organizations which operate under
Section 501(c)(3) of the Internal Revenue Code; and (c) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio,
provided that the aggregate amount invested pursuant to this exemption equals
at least $250,000. INVESTORS WHO QUALIFY FOR ANY OF THESE EXEMPTIONS FROM THE
SALES CHARGE MUST PURCHASE INVESTOR A SHARES.
QUALIFIED PLANS. The sales charge (as a percentage of the offering
price) payable by qualified employee benefit plans ("Qualified Plans") having
at least 20 employees eligible to participate on purchases of Investor A
Investor Shares of the Portfolios aggregating less than $500,000 will be 1.00%.
No sales charge will apply to purchases by Qualified Plans of Investor A Shares
aggregating $500,000 and above. The sales charge payable by Qualified Plans
having less than 20 employees eligible to participate on purchases of Investor
A Shares of the Portfolios aggregating less than $100,000 will be 2.50%. [The
above schedule will apply to purchases by such Qualified Plans of Investor A
Investor Shares aggregating $100,000 and above.]
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the
sales charge price. Upon notice to the investor's broker or the Transfer
Agent, purchases of Investor A Shares made at any one time by the following
persons may be considered when calculating the sales charge: (a) an
individual, his or her spouse, and their children under the age of 21; (b) a
trustee or fiduciary of a single trust estate or single fiduciary account; or
(c) any organized group which has been in existence for more than six months,
if it is not organized for the purpose of buying redeemable securities of a
registered investment company, and if the purchase is made through a central
administrator, or through a single dealer, or by other means which result in
economy of sales effort or expense. An organized group does not include a
group of individuals whose sole organizational connection is participation as
credit card holders of a company, policyholders of an insurance company,
customers of either a bank or broker/dealer or clients of an investment
adviser. Purchases made by an organized group may include, for example, a
trustee or other fiduciary purchasing for a single fiduciary account or other
employee benefit plan purchases made through a payroll deduction plan.
REDUCED SALES CHARGES - INVESTOR A SHARES
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current
value of an investor's existing Investor A Shares in any of the Portfolios that
are subject to a front-end sales charge may be combined with the amount of the
investor's current purchase in determining the applicable sales charge. IN
ORDER TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION, PREVIOUS PURCHASES OF
INVESTOR A SHARES MUST BE CALLED TO THE ATTENTION OF THE FUND'S TRANSFER AGENT
BY THE INVESTOR AT THE TIME OF THE CURRENT PURCHASE.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a
Portfolio (or Investor A Shares of anther non-money market fund of the Fund), a
shareholder has a one-time right, to be exercised within 45 days, to reinvest
the redemption proceeds without any sales charges. The Transfer Agent must be
notified in writing by the purchaser, or by his or her broker, at the time the
purchase is made of the reinvestment in order to eliminate a sales charge. An
investor should consult a tax adviser concerning the tax consequences of use of
the reinvestment privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Investor A Shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of any other investment
company which were sold with a sales charge or commission. [This does not
include shares of an affiliated mutual fund which were or would be subject to a
contingent deferred sales charge upon redemption.] Such
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<PAGE> 386
purchases must be made within 60 days of the redemption, and the Fund must be
notified by the investor in writing, or by his financial institution, at the
time the purchase of Investor A Shares is made. The Distributor will offer to
pay dealers a placement fee of .25% of the net asset value of Investor A Shares
purchased by their clients or customers in this manner, provided the aggregate
of such fees (including placement fees described above payable to dealers in
connection with purchases of Investor A Shares aggregating $1,000,000 or more)
does not exceed the aggregate amount of sales charges, net of dealer
reallowances, on Investor A Shares subject to a sales charge. Dealers must
refund a pro-rata portion of such fee if the Investor A Shares are redeemed
within six months.
LETTER OF INTENT. An investor may qualify for a reduced sales charge
immediately by signing a nonbinding Letter of Intent stating the investor's
intention to invest during the next 13 months a specified amount in Investor A
Shares which, if made at one time, would qualify for a reduced sales charge.
The Letter of Intent may be signed at any time within 90 days after the first
investment to be included in the Letter of Intent. The initial investment must
meet the minimum initial investment requirement and represent at least 5% of
the total intended investment. THE INVESTOR MUST INSTRUCT THE TRANSFER AGENT
UPON MAKING SUBSEQUENT PURCHASES THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF
INTENT. All dividends and capital gains of a Portfolio that are invested in
additional Investor A Shares of the same Portfolio are applied to the Letter of
Intent.
During the term of a Letter of Intent, the Fund's transfer agent will
hold Investor A Shares representing 5% of the indicated amount in escrow for
payment of a higher sales load if the full amount indicated in the Letter of
Intent is not purchased. The escrowed Investor A Shares will be released when
the full amount indicated has been purchased. Any redemptions made during the
13-month period will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month
period, the investor will be required to pay an amount equal to the difference
between the sales charge actually paid and the sales charge the investor would
have had to pay on his or her aggregate purchases if the total of such
purchases had been made at a single time. If remittance is not received within
20 days of the expiration of the 13-month period, PFPC, as attorney-in-fact,
pursuant to the terms of the Letter of Intent, will redeem an appropriate
number of Investor A Shares held in escrow to realize the difference.
PURCHASES OF INVESTOR B AND INVESTOR C SHARES
Investor B Shares are subject to a deferred sales charge at the rates
set forth in the chart below if they are redeemed within [seven] years of
purchase. Brokers will receive commissions from the Distributor in connection
with sales of Investor B Shares. These commissions may be different than the
reallowances or placement fees paid to dealers in connection with sales of
46
<PAGE> 387
Investor A Shares. The deferred sales charge on Investor B Shares is based on
the lesser of the net asset value of the Investor B Shares on the purchase date
or redemption date.
The amount of any contingent deferred sales charge an investor must
pay on Investor B Shares depends on the number of years that elapse between the
purchase date and the date the Investor B Shares are redeemed.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
---------------------- ----------------------
ALL OTHER
PORTFOLIOS
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00%
More than two, but less than three 3.50%
More than three, but less than four 3.00%
More than four, but less than five 2.50%
More than five, but less than six 2.00%
More than six, but less than seven 1.50%
More than seven, but less than eight 1.00%
</TABLE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent
deferred sales charge on Investor B and Investor C Shares is not charged in
connection with: (1) exchanges described in "What are the Shareholder Features
of the Fund?--Exchange Privilege;" (2) redemptions made in connection with
minimum required distributions from IRA, 403(b)(7) and Qualified Plan accounts
due to the shareholder reaching age 70 1/2; (3) redemptions in connection with
a shareholder's death or disability (as defined in the Internal Revenue Code)
subsequent to the purchase of Investor B or Investor C Shares; and (4)
involuntary redemptions of Investor B and Investor C Shares in accounts with
low balances as described in "How are Shares Redeemed?" In addition, no
contingent deferred sales charge is charged on Investor B or Investor C Shares
acquired through the reinvestment of dividends or distributions.
When an investor redeems Investor B or Investor C Shares, the
redemption order is processed to minimize the amount of the contingent deferred
sales charge that will be charged. Investor B and Investor C Shares are
redeemed first from those Shares that are not subject to the deferred sales
load (i.e., Shares that were acquired through reinvestment of dividends or
distributions) and after that from the Shares that have been held the longest.
HOW IS NET ASSET VALUE CALCULATED?
Net asset value is calculated separately for each class of Investor
Shares as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by dividing the value of all securities
and other assets owned by a Portfolio (including, for the Index Equity
Portfolio, all of its shares in the Index Master Portfolio) that are allocated
to a particular class of Shares, less the liabilities charged to that class, by
the number of shares of the class that are outstanding. The net asset value
per share of the Index Master Portfolio is calculated as of the close of the
NYSE by dividing the total market value of its investments and other assets,
less any liabilities, by the total outstanding shares of the Index Master
Portfolio
Most securities held by a Portfolio are priced based on their market
value as determined by reported sales prices or the mean between their bid and
asked prices. Portfolio securities which are primarily traded on foreign
47
<PAGE> 388
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except when an occurrence
subsequent to the time a value was so established is likely to have changed
such value. Securities for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the Portfolio's sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to
investors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid within ten days after the end of
each quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by each Portfolio at least annually. The period for
which dividends are payable and the time for payment are subject to change by
the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and
fractional Shares of the same class on which the distributions are paid, unless
a shareholder elects to receive distributions in cash. This election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
As stated previously, the Index Equity Portfolio seeks its investment
objective by investing all of its investable assets in the Index Master
Portfolio, and the Index Equity Portfolio is allocated its pro rata share of
the ordinary income and deductions of the Index Master Portfolio. This net
income, less the Index Equity Portfolio's expenses incurred in operations, is
the Index Equity Portfolio's net investment income from which dividends are
distributed as described above. The Index Master Portfolio also allocates to
the Index Equity Portfolio its pro rata share of capital gains, if any.
HOW ARE FUND DISTRIBUTIONS TAXED?
Each Portfolio intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. If a
Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are treated as a return of capital), whether the distributions are paid in
cash or reinvested in additional Shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), if any, will
be taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds Investor Shares. All other distributions, to the
extent taxable, are taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends
received deduction allowed to certain corporations only to the extent of the
total qualifying dividends received by a Portfolio from domestic corporations
for a taxable year. Corporate shareholders will have to take into account the
entire amount of any dividend received in determining their business untaxed
reported profits adjustment for Federal alternative minimum and environmental
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<PAGE> 389
tax purposes. The dividends received deduction is not available for capital
gain dividends.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
following January.
An investor considering buying Shares on or just before a dividend
record date should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Shares depending upon their tax basis and
their price at the time of redemption, transfer or exchange. Generally,
shareholders may include sales charges paid on the purchase of Shares in their
tax basis for the purposes of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if a shareholder exchanges the
Shares for Shares of another Portfolio within 90 days of purchase and is able
to reduce the sales charges applicable to the new Shares (by virtue of the
Fund's exchange privilege, the amount equal to such reduction may not be
included in tax basis of the shareholder's exchanged Shares but may be included
(subject to the same limitation) in the tax basis of the new Shares.
Dividends and certain interest income earned by a Portfolio from
foreign securities may be subject to foreign withholding taxes or other taxes.
So long as more than 50% of the value of a Portfolio's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect, for U.S. federal income tax purposes, to
treat certain foreign taxes paid by it, including generally any withholding
taxes and other foreign income taxes, as paid by its shareholders. It is
possible that the International Equity and International Emerging Markets
Portfolios will make this election in certain years. If a Portfolio makes the
election, the amount of such foreign taxes paid by the Portfolio will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
either (a) to credit a proportionate amount of such taxes against a
shareholder's U.S. Federal income tax liabilities, or (b) if a shareholder
itemizes deductions, to deduct such proportionate amounts from U.S. Federal
taxable income.
The Index Master Portfolio intends to qualify for taxation as a
partnership for Federal income tax purposes. As such, the Index Master
Portfolio is not subject to tax and the Index Equity Portfolio will be treated
for Federal income tax purposes as recognizing its pro rata portion of the
Index Master Portfolio's income and deductions, and owning its pro rata share
of the Index Master Portfolio's assets. The Equity Index Portfolio's status as
a regulated investment company is dependent on, among other things, the Index
Master Portfolio's continued classification as a partnership for Federal income
tax purposes.
This is not an exhaustive discussion of applicable tax consequences,
and investors may wish to contact their tax advisers concerning investments in
the Portfolios. The application of state and local income taxes to investments
in the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals,
foreign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or
administrative changes or court decisions may materially affect the tax
consequences of investing in the Portfolios.
49
<PAGE> 390
HOW IS THE FUND ORGANIZED?
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. On January ___, 1996 the Fund changed its name from The
PNC Fund to Compass Capital Funds. The Declaration of Trust authorizes the
Board of Trustees to classify and reclassify any unissued shares into one or
more classes of shares. Pursuant to this authority, the Trustees have
authorized the issuance of an unlimited number of shares in twenty-eight
investment portfolios. Each Portfolio described in this Prospectus offers five
separate classes of shares -- Institutional Shares, Service Shares, Investor A
Shares, Investor B Shares and Investor C Shares. This prospectus relates only
to Investor Shares (Investor C Shares only with respect to the Index Equity
Portfolio) of the nine portfolios described herein, each of which is classified
as a diversified portfolio under the 1940 Act.
Shares of each class bear their pro-rata portion of all operating
expenses paid by a Portfolio, except transfer agency fees and amounts payable
under the Fund's Distribution and Service Plan. In addition, each class of
Investor Shares are sold with different sales charges. Because of these "class
expenses" and sales charges, the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the performance of the Portfolio's
three classes of Investor Shares. The Fund offers various services and
privileges in connection with its Investor Shares that are not generally
offered in connection with its Institutional and Service Shares, including an
automatic investment plan, automatic withdrawal plan and checkwriting. For
further information regarding the Fund's Institutional and Service Share
classes, contact [name and number].
Each share of a Portfolio has a par value of $.001, represents an
interest in that Portfolio and is entitled to the dividends and distributions
earned on that Portfolio's assets as are declared in the discretion of the
Board of Trustees. The Fund's shareholders are entitled to one vote for each
full share held and proportionate fractional votes for fractional shares held,
and will vote in the aggregate and not by class, except where otherwise
required by law or as determined by the Board of Trustees. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
On January ___, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE
The Index Equity Portfolio, unlike many other investment companies
which directly acquire and manage their own portfolio of securities, seeks to
achieve its investment objective by investing all of its investable assets in
the Index Master Portfolio. The Index Equity Portfolio will purchase shares of
the Index Master Portfolio at net asset value. The net asset value of the
Index Equity Portfolio will respond to increases and decreases in the value of
the Index Master Portfolio's securities and to the expenses of the Index Master
Portfolio allocable to the Index Equity Portfolio (as well as its own
expenses). The Index Equity Portfolio may withdraw its investment in the Index
Master Portfolio at any time upon ____ days notice to the Index Master
Portfolio if the Board of Trustees of the Fund determines that it is in the
best interest of the Index Equity Portfolio to do so. Upon withdrawal, the
Board of Trustees would consider what action might be taken, including the
investment of all of the assets of the Index Equity Portfolio in another pooled
investment entity having the same investment objective as the Index Equity
Portfolio or the hiring of an investment adviser to manager the
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<PAGE> 391
Index Equity Portfolio's assets in accordance with the investment policies
described above with respect to the Index Equity Portfolio.
The Index Master Portfolio is a separate series of The DFA Investment
Trust Company (the "Trust"), which is a business trust created under the laws
of the State of Delaware. The Index Equity Portfolio and other institutional
investors that may invest in the Index Master Portfolio from time to time (e.g.
other investment companies) will each bear a share of all liabilities of the
Index Master Portfolio. Under the Delaware Business Trust Act, shareholders of
the Master Portfolio have the same limitation of personal liability as
shareholders of a Delaware corporation. Accordingly, Fund management believes
that neither the Index Equity Portfolio nor its shareholders will be adversely
affected by reason of the Index Equity Portfolio's investing in the Index
Master Portfolio.
The shares of the Index Master Portfolio will be offered to
institutional investors in private placements for the purpose of increasing the
funds available for investment and to achieve economies of scale that might be
available at higher asset levels. The expenses of such other institutional
investors and their returns may differ from those of the Index Equity
Portfolio. While investment in the Index Master Portfolio by other
institutional investors offers potential benefits to the Index Equity Master
Portfolio (and, indirectly, to the Portfolio), economies of scale and related
expense reductions might not be achieved. Also, if an institutional investor
were to redeem its interest in the Index Master Portfolio, the remaining
investors in the Index Master Portfolio could experience higher pro rata
operating expenses and correspondingly lower returns. In addition,
institutional investors that have a greater pro rata ownership interest in the
Index Master Portfolio than the Index Equity Portfolio could have effective
voting control over the operation of the Index Equity Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting
rights, except as set forth below, and with no preferences as to conversion,
exchange, dividends, redemption or any other feature. Shareholders of the
Trust have the right to vote only (i) for removal of its trustees, (ii) with
respect to such additional matters relating to the Trust as may be required by
the applicable provisions of the 1940 Act, including the approval of the
investment advisory agreement and the selection of trustees and accountants,
and (iii) on such other matters as the trustees of the Trust may consider
necessary or desirable. In addition, approval of the shareholders of the Trust
is required to adopt any amendments to the Agreement and Declaration of Trust
of the Trust which would adversely affect to a material degree the rights and
preferences of the shares of the Index Master Portfolio or to increase or
decrease their par value. The Index Master Portfolio's shareholders will also
be asked to vote on any proposal to change a fundamental policy (i.e. a policy
that may be changed only with the approval of shareholders) of the Index Master
Portfolio.
If the Index Equity Portfolio, as a shareholder of the Index Master
Portfolio, is requested to vote on matters pertaining to the Index Master
Portfolio, the Fund's Trustees intend to vote all of the shares that the Index
Equity Portfolio holds in the Index Master Portfolio without submitting any
such questions to the shareholders of the Index Equity Portfolio. If the
Fund's Trustees decide to adopt "pass-through" voting, the Index Equity
Portfolio, if required under the 1940 Act or other applicable law, would hold a
meeting of its shareholders and would cast its votes proportionately as
instructed by Index Equity Portfolio shareholders. In such cases, shareholders
of the Index Equity Portfolio, in effect, would have the same voting rights
they would have as direct shareholders of the Index Master Portfolio.
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The investment objective of the Index Master Portfolio may not be
changed without approval of its shareholders. Shareholders of the
Portfolios will receive written notice thirty days prior to the effective date
of any change in the investment objective of the Master Portfolio. If the Index
Master Portfolio changes its investment objective in a manner which is
inconsistent with the investment objective of the Index Equity Portfolio and
the Fund's Board of Trustees fails to approve a similar change in the
investment objective of the Index Equity Portfolio, the Index Equity
Portfolio would be forced to withdraw its investment in the Index Equity Master
Portfolio and either seek to invest its assets in another registered investment
company with the same investment objective as the Index Equity Portfolio, which
might not be possible, or retain an investment adviser to manage the Index
Equity Portfolio's assets in accordance with its own investment objective,
possibly at increased cost. A withdrawal by the Index Equity Portfolio of its
investment in the Index Master Portfolio could result in a distribution in kind
of portfolio securities (as opposed to a cash distribution) to the Index Equity
Portfolio. Should such a distribution occur, the Index Equity Portfolio could
incur brokerage fees or other transaction costs in converting such securities
to cash in order to pay redemptions. In addition, a distribution in kind for
the Index Equity Portfolio could result in a less diversified portfolio of
investments and could adversely affect the liquidity of the Portfolio.
The conversion of the Index Equity Portfolio into a Feeder fund of the
Index Master Portfolio was approved by shareholders of the Index Equity
Portfolio at a meeting held on [November 30], 1995. The policy of the Index
Equity Portfolio, and other similar investment companies, to invest their
investable assets in funds such as the Index Master Portfolio is a relatively
recent development in the mutual fund industry and, consequently, there is a
lack of substantial experience with the operation of this policy.
There may also be other investment companies through which you can
invest in the Index Master Portfolio which may have different sales changes and
other expenses which may affect performance. For information about other funds
that may invest in the Master Index Portfolio, call [__________] or contact
your broker.
HOW IS PERFORMANCE CALCULATED?
Performance information for each class of Investor Shares of the
Portfolios may be quoted in advertisements and communications to shareholders.
Total return will be calculated on an average annual total return basis for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in Service Shares of a Portfolio
over the measuring period. Total return may also be calculated on an aggregate
total return basis. Aggregate total return reflects the total percentage
change in value over the measuring period. Both methods of calculating total
return assume that dividend and capital gain distributions made by a Portfolio
with respect to a class of Shares are reinvested in Shares of the same class,
and also reflect the maximum sales load charged by the Portfolio with respect
to a class of Shares. When, however, a Portfolio compares the total return of
a share class to that of other funds or relevant indices, total return may also
be computed without reflecting the sales load.
The yield of a class of Shares of the Balanced Portfolio is computed
by dividing the net income allocated to that class during a 30-day (or one
month) period by the maximum offering price per Share on the last day of the
period and annualizing the result on a semi-annual basis.
The performance of a Share class may be compared to the performance of
other mutual funds with similar investment objectives and to relevant indexes,
as well as to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a class of Shares may be compared to
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<PAGE> 393
data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc. and Weisenberger Investment Company Service, and to the performance of the
S&P 500 Index, EAFE, the Dow Jones Industrial Average, the Dimensional Fund
Advisor's Small Cap Index, the Lehman GMNA Index, the Lehman Index of Baa-rated
Corporate Bonds, the T-Bill Index, the "stocks, bonds and inflation index"
published annually by Ibbotson Associates, the Lipper International Fund Index,
the Lehman Government Corporate Bond Index and the Financial Times World Stock
Index. Performance information may also include evaluations of the Portfolios
and their Share classes published by nationally recognized ranking services,
and information as reported by financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or return of a class of Shares of a particular Portfolio, a
Portfolio may provide other information demonstrating hypothetical investment
returns. This information may include, but is not limited to, illustrating the
compounding effects of a dividend in a dividend reinvestment plan or the impact
of tax-deferred investing.
Performance quotations for Shares of a Portfolio represent past
performance and should not be considered representative of future results. The
investment return and principal value of an investment in a Portfolio will
fluctuate so that an investor's Service Shares, when redeemed, may be worth
more or less than their original cost. Since performance will fluctuate,
performance data for Service Shares of a Portfolio cannot necessarily be used
to compare an investment in such Shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Performance is generally a function
of the kind and quality of the instruments held in a portfolio, portfolio
maturity, operating expenses and market conditions. Any fees charged by
brokers or other institutions directly to their customer accounts in connection
with investments in Service Shares will not be included in the Portfolio
performance calculations.
HOW CAN I GET MORE INFORMATION?
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, COMPASS CAPITAL FUNDS have other sources of
information regarding each Fund and its portfolio holdings, strategy and
current dividend and yield levels.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL FUNDS by either using
a toll-free number or through electronic access:
For Performance and Portfolio Management Questions (800) dial compass
For Information Related to Share Purchase and Redemptions call your investment
adviser or Compass Capital Funds at (800) xxx-xxxx
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) xxx-xxxx
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<PAGE> 394
Information is also available on the World Wide Web through the Internet.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing COMPASSFUNDS.COM
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<PAGE> 395
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE 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 FUND OR ITS
DISTRIBUTOR. THE INDEX EQUITY PORTFOLIO IS NOT SPONSORED, ENDORSED, SOLD OR
PROMOTED BY STANDARD & POOR'S CORPORATION. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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THE EQUITY
PORTFOLIOS
INVESTOR SHARES
PROSPECTUS
VALUE EQUITY PORTFOLIO
GROWTH
EQUITY PORTFOLIO
SMALL CAP GROWTH
EQUITY PORTFOLIO
CORE
EQUITY PORTFOLIO
INDEX
EQUITY PORTFOLIO
SMALL CAP VALUE
EQUITY PORTFOLIO
INTERNATIONAL
EQUITY PORTFOLIO
INTERNATIONAL EMERGING
MARKETS PORTFOLIO
BALANCED PORTFOLIO
JANUARY ___, 1996
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COMPASS CAPITAL FUNDS(R)
(FORMERLY, THE PNC(R) FUND)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary
information pertaining to shares ("Shares") representing interests in the Money
Market, Municipal Money Market, U.S. Treasury Money Market (formerly, the
Government Money Market Portfolio), Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, New Jersey Municipal Money Market, Value Equity, Growth
Equity, Index Equity, Small Cap Value Equity, International Equity,
International Emerging Markets, Balanced, Small Cap Growth Equity, Core Equity,
Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short Government Bond (formerly, the Short-Term
Bond Portfolio), Intermediate Bond (formerly, the Intermediate-Term Bond
Portfolio), Government Income, International Bond (formerly, the International
Fixed Income Portfolio), New Jersey Tax-Free Income and Core Bond Portfolios of
Compass Capital Funds (the "Fund"). The supplementary information contained
herein with respect to the Index Equity, New Jersey Tax-Free Income and Core
Bond Portfolios pertains only to their respective Investor C Shares. The Money
Market, Municipal Money Market, U.S. Treasury Money Market, Ohio Municipal
Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal
Money Market, Virginia Municipal Money Market and New Jersey Municipal Money
Market Portfolios are hereinafter collectively called "Money Market
Portfolios," and the other Portfolios are hereinafter collectively called
"Non-Money Market Portfolios." This Statement of Additional Information is not
a prospectus, and should be read only in conjunction with the Prospectuses of
the Fund relating to the Portfolios dated _____________, 1995, as amended from
time to time (the "Prospectuses"). Prospectuses may be obtained from the Fund's
distributor by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated ____________, 1995. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the
Prospectuses.
<PAGE> 398
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Policies . . . . . . . . . . . . . . . 3
Trustees and Officers . . . . . . . . . . . . . . 44
Investment Advisory, Administration,
Distribution and Servicing Arrangements . . . . 50
Portfolio Transactions . . . . . . . . . . . . . 63
Purchase and Redemption Information . . . . . . . 67
Valuation of Portfolio Securities . . . . . . . . 71
Performance Information . . . . . . . . . . . . . 72
Taxes . . . . . . . . . . . . . . . . . . . . . . 92
Additional Information Concerning Shares . . . . 101
Miscellaneous . . . . . . . . . . . . . . . . . . 102
Appendix A . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUSES IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUSES AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUSES DO NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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INVESTMENT POLICIES
The following supplements information contained in the Prospectus
concerning the Portfolios' investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.
The Index Equity Portfolio invests all of its investable assets in The
U.S. Large Company Series (the "Index Master Portfolio") of The DFA Investment
Trust Company (the "Trust"). Accordingly, the following discussion relates to:
(i) the investment policies of all the Portfolios except the Index Equity
Portfolio; and (ii) where indicated the investment policies of the Index Master
Portfolio. The discussions herein with respect to the Index Equity and Index
Master Portfolios, as well as with respect to the Core Bond and New Jersey
Tax-Free Income Portfolios, pertain exclusively to their respective Investor C
Shares.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio other than the Municipal
Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market and New
Jersey Municipal Money Market Portfolios (the "Municipal Portfolios") and the
Index Master Portfolio may invest in reverse repurchase agreements. Reverse
repurchase agreements involve the sale of securities held by a Portfolio
pursuant to a Portfolio's agreement to repurchase the securities at an agreed
upon price, date and interest rate. Such agreements are considered to be
borrowings under the Investment Company Act of 1940 (the "1940 Act"), and may be
entered into only for temporary or emergency purposes. While reverse repurchase
transactions are outstanding, a Portfolio will maintain in a segregated account
cash, U.S. Government securities or other liquid, high-grade debt securities in
an amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to purchasable
variable and floating rate instruments, the adviser or sub-adviser will consider
the earning power, cash flows and liquidity ratios of the issuers and guarantors
of such instruments and, if the instruments are subject to a demand feature,
will monitor their financial status to meet payment on demand. Such instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in
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addition to providing for periodic adjustments in the interest rate. The absence
of an active secondary market with respect to particular variable and floating
rate instruments could make it difficult for a Portfolio to dispose of a
variable or floating rate note if the issuer defaulted on its payment obligation
or during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss with
respect to such instruments. In determining average-weighted portfolio maturity,
an instrument will usually be deemed to have a maturity equal to the longer of
the period remaining until the next interest rate adjustment or the time the
Portfolio involved can recover payment of principal as specified in the
instrument. Variable rate U.S. Government obligations held by the Portfolios,
however, will be deemed to have maturities equal to the period remaining until
the next interest rate adjustment.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. Each Non-Money Market Portfolio may purchase bank
obligations, such as certificates of deposit, bankers' acceptances and time
deposits, including instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The assets of a bank or savings institution
will be deemed to include the assets of its domestic and foreign branches for
purposes of each Portfolio's investment policies. Investments in short-term bank
obligations may include obligations of foreign banks and domestic branches of
foreign banks, and also foreign branches of domestic banks.
The Index Master Portfolio may purchase obligations of U.S.
banks and savings and loan associations and dollar- denominated obligations of
U.S. subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Index
Master Portfolio if the bank has assets in excess of $1 billion.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make
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payments under its guarantee. Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
The Managed Income, Intermediate Government, Short Government Bond,
Intermediate Bond, Government Income and International Bond Portfolios may
invest in multiple class pass-through securities, including collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduit
("REMIC") pass-through or participation certificates ("REMIC Certificates").
These multiple class securities may be issued by U.S. Government agencies or
instrumentalities, including FNMA and FHLMC, or by trusts formed by private
originators of, or investors in, mortgage loans. In general, CMOs and REMICs
are debt obligations of a legal entity that are collateralized by, and multiple
class pass-through securities represent direct ownership interests in, a pool
of residential mortgage loans or mortgage pass-through securities (the
"Mortgage Assets"), the payments on which are used to make payments on the CMOs
or multiple pass-through securities. Investors may purchase beneficial
interests in REMICs, which are known as "regular" interests or "residual"
interests. The Portfolios do not intend to purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all
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of the classes of CMOs or REMIC Certificates to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of principal
will be made on any class of sequential pay CMOs or REMIC Certificates until all
other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
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FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally guarantees
ultimate collection of all principal of the related mortgage loans without
offset or deduction. FHLMC also guarantees timely payment of principal on
certain Pcs, referred to as "Gold Pcs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
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U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Portfolios may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, the Farmers Home Administration, the Export-Import Bank of the
United States, the Small Business Administration, the Federal National Mortgage
Association, the Government National Mortgage Association, the General Services
Administration, the Student Loan Marketing Association, the Central Bank for
Cooperatives, the Federal Home Loan Mortgage Corporation, the Federal
Intermediate Credit Banks, the Maritime Administration, the International Bank
for Reconstruction and Development (the "World Bank"), the Asian-American
Development Bank and the Inter-American Development Bank.
The Index Master Portfolio may purchase (i) debt securities
issued by the U.S. Treasury which are direct obligations of the U.S. Government,
including bills, notes and bonds, and (ii) obligations issued or guaranteed by
U.S. Government- sponsored instrumentalities and federal agencies, including the
Federal National Mortgage Association, Federal Home Loan Bank and the Federal
Housing Administration.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Index Master Portfolio may
purchase debt securities of supranational organizations such as the European
Coal and Steel Community, the European Economic Community and the World Bank,
which are charted to promote economic development.
LEASE OBLIGATIONS. The Municipal Money Market, Pennsylvania Municipal
Money Market, Ohio Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market, New Jersey Municipal Money Market,
Managed Income, Tax-Free Income, Pennsylvania Tax-Free Income, Ohio Tax-Free
Income, Short Government Bond, Intermediate Bond, International Bond and
New Jersey Tax-Free Income Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option. In determining
whether a lease obligation is liquid, the Adviser will consider, among other
factors, the following: (i) whether the lease can be cancelled; (ii) the degree
of assurance that assets represented by the lease could be sold; (iii) the
strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (iv) the likelihood that the
municipality would discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of
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nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios will
only invest in lease obligations with puts that (i) may be exercised at par on
not more than seven days notice, and (ii) are issued by institutions deemed by
the adviser to present minimal credit risks. Such obligations will be considered
liquid. However, a number of puts are not exercisable at the time the put would
otherwise be exercised if the municipal borrower is not contractually obligated
to make payments (e.g., an event of nonappropriation with a "nonappropriation"
lease obligation). Under such circumstances, the lease obligation while
previously considered liquid would become illiquid, and a Portfolio might lose
its entire investment in such obligation.
Municipal leases, like other municipal debt obligations, are subject to
the risk of non-payment. The ability of issuers of municipal leases to make
timely lease payments may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value of
the municipal lease experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal leases and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in lease payments, the
Fund may take possession of and manage the assets securing the issuer's
obligations on such securities, which may increase the Fund's operating expenses
and adversely affect the net asset value of the Fund. When the lease contains a
non-appropriation clause, however, the failure to pay would not be a default and
the Fund would not have the right to take possession of the assets. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, may
limit the extent to which the Fund may exercise its rights by taking possession
of such assets, because
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as a regulated investment company the Fund is subject to certain limitations on
its investments and on the nature of its income.
COMMERCIAL PAPER. The Money Market Portfolios may purchase commercial
paper rated in one of the two highest rating categories of a nationally
recognized statistical rating organization ("NRSRO"). The Non-Money Market
Portfolios, except the Index Master Portfolio, may purchase commercial paper
rated (at the time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when
deemed advisable by a Portfolio's adviser or sub-adviser, "high quality" issues
rated "A-2" or "Prime-2" by S&P or Moody's, respectively. The Index Master
Portfolio may purchase commercial paper rated (at the time of purchase) A-1 or
better by S&P or Prime-1 by Moody's, or, if not rated, issued by a corporation
having an outstanding unsecured issue rated Aaa by Moody's or AAA by S&P, and
having a maximum maturity of nine months. These ratings symbols are described in
Appendix A.
Commercial paper purchasable by each Portfolio includes
"Section 4(2) paper," a term that includes debt obligations issued in reliance
on the "private placement" exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) paper is restricted as to
disposition under the Federal securities laws, and is frequently sold (and
resold) to institutional investors such as the Fund through or with the
assistance of investment dealers who make a market in the Section 4(2) paper,
thereby providing liquidity. Certain transactions in Section 4(2) paper may
qualify for the registration exemption provided in Rule 144A under the
Securities Act of 1933.
REPURCHASE AGREEMENTS. Each Portfolio (including the Index Master
Portfolio) other than the Municipal Portfolios may invest in repurchase
agreements. The repurchase price under the repurchase agreements described in
the Prospectuses generally equals the price paid by a Portfolio involved plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on securities underlying the repurchase agreement). The
financial institutions with whom a Portfolio may enter into repurchase
agreements will be banks and non-bank dealers of U.S. Government securities that
are listed on the Federal Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed creditworthy by the Portfolio's
adviser or sub-adviser. A Portfolio's adviser or sub-adviser will continue to
monitor creditworthiness of the seller under a repurchase agreement, and will
require the seller to maintain during the term of the agreement the value of the
securities subject to the agreement at not less than the repurchase price
(including accrued interest). In addition, the Portfolio's adviser or sub-
adviser will mark-to-market daily the value of the securities, and will, if
necessary, require the seller to maintain additional securities to ensure that
the value
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is not less than the repurchase price. Securities subject to repurchase
agreements will be held by the Fund's custodian (or sub- custodian) in the
Federal Reserve/Treasury book-entry system or by another authorized securities
depository. Repurchase agreements are considered to be loans by the Portfolios
under the 1940 Act.
The Index Master Portfolio will not enter into a repurchase agreement
with a duration of more than seven days if, as a result, more than 10% of the
value of its total assets would be so invested. The Index Master Portfolio will
also only invest in repurchase agreements with a bank if the bank has at least
$1 billion in assets and has a credit rating of not less than A as determined by
Moody's or S&P. The Adviser to the Index Master Portfolio will monitor the
market value of transferred securities plus any accrued interest thereon so that
the value of such securities will at least equal the repurchase price. The
instruments through which the Index Master Portfolio purchases securities
("underlying securities") from a bank, or a registered U.S. Government
securities dealer, with an agreement by the seller to repurchase the security at
an agreed price, plus interest at a specified rate. The underlying securities
will be limited to U. S. Government and agency obligations described under
"Government Obligations" above.
INVESTMENT GRADE DEBT OBLIGATIONS. Each of the Money Market Portfolios
may invest in securities in the two highest rating categories of NRSROs. The
Non-Money Market Portfolios, except the Index Master Portfolio, invest in
"investment grade securities", which are securities rated in the four highest
rating categories of an NRSRO. It should be noted that debt obligations rated in
the lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P) are
considered to have some speculative characteristics and are more sensitive to
economic change than higher rated securities.
The Index Master Portfolio may invest in non-convertible corporate debt
securities which are issued by companies whose commercial paper is rated Prime-1
by Moody's or A-1 by S&P and dollar-denominated obligations of foreign issuers
issued in the U.S. If the issuer's commercial paper is unrated, then the debt
security would have to be rated at least AA by S&P or Aa2 by Moody's. If there
is neither a commercial paper rating nor a rating of the debt security, then the
Index Master Portfolio's investment adviser must determine that the debt
security is of comparable quality to equivalent issues of the same issuer rated
at least AA or Aa2.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a Portfolio agrees
to purchase securities on a when-issued or forward commitment basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment
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in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Portfolio
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Portfolio commitments. It may be expected that the market value of the
Portfolios' net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its commitments to purchase
when- issued securities and forward commitments will not exceed 25% of the value
of its total assets absent unusual market conditions.
A Portfolio will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, a Portfolio may dispose of or renegotiate a
commitment after it has been entered into, and may sell securities it has
committed to purchase before those securities are delivered to the Portfolio on
the settlement date. In these cases the Portfolio may realize a taxable capital
gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or
a forward commitment to purchase securities, and any subsequent fluctuations in
their market value, is taken into account when determining the market value of a
Portfolio starting on the day the Portfolio agrees to purchase the securities.
The Portfolio does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. As stated in their
Prospectus, the Value Equity, Growth Equity, Small Cap Growth Equity, Core
Equity, Small Cap Value Equity, International Equity, International Emerging
Markets and Balanced Portfolios may participate in rights offerings and may
purchase warrants, which are privileges issued by corporations enabling the
owners to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time. Subscription
rights normally have a short life span to expiration. The purchase of rights or
warrants involves the risk that the Portfolios could lose the purchase value of
a right or
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warrant if the right to subscribe to additional shares is not exercised prior to
the rights' and warrants' expiration. Also, the purchase of rights and/or
warrants involves the risk that the effective price paid for the right and/or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security. A Portfolio will not invest
more than 5% of its net assets, taken at market value, in warrants, or more than
2% of its net assets, taken at market value, in warrants not listed on the New
York or American Stock Exchanges. Warrants acquired by a Portfolio in units or
attached to other securities are not subject to this restriction.
FOREIGN CURRENCY TRANSACTIONS. Forward foreign currency exchange
contracts involve an obligation to purchase or sell a specified currency at a
future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow a Portfolio to establish a rate of exchange for a future point
in time. The Portfolio may use forward foreign currency exchange contracts to
hedge against movements in the value of foreign currencies (including the "ECU"
used in the European Community) relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. A
Portfolio may enter into forward foreign currency exchange contracts when deemed
advisable by its adviser or sub-adviser under two circumstances. First, when
entering into a contract for the purchase or sale of a security, the Portfolio
may enter into a forward foreign currency exchange contract for the amount of
the purchase or sale price to protect against variations, between the date the
security is purchased or sold and the date on which payment is made or received,
in the value of the foreign currency relative to the U.S. dollar or other
foreign currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline substantially relative to the U.S.
dollar or other leading currencies, in order to reduce risk, the Portfolio may
enter into a forward contract to sell, for a fixed amount, the amount of foreign
currency approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency. No Portfolio intends to enter into forward
contracts under this second circumstance on a regular or continuing basis and
will not do so if, as a result, it will have more than 15% of the value of its
total assets committed to such contracts. With respect to any forward foreign
currency contract, it will not generally be possible to match precisely the
amount covered by that contract and the value of the securities involved due to
the changes in the values of such securities resulting from market movements
between the date the forward contract is entered into and the date it matures.
In addition, while forward contracts may offer
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protection from losses resulting from declines in the value of a particular
foreign currency, they also limit potential gains which might result from
increases in the value of such currency. A Portfolio will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A separate account of a Portfolio consisting of cash or liquid
securities equal to the amount of the Portfolio's assets that could be required
to consummate forward contracts entered into under the second circumstance, as
set forth above, will be established with the Fund's custodian. For the purpose
of determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Portfolio.
OPTIONS. Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in the underlying securities themselves. A Portfolio will
write call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if a Portfolio owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as are held in a segregated account by
its custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Portfolio maintains with its
custodian cash or cash equivalents equal to the contract value. A call option is
also covered if a Portfolio holds a call on the same security or index as the
call written where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise
price of the call written provided the difference is maintained by the Portfolio
in cash or cash equivalents in a segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is
recorded as an asset of the Portfolio. When a Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio's statement
of assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded option
is the last sale price or, in the absence of a sale, the mean between the last
bid and asked
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prices. If an option purchased by a Portfolio expires unexercised the Portfolio
realizes a loss equal to the premium paid. If the Portfolio enters into a
closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by the Portfolio on the closing
transaction is more than the premium paid to purchase the option, or a loss if
it is less. If an option written by a Portfolio expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by a
Portfolio is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Portfolio will realize a gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Non-Money Market Portfolio
(including the Index Master Portfolio) may invest in futures contracts and
options thereon (interest rate futures contracts or index futures contracts, as
applicable). Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
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continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, a Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to effectively hedge.
Successful use of futures by a Portfolio is also subject to the
adviser's ability to correctly predict movements in the direction of the market.
For example, if a Portfolio has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Portfolio will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices which reflect the
rising market. A Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio involves the risk of
loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the
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daily limit has been reached in a particular type of contract, no trades may be
made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
STAND-BY COMMITMENTS. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Portfolio at any time before the maturity of
the underlying Municipal Obligations and may be sold, transferred or assigned
only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Portfolio may pay
for such a stand-by commitment either separately in cash or by paying a higher
price for Municipal Obligations which are acquired subject to the commitment for
Municipal Obligations (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments for Municipal Obligations held by a Portfolio will not
exceed 1/2 of 1% of the value of such Portfolio's total assets calculated
immediately after each stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in the adviser's or sub- adviser's opinion, present
minimal credit risks. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and not to exercise its rights thereunder for
trading purposes. Stand-by commitments will be valued at zero in determining net
asset value. Accordingly, where a Portfolio pays directly or indirectly for a
stand-by commitment, its cost will be reflected as an unrealized loss for the
period during which the commitment is held by such Portfolio and will be
reflected in realized gain or loss when the commitment is exercised or expires.
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TAX-EXEMPT DERIVATIVES. The Municipal Portfolios and the Tax-Free
Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and New Jersey
Tax-Free Income Portfolios (collectively, the "Money and Non-Money Market
Municipal Portfolios") may hold tax- exempt derivatives which may be in the form
of tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have been
used. For example, interests in long-term fixed-rate municipal obligations, held
by a bank as trustee or custodian, are coupled with tender option, demand and
other features when the tax-exempt derivatives are created. Together, these
features entitle the holder of the interest to tender (or put), the underlying
municipal obligation to a third party at periodic intervals and to receive the
principal amount thereof. In some cases, municipal obligations are represented
by custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying municipal securities at its face
value to the sponsor (usually a bank or broker dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender option, to trade at par on the date of a rate adjustment. The Money
and Non-Money Market Municipal Portfolios may hold tax-exempt derivatives, such
as participation interests and custodial receipts, for municipal obligations
which give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Fund nor its
investment adviser will review the proceedings related to the creation of any
tax-exempt derivatives or the basis for such opinions.
SECURITIES LENDING. A Portfolio would continue to accrue interest on
loaned securities and would also earn income on investment collateral for such
loans. Any cash collateral received by a Portfolio in connection with such loans
would be invested in short-term U.S. Government obligations.
While the Index Master Portfolio may earn additional income from
lending securities, such activity is incidental to the investment objective of
the Index Master Portfolio. The value of securities loaned may not exceed 33
1/3% of the value of the Index Master Portfolio's total assets. In connection
with such loans, the Index Master Portfolio will receive collateral consisting
of cash or U.S. Government securities, which will be maintained at all times in
an amount equal to at least 100% of
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the current market value of the loaned securities. In addition, the Index Master
Portfolio will be able to terminate the loan at any time, will receive
reasonable interest on the loan, as well as amounts equal to any dividends,
interest or other distributions on the loaned securities. In the event of the
bankruptcy of the borrower, the Trust could experience delay in recovering the
loaned securities. Management of the Trust believes that this risk can be
controlled through careful monitoring procedures.
YIELDS AND RATINGS. The yields on certain obligations are dependent on
a variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's and S&P represent their respective opinions as to
the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices. Subsequent to its purchase by a Portfolio, a rated security may cease to
be rated. The adviser or sub-adviser will consider such an event in determining
whether the Portfolio should continue to hold the security.
SECURITIES OF SMALL CAP ISSUERS. Securities of small cap issues
purchased by the Small Cap Value Equity and Small Cap Growth Equity Portfolios
may be exchange-listed or purchased "over-the-counter."
INTEREST RATE TRANSACTIONS AND CURRENCY SWAPS. The Core Bond and Short
U.S. Government Portfolios may enter into interest rate swaps, caps and floors
on either an asset-based or liability-based basis, depending on whether a
Portfolio is hedging its assets or its liabilities. The International Bond
Portfolios may also enter into currency swaps, which involve the exchange of the
rights of a Portfolio and another party to make or receive payments in specific
currencies.
A Portfolio will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate swap on a
daily basis and will deliver an amount of cash, U.S. Government securities or
liquid high-grade debt securities having an aggregate net asset value at least
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equal to the accrued excess to a custodian that satisfies the requirements of
the 1940 Act.
A Portfolio will enter into currency or interest rate swap, cap and
floor transactions only with institutions deemed the creditworthy by the
Portfolio's adviser or sub-adviser. If there is a default by the other party to
such a transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.
INVESTMENT COMPANIES. Each Portfolio, other than the Index Equity
Portfolio, currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or by the Fund as a whole.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN OHIO MUNICIPAL
OBLIGATIONS. As described above, the Ohio Tax-Free Money Market and Ohio
Tax-Free Income Portfolios (the "Ohio Portfolios") will each invest most of its
net assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of) the State of Ohio, political
subdivisions of the State, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Portfolios are therefore
susceptible to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connection
with their issuance of securities and from other publicly available information,
and is believed to be accurate. No independent verification has been made of any
of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those
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local obligations. There may be specific factors that at particular times apply
in connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
Ohio is the seventh most populous state; the 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1993 is 11,091,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last four years the State rates were below the national rates (5.5% versus
6.1% in 1994). The unemployment rate and its effects vary among geographic areas
of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Portfolios or the ability of particular obligors to
make timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure
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resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million
in the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). In the next two fiscal years necessary corrective
steps were taken (including selected reductions in appropriations spending and
the transfer of $64 million from the BSF to the GRF) to respond to certain lower
receipts and higher expenditures than earlier estimated. June 30, 1991 ending
fund balances were $135.3 million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most other appropriations for a month. The
general appropriations act for the entire biennium was passed on July 11, 1991.
Pursuant to it, $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of FY 1992, both
in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed, an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales-use and
personal income taxes. Higher expenditure levels were in certain areas,
particularly human services including Medicaid. In response, the Governor
ordered most State agencies to reduce GRF spending in the last six months of FY
1992 by a total of approximately $184 million; the $100.4 million BSF balance
and additional amounts from certain other funds were transferred late in the FY
to the GRF; and adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to BSF replenishment, $21 million was deposited in the BSF.
No spending reductions were applied to appropriations needed for debt
service on or lease rentals relating to any State obligations.
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The 1994-95 biennium presented a more affirmative financial picture for
the State. Based on June 30, 1994 balances, an additional $260 million was
deposited in the BSF. The biennium ended June 30, 1995 with a GRF ending fund
balance of $928 million, of which $535.2 million has been transferred into the
BSF (which has a current balance of over $828 million).
The GRF appropriations act for the current 1994-95 biennium was on June
28, 1995 passed and promptly signed (after selective vetoes) by the Governor.
All necessary GRF appropriations for State debt service and lease rental
payments then projected for the biennium were included in that act. In
accordance with the appropriations act, the significant June 30, 1995 GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million has been transferred to a variety of funds, including $535.2 million to
the BSF. $322.8 million was transferred to other funds, including school
assistance funds and, in anticipation of possible federal program changes, a
human services stabilization fund.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At June 9, 1995, $820.1 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
awaiting delivery. The only such State debt then still authorized to be incurred
are portions of the highway bonds, and the following: (a) up to $100 million of
obligations for coal research and development may be outstanding at any one time
($34.7 million outstanding); (b) $360 million of obligations authorized for
local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year ($728.2 million outstanding); and (c) up to $200
million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($50 million outstanding, with
no more than $50 million to be issued in any one year).
The General Assembly has placed on the November 1995 ballot a proposed
constitutional amendment that would extend the local infrastructure bond program
(authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued
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over 10 years for the purpose) and authorize additional highway bonds. The
latter would supersede the current $500 million highway obligation
authorization, and would authorize not more than $1.2 billion to be outstanding
at any time and not more than $220 million to be issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly
that would submit a constitutional amendment relating to certain other aspects
of State debt. The proposal would authorize, among other things, the issuance of
general obligation debt for a variety of purposes without debt service on all
State general obligation debt and GRF-supported obligations not to exceed 5% of
the preceding Fiscal Year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.5 billion of
which were outstanding at June 9, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of each
house or by a majority vote of the electors. It cannot be predicted whether
required Senate concurrence will be received.
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment
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obligations under lease-purchase agreements of Ohio public agencies (in which
certificates of participation may be issued) are limited in duration to the
agency's fiscal period, and are renewable only upon appropriations being made
available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate in the range of 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 120 districts
from voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. In one case, the trial
court concluded that aspects of the system (including basic operating
assistance) are unconstitutional, and ordered the State to provide for and fund
a system complying with the Ohio Constitution. The State has appealed. A small
number of the State's 612 local school districts have in any year required
special assistance to avoid year-end deficits. A current program provides for
school district cash need borrowing directly from commercial lenders, with
diversion of State subsidy distributions to repayment if needed. Recent
borrowings under this program totalled $94.5 million for 27 districts (including
$75 million for one)in FY 1993, $41.1 million for 28 districts in FY 1994, and
$20.1 million for eight districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys distributed
by the State. For those few municipalities that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the municipality's fiscal affairs and for
development of a financial plan to eliminate deficits and cure any defaults.
Since inception in 1979, these procedures have been applied to 23 cities and
villages; for 18 of them the fiscal situation was resolved and the procedures
terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
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SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA MUNICIPAL
OBLIGATIONS. The concentration of investments in Pennsylvania Municipal
Obligations by the Pennsylvania Municipal Money Market and Pennsylvania Tax-Free
Income Portfolios raises special investment considerations. In particular,
changes in the economic condition and governmental policies of the Commonwealth
of Pennsylvania and its municipalities could adversely affect the value of those
Portfolios and their portfolio securities. This section briefly describes
current economic trends in Pennsylvania.
Pennsylvania has historically been dependent on heavy industry although
recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic growth
in Pennsylvania are in the service sector, including trade, medical and health
services, education and financial institutions. Agriculture continues to be an
important component of the Commonwealth's economic structure, with nearly
one-third of the Commonwealth's total land area devoted to cropland, pasture and
farm woodlands.
The population of Pennsylvania experienced a slight increase in the
period 1980 through 1990 and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1980 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 50% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 120
funds have been established for purposes of recording receipts and disbursements
of the Commonwealth, of which the General Fund is the largest. Most of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. The major tax sources for the General Fund are the sales tax, the
personal income tax and the corporate net income tax. Major expenditures of the
Commonwealth include funding for education, public health and welfare,
transportation, and economic development.
The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund (the principal operating fund of the
Commonwealth) and for certain special revenue funds which together represent the
majority of expenditures of the Commonwealth. Although a negative balance was
experienced applying generally accepted accounting principles ("GAAP") in the
General Fund for fiscal 1990 and 1991, tax increases and spending decreases
helped return the General Fund balance to a surplus at June 30, 1992 of $87.5
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million and at June 30, 1993 of $698.9 million. The deficit in the
Commonwealth's unreserved/undesignated funds of prior years also was reversed to
a surplus of $64.4 million as of June 30, 1993.
Current constitutional provisions permit the Commonwealth to issue the
following types of debt: (i) electorate approved debt, (ii) debt for capital
projects subject to an aggregate debt limit of 1.75 times the annual average tax
revenues of the preceding five fiscal years, (iii) tax anticipation notes
payable in the fiscal year of issuance and (iv) debt to suppress insurrection or
rehabilitate areas affected by disaster. Certain state-created agencies issue
debt supported by assets of, or revenues derived from, the various projects
financed and the debt of such agencies is not an obligation of the Commonwealth,
although some of the agencies are indirectly dependent on Commonwealth
appropriations.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suits relating to the following matters: (a) the ACLU has
filed suit in Federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
because of that settlement. The district court has denied class certification to
the ACLU, and the parties have stipulated to a judgment against the plaintiffs
to allow plaintiffs to appeal the denial of class certification (no available
estimates of potential liability); (b) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for county funding of the judicial system
to be in conflict with the constitution of the Commonwealth, but stayed judgment
pending enactment by the legislature of funding consistent with the opinion, and
the legislature has yet to consider legislation implementing the judgment. In
1992, a new action in mandamus was filed seeking to compel the Commonwealth to
comply with the original decision; (c) several banks have filed suit against the
Commonwealth contesting the constitutionality of a law enacted in 1989 imposing
a bank shares tax; in July 1994, the Commonwealth Court en banc upheld the
constitutionality of the 1989 bank shares tax law, but struck down a companion
law to provide credits against the bank shares tax for new banks; cross-appeals
from that decision to the Pennsylvania Supreme Court have been filed; (d)
litigation has been filed in both state and Federal court by an association of
rural and small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for funding local
school districts -- the Federal case has been stayed pending resolution of the
state case and the state case is in the pre-trial stage (no available estimate
of potential liability); (e) the ACLU has brought a class action on behalf of
inmates challenging the conditions of confinement in thirteen of the
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Commonwealth correctional institutions; a proposed settlement agreement has been
submitted to the court and members of the class for their review (no available
estimate of potential cost of complying with the injunction sought, but capital
and personnel costs might cost millions of dollars); (f) a consortium of public
interest law firms has filed a class action suit alleging that the Commonwealth
has not complied with a Federal mandate to provide screening, diagnostic and
treatment services for all Medicaid- eligible children under 21; the district
court denied class certification and the parties have submitted a tentative
settlement agreement to the court for approval; and (g) litigation has been
filed in federal court by the Pennsylvania Medical Society seeking payment of
the full co-pay and deductible in excess of the maximum fees set under the
Commonwealth's medical assistance program for outpatient services provided to
medical assistance patients who also were eligible for Medicare; the
Commonwealth received a favorable decision in the federal district court, but
the Pennsylvania Medical Society won a reversal in the federal circuit court
(potential liability estimated at $50 million per year).
Local government units in the Commonwealth of Pennsylvania (which
include, among other things, counties, cities, boroughs, towns, townships,
school districts and other municipally created units such as industrial
development authorities and municipality authorities, including water and sewer
authorities) are permitted to issue debt for capital projects: (i) in any amount
so long as the debt has been approved by the voters of the local government
unit; or (ii) without electoral approval if the aggregate outstanding principal
amount of debt of the local government unit is not in excess of 100% of its
borrowing base (in the case of a school district of the first class), 300% of
its borrowing base (in the case of a county) or 250% of its borrowing base (in
the case of all other local government units); or (iii) without electoral
approval and without regard to the limit described in (ii) in any amount in the
case of certain subsidized debt and qualifying self-liquidating debt. Lease
rental debt may also be issued, in which case the total debt limits described in
section (ii) (taking into account all existing lease rental debt in addition to
all other debt) are increased. The borrowing base for a local government unit is
the average of total revenues for the three fiscal years preceding the
borrowing. The risk of investing in debt issued by any particular local
government unit depends, in the case of general obligation bonds secured by tax
revenues, on the credit-worthiness of that issuer or, in the case of revenue
bonds, on the revenue producing ability of the project being financed, and not
directly on the credit-worthiness of the Commonwealth of Pennsylvania as a
whole.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit markets
and a long-term solution to the City's
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financial crisis is still being sought. The City experienced a series of General
Fund deficits for fiscal years 1988 through 1992. The City has no legal
authority to issue deficit reduction bonds on its own behalf, but state
legislation has been enacted to create an Intergovernmental Cooperation
Authority (the "Authority") to provide fiscal oversight for Pennsylvania cities
(primarily Philadelphia) suffering recurring financial difficulties. The
Authority is broadly empowered to assist cities in avoiding defaults and
eliminating deficits by encouraging the adoption of sound budgetary practices
and issuing bonds. In order for the Authority to issue bonds on behalf of the
City, the City and the Authority entered into an intergovernmental cooperative
agreement providing the Authority with certain oversight powers with respect to
the fiscal affairs of the City, and the Authority originally approved a
five-year financial plan prepared by the City on April 6, 1992. The Authority
approved the latest update of the five year financial plan on May 2, 1994. The
City has reported a surplus of approximately $15 million for the fiscal year
ending June 30, 1994. In June 1992, the Authority issued $474,555,000 in bonds
to liquidate the City's deficit balance in its general fund. The Authority
issued $643,430,000 of bonds in July 1993 and $178,675,000 of bonds in August
1993 to refund certain general obligation bonds of the City and to fund
additional capital projects.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NORTH CAROLINA MUNICIPAL
OBLIGATIONS. The concentration of investments in North Carolina Municipal
Obligations by the North Carolina Municipal Money Market Portfolio raises
special investment considerations. In particular, changes in the economic
condition and governmental policies of North Carolina and its political
subdivisions, agencies, instrumentalities, and authorities could adversely
affect the value of the Portfolio and its portfolio securities. This section
briefly describes current economic trends in North Carolina.
The State of North Carolina has two major operating funds: the General
Fund and the Highway Fund. In addition, the 1989 General Assembly created the
Highway Trust Fund to provide funding for a major highway construction program.
North Carolina derives most of its revenue from taxes, including individual
income tax, corporation income tax, sales and use taxes, corporation franchise
tax, alcoholic beverage tax, insurance tax, inheritance tax, tobacco products
tax, and soft drink tax. North Carolina receives other non-tax revenues which
are also deposited in the General Fund. The most important are Federal funds
collected by North Carolina agencies, university fees and tuition, interest
earned by the North Carolina Treasurer on investments of General Fund moneys and
revenues from the judicial branch. The proceeds from the motor fuel tax, highway
use tax
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and motor vehicle license tax are deposited in the Highway Fund and the Highway
Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing and
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in the
North Carolina sales tax and increases in the personal and corporate income tax
rates, as well as increases in the tax on cigarettes and alcohol, among other
items.
Fiscal year 1992 ended with a positive fund balance of approximately
$164.8 million. By law, $41.2 million of such positive fund balance was required
to be reserved in the General Fund of North Carolina as part of a "Savings
Reserve," leaving an unrestricted General Fund balance at June 30, 1992 of
$123.6 million. Fiscal year 1993 ended with a positive General Fund balance of
approximately $537.3 million. Of this amount, $134.3 million was reserved in the
Savings Reserve and $57 million was reserved in a Reserve for Repair and
Renovation of State Facilities, leaving an unrestricted General Fund balance at
June 30, 1993 of $346 million. Fiscal year 1994 ended with a positive General
Fund balance of approximately $444.7 million. An additional $178 million was
available from a reserved fund balance. Of this aggregate amount, $155.7 million
was reserved in the Savings Reserve (bringing the total reserve to $210.6
million after prior withdrawals) and $60 million was reserved in the Reserve for
Repair and Renovation of State Facilities (bringing the total reserve to $60
million after prior withdrawals), leaving an unrestricted General Fund balance
at June 30, 1994 of $407 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis (GAAP), the General Fund balance at June 30, 1993 and 1994 was $681.5
million and $1,240.9 million, respectively.
The General Assembly reduced departmental operating requirements by
$357.6 million for fiscal year 1995 and authorized continuation funding of
$8,489.3 million. The savings reductions were based on recommendations from the
Governor, a Governmental Performance Audit Committee, and selective savings
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identified by the General Assembly. After review of the continuation budget, the
General Assembly authorized funding for planned expansion to existing programs
and funded new initiatives for children, economic development, education, human
services, and environmental programs. Expansion funds of $1,650.4 million for
fiscal year 1995 were approved. In addition to the transfers to the Savings
Reserve from the fiscal year-end credit balance, the General Assembly in 1993
appropriated $66.7 million for the Savings Reserve. The General Assembly
authorized $189.4 million for capital improvements spending and $60 million for
the Reserve for Repair and Renovation of State Facilities for fiscal year 1995.
The North Carolina budget is based upon a number of existing and
assumed State and non-State factors, including State and national economic
conditions, international activity, Federal government policies and legislation
and the activities of the State's General Assembly. Such factors are subject to
change which may be material and affect the budget. The Congress of the United
States is considering a number of matters affecting the federal government's
relationship with State governments that, if enacted into law, could affect
fiscal and economic policies of the States, including North Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in November 1994, North Carolina ranked
ninth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in March 1995 to be 3.9% of the labor force, as
compared with an unemployment rate of 5.5% nationwide. As part of its 1993-95
budget, the General Assembly provided major funding for economic initiatives in
an effort to create additional jobs.
The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet its
financial obligations:
1. Swanson Case -- State Tax Refunds - Federal Retirees. In
Davis v. Michigan (1989), the United States Supreme Court ruled that a Michigan
income tax statute which taxed federal retirement benefits while exempting
those paid by state and local governments violated the constitutional doctrine
of intergovernmental tax immunity. At the time of the Davis decision, North
Carolina law contained similar exemptions in favor of state and local retirees.
Those exemptions were repealed prospectively, beginning with the 1989 tax year.
All
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public pension and retirement benefits are now entitled to a $4,000 annual
exclusion.
Following Davis, federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991,
the North Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and that the
taxes collected from the federal retirees were thus not improperly collected. In
1993, the United States Supreme Court vacated that decision and remanded the
case back to the North Carolina Supreme Court. The North Carolina Supreme Court
then ruled in favor of the State on the grounds that the federal retirees had
failed to comply with state procedures for challenging unconstitutional taxes.
Plaintiffs petitioned the United States Supreme Court for review of that
decision, and the United States Supreme Court denied that petition. The United
States District Court has ruled in favor of the defendants in the companion
federal case, and a petition for reconsideration was denied. Plaintiffs have
appealed to the United States Court of Appeals. Oral arguments were heard in the
Court of Appeals in February 1995, and its decision concurs with the lower
court's ruling.
An additional lawsuit was recently filed in State Court by federal
pensioners to recover State income taxes paid on federal retirement benefits.
This case grew out of a claim by federal pensioners in the original federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and federal retirees, the
increased benefits to State retirees constituted an indirect violation of Davis.
The lawsuit seeks a refund of taxes paid by federal retirees on federal
retirement benefits received in the years 1989 through 1993 and refunds or
monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. An extension of time to answer the complaint has been
filed by the North Carolina Attorney General, which believes that sound legal
authority and arguments support the denial of this claim.
2. Bailey case -- State Tax Refunds - State Retirees. State and local
governmental retirees filed a class action suit in 1990 as a result of the
repeal of the income tax exemptions for state and local government retirement
benefits. The original suit was dismissed after the North Carolina Supreme Court
ruled in 1991 that the plaintiffs had failed to comply with state law
requirements for challenging unconstitutional taxes and the
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United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions. On May 31, 1995 the Superior Court issued an
order ruling in favor of the plaintiffs. Under the terms of the order, the
Superior Court found that the act of the General Assembly that repealed the tax
exemption on State and local government retirement benefits is null, void, and
unenforceable and that retirement benefits which were vested before August 1989
are exempt from taxation. The North Carolina Attorney General intends to pursue
an appeal from this order.
The North Carolina Attorney General's office estimates that the
amount in controversy is approximately $40-$45 million annually for the tax
years 1989 through 1991. In addition, it is anticipated that the decision
reached in this case will govern the resolution of tax refund claims made by
retired state and local government employees for taxes paid on retirement
benefit income for tax years after 1991. Furthermore, if the order of the
Superior Court is upheld, its provisions would apply prospectively to prevent
future taxation of State and local government retirement benefits that were
vested before August 1989.
3. Fulton Case. The State's intangible personal property tax levied on
certain shares of stock has been challenged by the plaintiff on grounds that it
violates the United States Constitution Commerce Clause by discriminating
against stock issued by corporations that do all or part of their business
outside the State. The plaintiff in the action is a North Carolina corporation
that does all or part of its business outside the State. The plaintiff seeks to
invalidate the tax in its entirety and to recover tax paid on the value of its
shares in other corporations. The North Carolina Court of Appeals invalidated
the taxable percentage deduction and excised it from the statute beginning with
the 1994 tax year. The effect of this ruling is to increase collections by
rendering all stock taxable on 100% of its value. The State and the plaintiff
sought further appellate review. On December 9, 1994, the North Carolina Supreme
Court ruled in favor of the State, reversing the decision of the Court of
Appeals and upholding the tax on intangible personal property. The plaintiff's
petition for review by the United States Supreme Court was granted. Oral
argument is expected in Fall 1995 and a decision expected by mid-1996. Net
collections from the tax for the fiscal year ended June 30, 1994 amounted to
$127.6 million. The North Carolina Attorney General's Office believes that sound
legal arguments support the State's position. In April 1995, the North Carolina
General Assembly repealed the State's intangible personal property tax,
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effective for taxable years beginning on or after January 1, 1995.
In October 1993, the State issued a total of $194.7 million general
obligation bonds (consisting of $87.5 million Prison and Youth Services
Facilities Bonds, $61 million Public Improvement Refunding Bonds, $30.2 million
Highway Refunding Bonds, and $16 million Clean Water Refunding Bonds). An
additional $67.5 million general obligation bonds (Prison and Youth Services
Facilities Bonds) were issued in November, 1993. On November 2, 1993, a total of
$740 million general obligation bonds (consisting of $310 million University
Improvement Bonds, $250 million Community College Bonds, $145 million Clean
Water Bonds, and $35 million State Parks Bonds) were approved by the voters of
the State. Pursuant to this authorization, the State issued $400 million general
obligation bonds (Capital Improvement Bonds) in January, 1994. The proceeds of
these Capital Improvement Bonds may be used for any purpose for which the
proceeds of the University Improvement Bonds, Community College Bonds, and State
Parks Bonds may be used (none of such proceeds may be used for Clean Water
purposes). An additional $60 million general obligation bonds (Clean Water
Bonds) were issued in September and October, 1994. The remaining $85 million
general obligation bonds (Clean Water Bonds) were issued in June and July, 1995.
The offering of the remaining $195 million of these authorized bonds is
anticipated to occur over the next two years.
Currently, Moody's Investors Service, Inc., Standard & Poor's
Corporation, and Fitch Investors Service, Inc. rate North Carolina general
obligation bonds Aaa, AAA, and AAA, respectively. See Appendix A.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN VIRGINIA MUNICIPAL
OBLIGATIONS. The Virginia Municipal Money Market Portfolio will invest primarily
in Virginia Municipal Obligations. For this reason, the Portfolio is affected by
political, economic, regulatory or other developments that constrain the taxing,
revenue-collecting and spending authority of Virginia issuers or otherwise
affect the ability of Virginia issuers to pay interest, principal, or any
premium. The following information constitutes only a brief summary of certain
of these developments and does not purport to be a complete description of them.
The Virginia Municipal Money Market Portfolio will invest primarily in
Virginia Municipal Obligations. For this reason, the Portfolio is affected by
political, economic, regulatory or other developments that constrain the taxing,
revenue-collecting and spending authority of Virginia issuers or otherwise
affect the ability of Virginia issuers to pay interest, principal, or any
premium. The following information constitutes only a brief
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summary of certain of these developments and does not purport to be a complete
description of them.
The rate of economic growth in the Commonwealth of Virginia has
increased steadily over the past decade. From 1984 to 1993, the Commonwealth's
4.8 percent rate of growth in per capita personal income was slightly ahead of
the national rate of growth of 4.7 percent. During 1990 and 1992, Virginia's per
capita personal income grew at a slightly lower rate than the U.S. average. Per
capita income in Virginia has been consistently above national levels over the
past decade and, in 1993, was $21,634 compared with the national level of
$20,817. The services sector in Virginia generates the largest number of jobs,
followed by wholesale and retail trade, government employment and manufacturing.
Because of Virginia's proximity to Washington, D.C. and the concentration of
military installations in the Commonwealth (the largest such concentration in
the United States), the Federal government has a greater economic impact on
Virginia relative to its size than on any of the other states except Alaska and
Hawaii. It is unclear what effect the current efforts by the Federal government
to restructure the defense budget will have on the long-term economic conditions
of the Commonwealth.
According to statistics published by the U.S. Department of Labor, the
Commonwealth typically has one of the lowest unemployment rates in the nation.
This is generally attributed to the balance among the various sectors
represented in the economy. During 1993, an average of 5 percent of Virginians
were unemployed as compared with the national average of 6.8 percent. At the
same time, the population of the state has continued to grow over the last
decade at a rate that is substantially higher than the national average. The
rate of increase in such population growth has declined since reaching a high of
2.1 percent annually in 1987 and, in 1993, was approximately 1.8 percent.
Virginia is one of twenty states with a right-to-work law and is
generally regarded as having a favorable business climate marked by few strikes
or work stoppages. Virginia is also one of the least unionized among the
industrialized states.
Budget and Deficit Matters
Virginia's state government operates on a two-year budget. The
Constitution vests the ultimate responsibility and authority for levying taxes
and appropriating revenue in the General Assembly, but the Governor has broad
authority to manage the budgetary process. The budgetary process begins in May
of even-numbered years, approximately 14 months before the start of a biennium
when the Governor gives initial guidance to state agencies regarding base
budgets, maximum employment levels and
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policy initiatives. By the following December, final revenue estimates are
submitted by the Department of Taxation and reviewed by the Governor, the
Advisory Board of Economists and the Advisory Council on Revenue Estimates.
Final adjustments to revenues and services are then made, and a bill detailing
the Governor's budget is prepared. The Governor is required by statute to
present the budget bill and a narrative summary of the bill to the General
Assembly by December 20 in the year immediately prior to each even- year
session. In the odd-year sessions of the General Assembly, amendments are
considered to the Appropriation Act of the previous year.
Once an appropriation act becomes law, revenue collections and
expenditures are constantly monitored by the Governor, assisted by the Secretary
of Finance and the Department of Planning and Budget, to ensure that a balanced
budget is maintained. If projected revenue collections fall below amounts
appropriated at any time, the Governor must reduce expenditures and withhold
allotments of appropriations (other than for debt service and other specified
purposes) to restore balance. Up to 15 percent of a general fund appropriation
to an agency may be withheld, if required.
The Constitution further requires the Governor to ensure that expenses
do not exceed anticipated total revenues plus fund balances during the
two-and-a-half-year period following the end of the General Assembly session in
which appropriations are made. An amendment to the Constitution, effective
January 1, 1993, established a Revenue Stabilization Fund. This fund is used to
offset a portion of anticipated shortfalls in revenues in years when
appropriations based on initial forecasts exceed expected revenues in any
subsequent forecast. The Revenue Stabilization Fund consists of an amount not to
exceed 10 percent of the Commonwealth's average annual tax revenues derived from
taxes on income and retail sales as certified by the Auditor of Public Accounts
for the three immediately preceding fiscal years. If in any year total revenues
are forecasted to decline by more than two percent of the certified tax revenues
collected in the most recently ended fiscal year, the General Assembly may
appropriate an amount for transfer from the Revenue Stabilization Fund to the
General Fund in an amount not to exceed one-half of the forecasted shortfall.
Earnings in excess of the 10 percent cap are transferred to the General Fund as
received.
In fiscal year 1994, revenues increased six percent from the previous
year, while total expenditures increased by 4.5 percent. Revenues exceeded
expenditures by $731.2 million, an increase of 20 percent over fiscal year 1993.
Tax Matters
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General fund revenues are principally composed of direct taxes. In
fiscal year 1994, approximately 94.9 percent of total tax revenues was derived
from five major taxes imposed by the Commonwealth on individual and fiduciary
income, sales and use, corporate income, public services corporations and
premiums of insurance companies.
Nongeneral revenues consist of all revenues not formally accounted for
in the general fund. Included in this category are special taxes and user
charges earmarked for specific purposes, the majority of institutional revenues
and revenues from the sale of property and commodities, plus receipts from the
Federal government.
Approximately 50 percent of the nongeneral revenues consist of grants
and donations from the Federal government, motor vehicle taxes and institutional
revenues. Institutional revenues consist primarily of fees and charges collected
by institutions of higher education, medical and mental hospitals and
correctional institutions. Motor vehicle-related taxes include the motor vehicle
fuel tax, a motor vehicle sales and use tax, oil excise tax, fees generated from
driver's licenses, title registration, and motor vehicle registrations and other
miscellaneous revenues.
Debt Management
In September 1991, the Debt Capacity Advisory Committee was created by
the Governor through an executive order. The committee is charged with annually
estimating the amount of tax-supported debt that may prudently be authorized
consistent with the financial goals, capital needs and policies of the
Commonwealth. The committee reviews the outstanding debt of all agencies,
institutions, boards and authorities of the Commonwealth for which the
Commonwealth has either a direct or indirect pledge of tax revenues or moral
obligation. The committee released its first report in January 1992 and its
second in January 1994.
The Department of Planning and Budget has prepared a Six-Year Capital
Outlay Plan for the Commonwealth. The Plan lists proposed capital projects, and
it recommends how the proposed projects should be financed. More specifically,
the Plan distinguishes between immediate demands and longer-term needs, assesses
the state's ability to meet its highest priority needs and outlines approaches
for addressing priorities in terms of costs, benefits and financing mechanisms.
The Constitution of Virginia prohibits the creation of debt by or on
behalf of the Commonwealth that is backed by the Commonwealth's full faith and
credit, except as provided in
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Section 9 of Article X. Section 9 of Article X contains several different
provisions for the issuance of general obligation and other debt:
Section 9(a)(2) provides that the General Assembly may incur general
obligation debt to meet certain types of emergencies, subject to limitations on
amount and duration; to meet casual deficits in the revenue or in anticipation
of the collection of revenues of the Commonwealth; and to redeem a previous debt
obligation of the Commonwealth. Total indebtedness issued pursuant to this
Section may not exceed 30 percent of an amount equal to 1.15 times the annual
tax revenues derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the
creation of general obligation debt for capital projects. Such debt is required
to be authorized by an affirmative vote of a majority of each house of the
General Assembly and approved in a statewide election. The outstanding amount of
such debt is limited to an amount equal to 1.15 times the average annual tax
revenues derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts for the three preceding fiscal years less the total
amount of bonds outstanding. The amount of 9(b) debt that may be authorized in
any single fiscal year is limited to 25 percent of the limit on all 9(b) debt
less the amount of 9(b) debt authorized in the current and prior three fiscal
years.
Section 9(c) provides that the General Assembly may authorize the
creation of general obligation debt for revenue-producing capital projects
(so-called "double-barrel" debt). Such debt is required to be authorized by an
affirmative vote of two-thirds of each house of the General Assembly and
approved by the Governor. The Governor must certify before the enactment of the
authorizing legislation and again before the issuance of the debt that the net
revenues pledged are expected to be sufficient to pay principal of and interest
on the debt. The outstanding amount of 9(c) debt is limited to an amount equal
to 1.15 times the average annual tax revenues derived from taxes on income and
retail sales, as certified by the Auditor of Public Accounts for the three
preceding fiscal years. While the debt limits under Sections 9(b) and 9(c) are
each calculated as the same percentage of the same average tax revenues, these
debt limits are separately computed and apply separately to each type of debt.
Based on individual, fiduciary and corporate income taxes and the state
sales and use tax, as certified as of July 1, 1994, the debt limits and
remaining debt margins under Article X, Section 9 are set forth below (in $
thousands).
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<TABLE>
<S> <C>
Section 9(a)(2) General Obligation Debt Limit(5):
- -------------------------------------------------
Debt Limit (30% of 1.15 times annual tax revenues for fiscal year 1994) $1,954,008
Less Bonds Outstanding: (none) -
----------
Debt Margin $1,954,008
==========
Section 9(b) General Obligation Debt Limit:
- -------------------------------------------
Debt Limit (1.15 times average tax revenues for three fiscal years as calculated above) $6,136,996
Less Bonds Outstanding:
Public Facilities Bonds 213,570
Transportation Facilities Refunding Bonds 71,825
----------
Debt Margin $5,851,601
Additional Section 9(b) Debt Borrowing Restriction:
Four-year authorization restriction (25% of 9(b) Debt Limit) $1,534,249
Less 9(b) Debt authorized in past three years 612,944
----------
Total Additional Borrowing Restriction (maximum amount
that could be authorized by the General Assembly) $ 921,305
==========
Section 9(c) General Obligation Debt Limit and Debt Margin
- ----------------------------------------------------------
Debt Limit (1.15 times average tax revenues for three fiscal years as calculated above) $6,136,996
Less Bonds Outstanding:
Parking Facilities 10,645
Transportation Facilities 80,115
Higher Education Institutions 406,427
----------
Debt Margin $5,639,809
==========
</TABLE>
Article X further provides in Section 9(d) that the restrictions of
Section 9 are not applicable to any obligation incurred by the Commonwealth or
any of its institutions, agencies or authorities if the full faith and credit of
the Commonwealth is not pledged or committed to the payment of such obligation.
There are currently outstanding various types of such 9(d) revenue bonds.
Certain of these bonds, however, are paid in part or in whole from revenues
received as appropriations by the General Assembly from general tax revenues,
while others are paid solely from revenues of the applicable project.
The debt repayments of the Virginia Public Building Authority, the
Virginia Port Authority, the Virginia College Building Authority Equipment
Leasing Program and The Innovative Technology Authority are supported in large
part by General Fund appropriations. Together, payments to these authorities
totaled $87.3 million in fiscal year 1994.
The Commonwealth Transportation Board ("CTB") in 1993 issued its
$111,680,000 Transportation Contract Revenue Refunding Bonds to refund in full
an earlier series of the same bonds issued to finance costs related to its Route
28 project. In 1989, CTB issued its $200,000,000 Transportation Revenue Bonds,
Series 1989 (U.S. Route 58 Corridor Development Program). These bonds were
refunded in part in 1993 by the issuance of CTB's $91,455,000 Transportation
Revenue Refunding Bonds, Series 1993A (U.S. Route 58 Corridor Development
Program). Additional costs of that program were financed through the issuance of
CTB's $98,715,000
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Transportation Revenue Bonds, Series 1993B (U.S. Route 58 Corridor Development
Program). In August 1993, CTB also issued its $134,060,000 Transportation
Revenue Bonds, Series 1993C (Northern Virginia Transportation District Program).
These bonds are secured by and payable from funds appropriated by the General
Assembly from the Transportation Trust Fund for such purpose. The Transportation
Trust Fund was established by the General Assembly in 1986 as a special
non-reverting fund administered and allocated by the Transportation Board to
provide increased funding for construction, capital and other needs of state
highways, airports, mass transportation and ports. The Virginia Port Authority
has also issued bonds in the approximate amount of $106 million which are
secured by a portion of the Transportation Trust Fund. The fund balance of the
Transportation Trust Fund administered by the Transportation Board at June 30,
1994, was $278.9 million.
The Commonwealth is also involved in numerous leases that are subject
to appropriation of funding by the General Assembly. For all capital leases, the
principal balance was $21.1 million as of June 30, 1993.
The Commonwealth finances the acquisition of certain personal property
and equipment through installment purchase agreements. The length of the
agreements and the interest rates charged vary. In most cases, the agreements
are collateralized by the personal property and equipment acquired. Installment
purchase agreements contain nonappropriation clauses indicating that
continuation of the installment purchase is subject to funding by the General
Assembly. The balance of installment purchase obligations was $48.3 million as
of June 30, 1993.
Bonds issued by the Virginia Housing Development Authority, the
Virginia Resources Authority and the Virginia Public School Authority are
designed to be self-supporting from their individual loan programs. A portion of
the Virginia Housing Development Authority and Virginia Public School Authority
bonds and all of the Virginia Resources Authority bonds are secured in part by a
moral obligation pledge of the Commonwealth. Should the need arise, the
Commonwealth may consider funding deficiencies in the respective debt service
reserves for such moral obligation debt. To date, none of these authorities has
advised the Commonwealth that any such deficiencies exist.
Local Government
Local government in the Commonwealth is comprised of 95 counties, 41
incorporated cities, and 190 incorporated towns. The Commonwealth is unique
among the several states in that cities and counties are independent, and their
land areas do not overlap. Cities and counties are the units of general
government that have traditionally provided all services not provided by the
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Commonwealth; they levy and collect their own taxes. On the other hand, towns
constitute a part of the counties in which they are located; they levy and
collect taxes for town purposes, but their residents are also subject to county
taxes. The largest expenditure by local governments in the Commonwealth are for
education, but local governments also provide other services such as water and
sewer, police and fire protection and recreational facilities.
According to figures prepared by the Auditor of Public Accounts of
Virginia, the total outstanding general obligation and revenue debt of counties
in the Commonwealth was approximately $4.1 billion as of June 30, 1993, most of
which was borrowed for school construction. The amount of debt of Virginia's
cities outstanding as of June 30, 1993, was approximately $3.6 billion, while
towns had approximately $233 million outstanding as of June 30, 1993.
Pending Litigation
On March 28, 1989, in Davis v. Michigan the United States Supreme Court
declared unconstitutional a Michigan statute exempting from state income tax the
retirement benefits paid to former workers by the state and local governments
but not comparable benefits paid by the Federal government. At that time,
Virginia exempted state and local but not Federal government benefits.
Harper v. Department of Transportation is a suit by Federal retirees
seeking refund of four years of state income taxes paid during the period from
1985 to 1988. On May 27, 1994, the Virginia Supreme Court agreed to hear Harper
on appeal from the Alexandria Circuit Court. In a July 1994 special session, the
Virginia General Assembly passed emergency legislation to provide payments to
Federal retirees in settlement of the principal amount, excluding interest, of
the retirees' claims for overpaid taxes. On July 26, 1994, in order to permit
the settlement process to go forward, the Virginia Supreme Court granted a stay
in the proceedings in Harper for six months or until further order of the Court,
whichever occurred first.
The settlement payments are to be made over a five-year period,
commencing on March 31, 1995. The total amount of the proposed settlement is
$340 million plus earnings on the investment of such amount that may be
appropriated. These amounts will be paid to participating retirees in
installments of $60 million on March 31, 1995, and $70 million on each
succeeding March 31 through 1999, subject to appropriation by the General
Assembly.
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Retirees who choose to accept and remain eligible to recover such taxes
must have responded to the Department of Taxation by November 1, 1994. By
February 1, 1995, retirees must have signed and returned to the Tax Commissioner
a settlement agreement releasing the Commonwealth from any further liability for
claims arising out of such taxes and dismissing any related litigation to which
the taxpayer is a party. The legislation also provides that in the event the
total principal amount of the claims of taxpayers opting out of the settlement
exceeds $20 million, the entire settlement is null and void unless reauthorized
by the General Assembly on or before March 1, 1995. The estimated amount of such
claims, including interest calculated as of December 31, 1993, is approximately
$707.5 million.
After the decision in Davis v. Michigan, the General Assembly amended
applicable Virginia law to make all pensions taxable. On July 8, 1993, in Stepka
v. Commonwealth several former state employees and one current state employee
filed suit against the Commonwealth and the Department of Taxation in the
Circuit Court of the City of Richmond claiming that legislature's response to
Davis breached an implied contract not to tax state employees' pensions and
seeking refunds for all such taxes paid. The Commonwealth and the Department
have filed responsive pleadings. The case involves multiple plaintiffs with
claims aggregating approximately $19.2 million as of June 1994. The outcome of
this action cannot be predicted.
Current Rating
Most recently, Moody's has rated the long-term general obligation bonds
of the Commonwealth Aaa, and Standard & Poor's has rated such bonds AAA. There
can be no assurance that the economic conditions on which these ratings are
based will continue or that particular bond issues may not be adversely affected
by changes in economic or political conditions.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NEW JERSEY MUNICIPAL
OBLIGATIONS. The State of New Jersey and its political subdivisions, agencies
and public authorities are authorized to issue two general classes of
indebtedness: general obligation bonds and revenue bonds. Both classes of bonds
may be included in the New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios. The repayment of principal and interest on general obligation
bonds is secured by the full faith and credit of the issuer, backed by the
issuer's taxing authority, without recourse to any special project or source of
revenue. Special obligation or revenue bonds may be repaid only from revenues
received in connection with the project for which the bonds are issued, special
excise taxes, or other special revenue sources and generally are issued by
entities without taxing power.
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Neither the State of New Jersey nor any of its subdivisions is liable for the
repayment of principal or interest on revenue bonds except to the extent stated
in the preceding sentences.
General obligation bonds of the State are repaid from revenues obtained
through the State's general taxing authority. An inability to increase taxes may
adversely affect the State's ability to authorize or repay debt.
Public authorities, private non-profit corporations, agencies and
similar entities of New Jersey ("Authorities") are established for a variety of
beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities are
not operating entities of the State of New Jersey, but are separate legal
entities that are managed independently. The State oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity bonds
in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond-issuing
Authority's ability to repay debt on special obligation bonds and no assurance
can be given that sufficient revenues will be obtained to make such payments,
although in some instances repayment may be guaranteed or otherwise secured.
Various Authorities have issued bonds for the construction of health
care facilities, transportation facilities, office buildings and related
facilities, housing facilities, pollution control facilities, water and sewage
facilities and power and electric facilities. Each of these facilities may incur
different difficulties in meeting its debt repayment obligations. Hospital
facilities, for example, are subject to changes in Medicare and Medicaid
reimbursement regulations, attempts by Federal and state legislatures to limit
the costs of health care and management's ability to complete construction
projects on a timely basis as well as to maintain projected rates of occupancy
and utilization. At any given time, there are several proposals pending on a
Federal and state level concerning health care which may further affect a
hospital's debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies, while power and electric facilities
may be subject to increased costs resulting from environmental restrictions,
fluctuations in fuel costs, delays in licensing procedures and the general
regulatory framework in which these facilities operate. All of
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these entities are constructed and operated under rigid regulatory guidelines.
Some entities which financed facilities with proceeds of private
activity bonds issued by the New Jersey Economic Development Authority, a major
issuer of special obligation bonds, have defaulted on their debt service
obligations. Because these special obligation bonds were repayable only from
revenue received from the specific projects which they funded, the New Jersey
Economic Development Authority was unable to repay the debt service to
bondholders for such facilities. Each issue of special obligation bonds,
however, depends on its own revenue for repayment, and thus these defaults
should not affect the ability of the New Jersey Economic Development Authority
to repay obligations on other bonds that it issues in the future.
The State has, in the past, experienced a period of substantial
economic growth with unemployment levels below the national average. Recently,
however, the state has experienced an economic slowdown, and its unemployment
rate has risen to the extent the State has lost its relative advantage over the
nation. To the extent that any adverse conditions exist in the future which
affect the obligor's ability to repay debt, the value of the Portfolio may be
immediately and substantially affected.
The following are cases presently pending or threatened in which the
State has a potential for either a significant loss of revenue or a significant
unanticipated expenditure: (i) several labor unions have challenged 1992
legislation mandating a revaluation of several public employee pension funds
which resulted in a refund of $773 million in public employer contributions to
the State and annual savings to the State of approximately $226 million for
fiscal 1993 and thereafter; (ii) in June 1990, the State Supreme Court held the
State's public school funding mechanism unconstitutional; legislation which was
enacted to establish a new funding system has also been challenged; (iii)
several cases filed in the State courts challenged the basis on which recoveries
of certain costs for residents in State psychiatric hospitals and other
facilities are shared between the State Department of Human Services and the
State's county governments, and certain counties are seeking the recovery from
the Department of costs they have incurred for the maintenance of such
residents; (iv) a lawsuit filed in the United States District Court in 1990
alleges that the State Department of Human Services has established unreasonably
low Medicaid payment rates for long-term care facilities; (v) a number of
taxpayers are seeking refunds of taxes paid to the Spill Compensation Fund, on
the grounds, inter alia, that the State law is preempted by the Federal
Superfund legislation; (vi) the 1990 Fair Automobile Insurance Reform Act has
been challenged in several State court suits, including provisions in the Act
dealing with the premium tax surtax which was intended to raise
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$300 million in 1993; (vii) a suit was filed in 1991 seeking to impose directly
on the State the responsibility for funding the State's judicial system, which
has been primarily funded by the counties; (viii) several union welfare benefit
plans are challenging the State's hospital rate-setting system in a suit filed
in United States District Court; the Court held in 1992 that certain provisions
of the State system are preempted by Federal law; and (ix) the method by which
various State agencies reduced their personnel has been challenged and the case
is pending before the State Supreme Court.
Although the Portfolio generally intends to invest its assets primarily
in New Jersey Municipal Obligations rated within the two highest rating
categories of an NRSRO, there can be no assurance that such ratings will remain
in effect until such obligations mature or are redeemed or will not be revised
downward or withdrawn. Such revisions or withdrawals may have an adverse affect
on the market price of such securities.
ADDITIONAL INVESTMENT LIMITATIONS.
Each Portfolio is subject to the investment limitations enumerated in
this subsection which may be changed with respect to a particular Portfolio only
by a vote of the holders of a majority of such Portfolio's outstanding shares
(as defined below under "Miscellaneous"). The Index Master Portfolio's
fundamental investment limitations are described separately.
MONEY MARKET PORTFOLIOS:
1) Each of the Money Market, Municipal Money Market and Government
Money Market Portfolios may not purchase securities of any one issuer (other
than securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or certificates of deposit for any such securities) if more
than 5% of the value of the Portfolio's total assets (taken at current value)
would be invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Portfolio or the
Fund, except that up to 25% of the value of the Portfolio's total assets (taken
at current value) may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the value of the Portfolio's total assets.
2) No Portfolio may borrow money or issue senior securities,
except that each Portfolio may borrow from banks and (other than a Municipal
Portfolio) enter into reverse repurchase
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agreements for temporary purposes in amounts up to one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge or hypothecate
any assets, except in connection with any such borrowing and then in amounts not
in excess of one- third of the value of the Portfolio's total assets at the time
of such borrowing. No Portfolio will purchase securities while its aggregate
borrowings (include reverse repurchase agreements and borrowing from banks) in
excess of 5% of its total assets are outstanding. Securities held in escrow or
separate accounts in connection with a Portfolio's investment practices are not
deemed to be pledged for purposes of this limitation.
3) Each of the Municipal Money Market, Government Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios may not purchase securities which would cause 25% or
more of the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the obligations of
issuers in the banking industry, or in obligations, such as repurchase
agreements, secured by such obligations (unless the Portfolio is in a temporary
defensive position) or which would cause, at the time of purchase, more than 25%
of the value of its total assets to be invested in the obligations of issuers in
any other industry. In applying the investment limitations stated in this
paragraph, (i) there is no limitation with respect to the purchase of (a)
instruments issued (as defined in investment limitation number 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (b) instruments issued by domestic
banks (which may include U.S. branches of foreign banks) and (c) repurchase
agreements secured by the instruments described in clauses (a) and (b); (ii)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (iii) utilities will be divided according to
their services, for example, gas, gas transmission, electric and gas, electric
and telephone will be each considered a separate industry.
4) Each of the Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios will invest at least 80%
of its net assets in AMT Paper and instruments the interest on which is exempt
from regular Federal income tax, except during defensive periods or during
periods of unusual market conditions.
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5) The Municipal Money Market Portfolio will invest at least 80% of its
net assets in instruments the interest on which is exempt from regular Federal
income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.
EQUITY AND BOND PORTFOLIOS:
Each of Equity and Bond Portfolios (other than the Ohio Tax-Free
Income, Pennsylvania Tax-Free Income and New Jersey Tax-Free Income
Portfolios) may not:
1) Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without regard to these limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
Each of the Equity and Bond Portfolios may not:
2) Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued (as defined in Investment Limitation No. 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and (ii) repurchase agreements
secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
Each Equity and Bond Portfolio (other than the Managed Income,
Intermediate Government, Short Government Bond,
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<PAGE> 444
Intermediate Bond, Government Income and Core Bond Portfolios) may not:
3) Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of
one-third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Portfolio's investment practices are not deemed to
be pledged for purposes of this limitation.
The Managed Income, Intermediate Government, Short Government
Bond, Intermediate Bond, Government Income, International Bond, Core Bond and
Balanced Portfolios may not:
4) Issue senior securities, borrow money or pledge its assets, except
that a Portfolio may borrow from banks or enter into reverse repurchase
agreements or dollar rolls in amounts up to 33 1/3% of the value of its total
assets (calculated when the loan is made) to take advantage of investment
opportunities and may pledge up to 33 1/3% of the value of its total assets to
secure such borrowings. Each Portfolio is also authorized to borrow an
additional 5% of its total assets without regard to the foregoing limitations
for temporary purposes such as clearance of portfolio transactions and share
redemptions. For purposes of these restrictions, the purchase or sale of
securities on a "when-issued," delayed delivery or forward commitment basis, the
purchase and sale of options and futures contracts and collateral arrangements
with respect thereto are not deemed to be the issuance of a senior security, a
borrowing or a pledge of assets.
MONEY MARKET, EQUITY AND BOND PORTFOLIOS:
No Portfolio may:
1. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
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<PAGE> 445
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof, or the disposition of securities, in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts and, in
the case of the International Bond Portfolio, currencies.
5. Purchase securities of companies for the purpose of
exercising control.
6. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to a Portfolio's transactions in futures contracts
and related options or a Portfolio's sale of securities short against the box,
and (b) a Portfolio may obtain short-term credit as may be necessary for the
clearance or purchases and sales of portfolio securities.
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that each Portfolio may,
to the extent appropriate to its investment policies, purchase securities
(publicly traded securities in the case of each Money Market Portfolio) of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options.
8. Make loans, except that each Portfolio may purchase and hold
debt instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
9. Notwithstanding the investment limitations of the Index
Equity Portfolio, the Index Equity Portfolio may invest all of its assets in
shares of an open-end management investment company with substantially the same
investment objective, policies and limitations as the Portfolio.
Although the foregoing investment limitations would permit the Money
Market Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months. Prior to making any such investments, a Money
Market Portfolio would notify its shareholders and add appropriate descriptions
concerning the instruments and transactions to its Prospectus.
-49-
<PAGE> 446
INDEX MASTER PORTFOLIO:
The investment limitations of the Index Master Portfolio, the Portfolio
in which the Index Equity Portfolio invests all of its investable assets, are
separate from those of the Index Equity Portfolio. The Index Master Portfolio
may not:
1. Invest in commodities or real estate, including limited partnership
interests therein, although it may purchase and sell securities of companies
which deal in real estate and securities which are secured by interests in real
estate, and may purchase or sell financial futures contracts and options
thereon;
2. Make loans of cash, except through the acquisition of repurchase
agreements and obligations customarily purchased by institutional investors;
3. As to 75% of the total assets of the Index Master Portfolio, invest
in the securities of any issuer (except obligations of the U.S. Government and
its instrumentalities) if, as a result, more than 5% of the Index Master
Portfolio's total assets, at market, would be invested in the securities of such
issuer;
4. Purchase or retain securities of an issuer if those officers and
trustees of the Trust or officers and directors of the Trust's investment
adviser owning more than 1/2 of 1% of such securities together own more than 5%
of such securities;
5. Borrow, except from banks and as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess of 5% of
the Index Master Portfolio's gross assets valued at the lower of market or cost;
provided that it may borrow amounts not exceeding 33% of its net assets from
banks and pledge not more than 33% of such assets to secure such loans;
6. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value, except as described
in (5) above;
7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;
8. Engage in the business of underwriting securities issued by others;
9. Invest for the purpose of exercising control over management of any
company;
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<PAGE> 447
10. Invest its assets in securities of any investment company, except
in connection with a merger, acquisition of assets, consolidation or
reorganization;
11. Invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
12. Acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of its total assets would
be invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;
15. Purchase securities on margin or sell short; or
16. Acquire more than 10% of the voting securities of any issuer.
Although (2) above prohibits cash loans, the Index Master Portfolio is
authorized to lend portfolio securities. With respect to (7) above, pursuant to
Rule 144A under the 1993 Act, the Index Master Portfolio may purchase certain
unregistered (i.e. restricted) securities upon a determination that a liquid
institutional market exists for the securities. If it is decided that a liquid
market does exist, the securities will not be subject to the 10% limitation on
holdings of illiquid securities stated in (7) above. While maintaining
oversight, the Board of Trustees of the Trust has delegated the day-to-day
function of making liquidity determinations to the Index Master Portfolio's
Adviser. For Rule 144A securities to be considered liquid, there must be at
least two dealers making a market in such securities. After purchase, the Board
of Trustees of the Trust and the Index Master Portfolio's Adviser will continue
to monitor the liquidity of Rule 144A securities.
For purposes of (12) above, utility companies will be divided
according to their services; e.g., gas, gas transmission, electric and gas,
electric, water and telephone will each be considered a separate industry.
Because the structure of the Index Master Portfolio is based on
the relative market capitalizations of eligible holdings, it is possible that
the Index Master Portfolio might include at least 5% of the outstanding voting
securities of one
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<PAGE> 448
or more issuers. In such circumstances, the Trust and the issuer would be deemed
"affiliated persons" under the Investment Company Act of 1940, and certain
requirements of the Act regulating dealings between affiliates might become
applicable.
TRUSTEES AND OFFICERS
THE FUND
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Anthony M. Santomero Trustee Deputy Dean from
310 Keithwood Road 1990 to 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor
Age: 48 of Finance since April
1984, Director, Wharton
Financial Institutions
Center, since July 1995,
and Dean's Advisory
Council Member since July
1984, The Wharton School,
University of
Pennsylvania; Associate
Editor, Journal of
Banking and Finance since
June 1978; Associate
Editor, Journal of
Economics and Business
since October 1979;
Associate Editor, Journal
of Money, Credit and
Banking since January
1980; Research Associate,
New York University
Center for Japan-U.S.
Business and Economic
Studies since July 1989;
Editorial Advisory Board,
Open Economics Review
since November 1990;
Director, The Zweig Fund
and The Zweig Total
Return Fund; Director or
Trustee of Temporary
Investment Fund, Inc.,
</TABLE>
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<PAGE> 449
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Trust for Federal
Securities, Municipal
Fund for Temporary
Investment, Municipal
Fund for California
Investors, Inc.,
Municipal Fund for New
York Investors, Inc., and
Provident Institutional
Fund.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: 60 (investment advisers)
since February 1989;
Director, Beaver
Management Corporation;
Until September 1988,
President, Treasurer and
Trustee, The Mutual
Assurance Company; Until
September 1988, Chairman,
President Treasurer and
Director, The Green Tree
Insurance Company (a
wholly-owned subsidiary
of The Mutual Assurance
Company); Until September
1988, Director, Keystone
State Life Insurance
Company; Director,
Trustee or Managing
General Partner of a
number of investment
companies advised by
PIMC.
Edward J. Roach Treasurer Certified Public
400 Bellevue Parkway and Vice- Accountant; Partner of
Suite 100 President the accounting firm of
Wilmington, DE 19809 Main Hurdman until 1981;
Age: 71 Vice Chairman of the
Board, Fox Chase Cancer Center;
Trustee Emeritus,
Pennsylvania School for
the Deaf; President, Vice
President and/or
Treasurer of a number of
investment companies
advised by PIMC.
</TABLE>
-53-
<PAGE> 450
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 55
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset
Management Group, Inc. ("PAMG") or Provident Distributors, Inc. ("PDI" or
"Distributor") $5,500 annually and $500 per meeting of the Board or any
committee thereof that is not held in conjunction with a Board meeting (subject
to a cap of $6,000 per year for such meeting fees), and pays the Chairman an
additional $5,000 annually. Trustees who are not affiliated with PAMG or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. No officer, director or
employee of PAMG, PNC Institutional Management Group, Inc. ("PIMC"), Provident
Capital Management, Inc. ("PCM"), BlackRock Financial Management, Inc.
("BlackRock"), PNC Equity Advisors Company ("PEAC"), Morgan Grenfell Investment
Services, Ltd. ("Morgan Grenfell"), PFPC Inc. ("PFPC"), Compass Capital Group,
Inc. ("CCGI"), Provident Distributors, Inc. ("PDI" and, collectively with PFPC
and CCGI, the "Administrators"), the Distributor or PNC Bank, National
Association ("PNC Bank" or the "Custodian") currently receives any compensation
from the Fund. Drinker Biddle & Reath, of which Mr. Jones is a partner,
receives legal fees as counsel to the Fund. As of the date of this Statement
of Additional Information, the trustees and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of each Portfolio.
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1995:
-54-
<PAGE> 451
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from
Aggregate Benefits Estimated Registrant and
Compensation Accrued as Annual Fund Complex(1)
Name of Person, from Part of Fund Benefits upon Paid to
Position Registrant Expenses Retirement Trustees
- --------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Philip E. Coldwell,* Trustee $ n/a n/a (_)(2) $
Robert R. Fortune,* Trustee $ n/a n/a (_)(2) $
Rodney D. Johnson,* Trustee $ n/a n/a (_)(2) $
G. Willing Pepper,* $ n/a n/a (_)(2) $
Chairman of the
Board and President
Anthony M. $ n/a n/a (_)(2) $
Santomero, Trustee
David R. Wilmerding, $ n/a n/a (_)(2) $
Jr., Trustee
</TABLE>
* Messrs. Coldwell, Fortune, Johnson and Pepper resigned from their
respective positions with the Fund on ______________, 1995.
THE TRUST
The names, ages and addresses of the trustees and officers of the
Trust and a brief statement of their present positions and principal
occupations during the past five years is set forth below. As used below, "DFA
Entities" refers to the following: Dimensional Fund Advisors Inc., Dimensional
Fund Advisors Ltd., DFA Australia Pty. Limited, DFA Investment Dimensions Group
Inc. (Registered Investment Company), Dimensional Emerging Markets Fund Inc.
(Registered Investment Company), Dimensional Investment Group Inc. (Registered
Investment Company) and DFA Securities Inc.
- ------------------------
1. A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser
or have an investment adviser that is an affiliated person of the
investment adviser of any of the other investment companies.
2. Total number of such other investment companies trustee serves on
within the Fund Complex.
-55-
<PAGE> 452
<TABLE>
<CAPTION>
TRUSTEES
- --------
<S> <C> <C>
David G. Booth* Trustee, President, Chairman-Chief Executive
Santa Monica, President and Officer and Director of all DFA Entities,
CA Chairman-Chief except Dimensional Fund
Age: 48 Executive Officer Advisors Ltd., of which he is
Chairman and Director
George M. Trustee Leon Carroll Marshall Professor of
Constantinides Finance, Graduate School of
Chicago, IL Business, University of Chicago.
Age: 47 Director, DFA Investment Dimensions
Group Inc., Dimensional Investment
Group Inc. and Dimensional Emerging
Markets Fund Inc.
John P. Gould Trustee Distinguished Service Professor of
Chicago, IL Economics, Graduate School of
Age: 56 Business, University of Chicago.
Trustee, First Prairie Funds
(Registered Investment Company).
Director, DFA Investment Dimensions
Group Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc. and Harbor
Investment Advisors.
Roger G. Trustee Professor in Practice of Finance,
Ibbotson Yale School of Management.
New Haven, CT Director, DFA Investment Dimensions
Age: 52 Group Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc., Hospital Fund,
Inc. (investment management
services) and Birr Portfolio
Analysis, Inc. (software products).
Chairman, Institute Study of
Securities Markets. Chairman and
President, Ibbotson Associates,
Inc., Chicago, IL (software, data,
publishing and consulting).
Merton H. Trustee Robert R. McCormick Distinguished
Miller Service Professor Emeritus,
Chicago, IL Graduate School of Business,
Age: 72 University of Chicago. Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment Group
Inc. and Dimensional Emerging
Markets Fund Inc.
</TABLE>
-56-
<PAGE> 453
<TABLE>
<CAPTION>
TRUSTEES
- --------
<S> <C> <C>
Myron S. Trustee Frank E. Buck Professor of Finance,
Scholes Graduate School of Business and
Greenwich, CT Professor of Law, Law School,
Age: 54 Senior Research Fellow, Hoover
Institution, (all) Stanford
University. Director, DFA
Investment Dimensions Group Inc.,
Dimensional Investment Group Inc.,
Dimensional Emerging Markets Fund
Inc., Benham Capital Management
Group of Investment Companies and
Smith Breedon Group of Investment
Companies. Limited Partner, Long-
Term Capital Management L.P. (money
manager).
Rex A. Trustee, Chairman Chairman, Chief Investment Officer
Sinquefield* and Chief and Director of all DFA Entities,
Santa Monica, Investment except Dimensional Fund Advisors
CA Officer Ltd., of which he is Chairman,
Age: 50 Chief Executive Officer and
Director.
*Interested
Trustees of the
Trust.
- ---------------
OFFICERS
- --------
Arthur Barlow Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 39
Maureen Connors Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 58
Robert Deere Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 37
Irene R. Diamant Vice President, Vice President and Secretary of all
Santa Monica, Secretary DFA Entities. Associate attorney,
CA Cahill Gordon & Reindel from 1987
Age: 45 to 1991.
</TABLE>
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<PAGE> 454
<TABLE>
<CAPTION>
OFFICERS
- --------
<S> <C> <C>
Eugene Fama, Vice President Vice President of all DFA Entities.
Jr.
Santa Monica,
CA
Age: 34
David Plecha Vice President Vice President of all DFA Entities.
Santa Monica, Assistant Vice President, Leland
CA O'Brien Rubenstein Associates, Los
Age: 33 Angeles, CA from 1987 to 1989.
George Sands Vice President Vice President of all DFA Entities.
Santa Monica, Managing Director, Assets Strategy
CA Consulting, Los Angeles, CA from
Age: 39 1991 to 1992 and previously Vice
President of Wilshire Associates,
Santa Monica, CA.
Michael T. Vice President, Vice President, Chief Financial
Scardina Chief Financial Officer, Controller and Treasurer
Santa Monica, Officer, of all DFA Entities.
CA Controller and
Age: 39 Treasurer
Cem Severoglu Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 32
Jeanne C. Executive Vice Executive Vice President of all DFA
Sinquefield, President Entities.
Ph.D.
Santa Monica,
CA
Age: 48
</TABLE>
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust
entitled to receive compensation, the compensation received from the Trust
during the fiscal year ended November 30, 1994 and the total compensation
received from all four registered investment companies for which Dimensional
Fund Advisers Inc. ("DFA") served as investment adviser during that same fiscal
year.
-58-
<PAGE> 455
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from Trust and
Trustee from Trust Trust Complex
- ------- ------------ -------------
<S> <C> <C>
George M. $5,125 $30,750
Constantinides
John P. Gould $5,125 $30,750
Roger G. Ibbotson $5,125 $30,750
Merton H. Miller $5,000 $30,000
Myron S. Scholes $4,000 $24,000
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Fund's Declaration of Trust provides that
shareholders shall not be subject to any personal liability in connection with
the assets of the Fund for the acts or obligations of the Fund, and that every
note, bond, contract, order or other undertaking made by the Fund shall contain
a provision to the effect that the shareholders are not personally liable
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any
claim against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the
-59-
<PAGE> 456
Fund to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS. The advisory and sub-advisory
services provided by PAMG, PIMC, BlackRock, PCM, PEAC, Morgan Grenfell and, with
respect to the Index Master Portfolio, Dimensional Fund Advisors Inc. ("DFA")
and the fees received by each of them for such services are described in the
Prospectuses. As stated in the Prospectuses, PAMG may from time to time
voluntarily waive its advisory fees with respect to a Portfolio and may
voluntarily reimburse Portfolios for expenses. In addition, if the total
expenses borne by any Portfolio in any fiscal year exceed the expense
limitations imposed by applicable state securities regulations, PAMG and the
Administrators will bear the amount of such excess to the extent required by
such regulations in proportion to the fees otherwise payable to them for such
year. Such amount, if any, will be estimated and accrued daily and paid on a
monthly basis. As of the date of this Statement of Additional Information, to
the knowledge of the Fund, there were no state expense limitations more
restrictive than the following: 2 1/2% of the first $30 million of average
annual net assets, 2% of the next $70 million of average annual net assets, and
1/2% of average annual net assets in excess of $100 million.
PAMG renders advisory services to each of the Portfolios, except the
Index Equity Portfolio, pursuant to an Investment Advisory Agreement. From each
Portfolio's respective commencement of operations to ______________
(____________, with respect to the Index Equity Portfolio) PIMC served as
adviser. PCM renders sub-advisory services to the Balanced, Value Equity, Small
Cap Value Equity, International Equity, Core Equity and International Emerging
Markets Portfolios pursuant to Sub-Advisory Agreements. PIMC renders
sub-advisory services to the Money Market, U.S. Treasury Money Market, Municipal
Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market and New
Jersey Municipal Money Market Portfolios pursuant to Sub-Advisory Agreements.
BlackRock renders sub-advisory services to the Balanced, Managed Income,
Intermediate Government, Tax-Free Income, Ohio Tax-Free Income, Pennsylvania
Tax-Free Income, Short Government Bond, Intermediate Bond, New Jersey
Tax-Free Income, Core Bond and Government Income Portfolios pursuant to
Sub-Advisory Agreements. PEAC renders sub-advisory services to the Growth Equity
and Small Cap Growth Equity Portfolios pursuant to Sub-Advisory Agreements.
Morgan Grenfell renders sub-advisory services to the International Bond
Portfolio pursuant to a Sub-Advisory Agreement. DFA renders
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<PAGE> 457
advisory services to the Index Master Portfolio, the investment company in which
the Index Equity Portfolio invests all of its assets, pursuant to an Investment
Management Agreement. These Advisory and Sub-Advisory Agreements are
collectively referred to as the "Advisory Contracts."
From December 1, 1992 (commencement of operations) to March 29, 1995,
PNC Bank, Ohio, National Association ("PNC Bank Ohio") served as sub-adviser to
the Ohio Tax-Free Income Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, PNC Bank Ohio served as sub-adviser to the
Municipal Money Market Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, PNC Bank Ohio served as sub-adviser to the
Managed Income and Growth Equity Portfolios. From April 20, 1992 (commencement
of operations) to July 22, 1992, Advanced Investment Management, Inc. and from
July 23, 1993 to January __, 1996, PEAC served as sub-adviser to the Index
Equity Portfolio. From April 20, 1992 to September 10, 1993, PCM served as sub-
adviser to the Intermediate Government Portfolio. From July 23, 1992 to March
29, 1995, PNC Bank served as sub-adviser to the Index Equity Portfolio. From
September 11, 1993 to March 29, 1995, PNC Bank served as sub-adviser to the
Managed Income, Intermediate Government and Growth Equity Portfolios. From
December 1, 1992 (commencement of operations) to March 29, 1995, PNC Bank served
as sub-adviser to the Ohio Tax-Free Income and Pennsylvania Tax-Free Income
Portfolios. From September 1, 1993 (commencement of operations) to March 29,
1995, PNC Bank served as sub-adviser to the Short Government Bond
Portfolio. From September 13, 1993 (commencement of operations) to March 29,
1995, PNC Bank served as sub-adviser to the Core Equity Portfolio. From
September 14, 1993 (commencement of operations) to March 29, 1995, PNC Bank
served as sub-adviser to the Small Cap Growth Equity Portfolio. From September
17, 1993 (commencement of operations) to March 29, 1995, PNC Bank served as
sub-adviser to the Intermediate Bond Portfolio. From May 14, 1990 (commencement
of operations) to July 1, 1995, PNC Bank served as sub-adviser to the Tax-Free
Income Portfolios. PNC Bank served as sub-adviser for the Money Market Portfolio
from October 4, 1989 (commencement of operations) to December 20, 1995; for the
Municipal Money Market Portfolio from September 10, 1993 to December 20, 1995;
for the U.S. Treasury Money Market Portfolio from November 1, 1989 (commencement
of operations) to December 20, 1995; for the Ohio Municipal Money Market
Portfolio from June 1, 1993 (commencement of operations) to December 20, 1995;
for the Pennsylvania Municipal Money Market Portfolio from June 1, 1993
(commencement of operations) to December 20, 1995; for the North Carolina
Municipal Money Market from May 4, 1993 (commencement of operations) to December
20, 1995; for the Virginia Municipal Money Market Portfolio from July 25, 1994
(commencement of operations) to December 20, 1995, and for the New Jersey
Municipal Money Market Portfolio from _________ to December 20, 1995. From
_________ to ___________ MidLantic Bank,
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<PAGE> 458
N.A. served as investment adviser to the predecessor portfolio of the New Jersey
Tax-Free Income Portfolio. From _________ to ___________ BlackRock served as
investment adviser to the predecessor portfolio of the Core Bond Portfolio.
Under the Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock and
Morgan Grenfell are not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or a Portfolio in connection with the
performance of the Advisory Contracts. Under the Advisory Contracts, PAMG, PIMC,
PCM, PEAC, BlackRock, Morgan Grenfell and DFA are liable for a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard of their respective duties
and obligations thereunder. Each of the Advisory Contracts (except the Advisory
Contract relating to the Index Master Portfolio) is terminable as to a Portfolio
by vote of the Fund's Board of Trustees or by the holders of a majority of the
outstanding voting securities of the relevant Portfolio, at any time without
penalty, on 60 days' written notice to PAMG, PIMC, PCM, PEAC, Morgan Grenfell or
BlackRock, as the case may be. PAMG, PIMC, PCM, PEAC, Morgan Grenfell and
BlackRock may also terminate their advisory relationship with respect to a
Portfolio, on 60 days' written notice to the Fund. The Advisory Contract
relating to the Index Master Portfolio is terminable by vote of the Trust's
Board of Trustees or by the holders of a majority of the outstanding voting
securities of the Index Master Portfolio at any time without penalty on 60 days'
written notice to DFA. DFA may also terminate its advisory relationship with
respect to the Index Master Portfolio on 90 days' written notice to the Trust.
Each of the Advisory Contracts terminates automatically in the event of its
assignment.
For the year or periods ended September 30, 1995, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) REIMBURSEMENTS WAIVERS
- ---------- --------- -------------- -------
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money Market
North Carolina Municipal Money
Market
Managed Income
Tax-Free Income
Intermediate Government
</TABLE>
-62-
<PAGE> 459
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) REIMBURSEMENTS WAIVERS
- ---------- --------- -------------- -------
<S> <C> <C> <C>
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Short Government Bond
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Core Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
Virginia Municipal Money Market
International Emerging Market
New Jersey Municipal Money Market
International Bond
</TABLE>
For the year or periods ended September 30, 1994, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) REIMBURSEMENTS WAIVERS
- ---------- --------- -------------- -------
<S> <C> <C> <C>
Money Market $ 951,230 $3,359,847 $ 0
Municipal Money Market $ 171,405 $ 599,920 $ 0
U.S. Treasury Money $ 281,771 $ 986,201 $ 0
Market
Ohio Municipal Money $ 6,724 $ 217,938 $20,660
Market
Pennsylvania Municipal $ 42,612 $ 336,382 $19,022
Money Market
North Carolina Municipal $ 0 $ 249,914 $26,804
Money Market
Managed Income $1,398,343 $ 599,290 $ 0
Tax-Free Income $ 0 $ 47,655 $35,898
Intermediate Government $ 368,546 $ 552,819 $ 0
Ohio Tax-Free Income $ 0 $ 35,709 $35,496
Pennsylvania Tax-Free $ 49,646 $ 227,003 $ 9,645
Income
Short Government $ 36,893 $ 137,696 $ 0
Bond
</TABLE>
-63-
<PAGE> 460
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) REIMBURSEMENTS WAIVERS
---------- ----------- -------------- -------
<S> <C> <C> <C>
Intermediate Bond $ 131,294 $ 206,071 $ 0
Value Equity $ 2,306,672 $ 865,002 $ 0
Growth Equity $ 467,637 $ 175,364 $ 0
Small Cap Growth Equity $ 55,825 $ 160,320 $ 0
Core Equity $ 303,169 $ 113,689 $ 0
Index Equity $ 28,392 $ 376,934 $ 0
Small Cap Value Equity $ 890,883 $ 197,974 $ 0
International Equity $ 1,408,053 $ 477,733 $ 0
Balanced $ 470,579 $ 202,166 $ 0
Virginia Municipal Money Market(1) $ 0 $ 8,925 $ 0
International Emerging Market(2) $ 7,672 $ 16,051 $ 0
New Jersey Municipal Money Market3 N/A N/A N/A
International Bond3 N/A N/A N/A
</TABLE>
(1) For the period from commencement of operations (July 25, 1994) through
September 30, 1994.
(2) For the period from commencement of operations (June 17, 1994) through
September 30, 1994.
(3) Portfolio was not operational as of September 30, 1994.
For the year or periods ended September 30, 1993, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $ 2,899,093 $ 815,911 $ 0
Municipal Money Market $ 509,475 $ 131,249 $ 0
U.S. Treasury Money Market $ 601,820 $ 195,459 $ 0
Ohio Municipal Money Market(1) $ 0 $ 28,953 $ 8,630
Pennsylvania Municipal Money Market(1) $ 0 $ 18,117 $ 11,411
North Carolina Municipal Money Market(2) $ 0 $ 47,085 $ 11,729
Managed Income $ 1,522,695 $ 87,513 $ 0
Tax-Free Income $ 0 $ 43,457 $ 0
Intermediate Government $ 594,202 $ 77,301 $ 0
Ohio Tax-Free Income(3) $ 0 $ 8,781 $ 20,906
</TABLE>
-64-
<PAGE> 461
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
---------- --------- ------- --------------
<S> <C> <C> <C>
Pennsylvania Tax-Free Income(3) $ 0 $ 87,528 $ 19,064
Short U.S. Government Bond(4) $ 0 $ 2,078 $ 1,349
Intermediate Bond(5) $ 0 $ 5,432 $ 0
Value Equity $ 1,996,726 $ 108,242 $ 0
Growth Equity $ 400,652 $ 31,912 $ 0
Small Cap Growth Equity(6) $ 5,432 $ 2,773 $ 0
Core Equity(7) $ 0 $ 5,372 $ 0
Index Equity $ 212,413 $ 161,606 $ 0
Small Cap Value Equity $ 564,065 $ 34,794 $ 0
International Equity $ 598,040 $ 47,134 $ 0
Balanced $ 124,556 $ 45,203 $ 0
Virginia Municipal Money Market(8) N/A N/A N/A
International Emerging Market(8) N/A N/A N/A
New Jersey Municipal Money Market(8) N/A N/A N/A
International Bond(8) N/A N/A N/A
</TABLE>
(1) Commenced operations June 1, 1993.
(2) Commenced operations May 3, 1993.
(3) Commenced operations December 1, 1992.
(4) Commenced operations September 1, 1993.
(5) Commenced operations September 17, 1993.
(6) Commenced operations September 14, 1993.
(7) Commenced operations September 13, 1993.
(8) Portfolio was not operational as of September 30, 1993.
For the year ended September 30, 1995, PIMC paid sub-advisory fees to the
specified Portfolios' sub-advisers, after waivers, and such sub-advisers waived
sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
---------- --------- -------
<S> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
</TABLE>
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<PAGE> 462
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- -------
<S> <C> <C>
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
North Carolina Municipal Money
Market
Managed Income
Tax-Free Income
Intermediate Government
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Short Government Bond
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Core Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
Virginia Municipal Money Market
International Emerging Market
New Jersey Municipal Money
Market
International Bond
</TABLE>
For the year or periods ended September 30, 1994, PIMC paid sub- advisory fees
to the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
- ---------- --------------- -------
<S> <C> <C>
Money Market $ 0 $ 479,008
Municipal Money Market $ 0 $ 85,703
U.S. Treasury Money Market $ 0 $ 140,886
Ohio Municipal Money Market $ 0 $ 24,962
Pennsylvania Municipal Money Market $ 0 $ 42,110
North Carolina Municipal Money Market $ 0 $ 27,768
Managed Income $ 1,198,580 $ 199,763
</TABLE>
-66-
<PAGE> 463
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
- ---------- --------------- -------
<S> <C> <C>
Tax-Free Income $ 0 $ 33,359
Intermediate Government $ 276,410 $ 368,546
Ohio Tax-Free Income $ 0 $ 24,996
Pennsylvania Tax-Free Income $ 33,198 $ 160,456
Short Government Bond $ 36,893 $ 85,319
Intermediate Bond $ 97,470 $ 138,685
Value Equity $ 2,018,338 $ 288,334
Growth Equity $ 409,182 $ 58,455
Small Cap Growth Equity $ 55,825 $ 101,371
Core Equity $ 265,273 $ 37,896
Index Equity $ 28,392 $ 275,602
Small Cap Value Equity $ 791,896 $ 0
International Equity $ 1,257,191 $ 251,438
Balanced $ 409,420 $ 79,849
Virginia Municipal Money Market(1) $ 0 $ 992
International Emerging Market(2) $ 6,723 $ 14,153
New Jersey Municipal Money Market(3) N/A N/A
International Bond(3) N/A N/A
</TABLE>
(1) Commenced operations July 25, 1994.
(2) Commenced operations June 17, 1994.
(3) Portfolio was not operational as of September 30, 1994.
For the years or periods ended September 30, 1993, PIMC paid sub- advisory fees
to the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- -------
<S> <C> <C>
Money Market $ 0 $ 412,778
Municipal Money Market $ 0 $ 71,192
U.S. Treasury Money Market $ 0 $ 88,587
Ohio Municipal Money Market(1) $ 0 $ 3,217
Pennsylvania Municipal Money Market(1) $ 0 $ 2,013
North Carolina Municipal Money Market(2) $ 0 $ 5,232
Managed Income $ 1,069,887 $ 61,259
Tax-Free Income $ 0 $ 30,420
Intermediate Government $ 415,941 $ 54,111
</TABLE>
-67-
<PAGE> 464
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- -------
<S> <C> <C>
Ohio Tax-Free Income(3) $ 0 $ 6,174
Pennsylvania Tax-Free Income(3) $ 0 $ 61,270
Short Government Bond(4) $ 0 $ 1,456
Intermediate Bond(5) $ 3,802 $ 3,802
Value Equity $ 1,452,164 $ 78,721
Growth Equity $ 291,383 $ 25,967
Small Cap Growth Equity6 $ 0 $ 2,017
Core Equity(7) $ 10,418 $ 3,906
Index Equity $ 159,310 $ 121,209
Small Cap Value Equity $ 410,229 $ 25,305
International Equity $ 478,432 $ 37,707
Balanced $ 90,586 $ 32,875
Virginia Municipal Money Market(8) N/A N/A
International Emerging Market(8) N/A N/A
New Jersey Municipal Money Market(8) N/A N/A
International Bond(8) N/A N/A
</TABLE>
(1) Commenced operations June 1, 1993.
(2) Commenced operations May 3, 1993.
(3) Commenced operations December 1, 1992.
(4) Commenced operations September 1, 1993.
(5) Commenced operations September 17, 1993.
(6) Commenced operations September 14, 1993.
(7) Commenced operations September 13, 1993.
(8) Portfolio was not operational as of September 30, 1993.
For the period from October 1, 1992 to September 10, 1993, PIMC paid
sub-advisory fees of $1,017,364 and $274,275 to PNC Bank Ohio for the Managed
Income and Growth Equity Portfolios, respectively. For the period from October
1, 1992 to September 10, 1993, PIMC paid sub-advisory fees of $397,885 to PMC
with respect to the Intermediate Government Portfolio.
For the services it provides as investment adviser to the Index Master
Portfolio, DFA is paid a monthly fee calculated as a percentage of average net
assets of the Index Master Portfolio. For the fiscal years ending November 30,
1993, 1994 and 1995, the Index Master Portfolio paid advisory fees to DFA
totalling $7,231, $11,000 and ____________, respectively. The Index Equity
Portfolio did not invest in the Index Master Portfolio during such periods. The
Index Master Portfolio is currently seeking
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<PAGE> 465
shareholder approval of a new investment management agreement with DFA. It is
anticipated that the Index Master Portfolio's sole shareholder will approve the
new agreement and that the advisory and other operating expenses of the Index
Equity Portfolio will be consistent with the expenses described in the Index
Equity Portfolio's Prospectus. If the Index Master Portfolio's shareholder fails
to approve the new agreement, the directors of the current shareholder will
consider appropriate action.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio
was advised by MidLantic Bank, N.A. For the fiscal years ended February 28,
1995, 1994 and 1993, the predecessor portfolio to the New Jersey Tax-Free Income
Portfolio paid $607,485, $159,582 and $37,159, respectively, in investment
advisory fees to MidLantic Bank, N.A. pursuant to its prior investment advisory
contract. In addition, during the fiscal years ended February 29, 1995, 1994 and
1993, MidLantic Bank, N.A. waived $2,451, $318,099 and $100,403, respectively,
in investment advisory fees.
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the fiscal years ended June 30, 1995 and 1994 and for the period
December 9, 1992 (commencement of operations) through June 30, 1993, BlackRock
waived its entire investment advisory fee in the amounts of $56,894, $34,010 and
$24,761, respectively, and reimbursed expenses amounting to $137,364, $137,179
and $0, respectively.
ADMINISTRATION AGREEMENTS. PFPC and PDI serve as the Fund's
co-administrators pursuant to an Administration Agreement (the "Administration
Agreement"). PFPC and PDI have agreed to maintain office facilities for the
Fund, furnish the Fund with statistical and research data, clerical, accounting,
and bookkeeping services, and certain other services required by the Fund.
The Administration Agreement provides that PFPC and PDI will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations thereunder.
PFPC serves as the administrative services agent for the Index
Master Portfolio pursuant to an Administration and Accounting Services
Agreement. The services provided by PFPC are subject to supervision by the
executive officers and the Board of Trustees of the Trust, and include
day-to-day keeping and maintenance of certain records, calculation of the
offering price of the shares, preparation of reports and acting as liaison with
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<PAGE> 466
the Trust's custodians and dividend and disbursing agents. PFPC also charges
each investor in the Index Master Portfolio a monthly fee of $1,000.
For the year ended September 30, 1995, the Fund paid PFPC and PDI combined
administration fees (after waivers), and PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal
Money Market
North Carolina Municipal
Money Market
Managed Income
Tax-Free Income
Intermediate Government
Ohio Tax-Free Income
Pennsylvania Tax-Free
Income
Short Government Bond
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Core Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
Virginia Municipal Money
Market
International Emerging
Market
New Jersey Municipal Money
Market
International Bond
</TABLE>
For the year ended September 30, 1994, the Fund paid PFPC and PDI combined
administration fees (after waivers), and PFPC and PDI
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<PAGE> 467
waived combined administration fees and reimbursed expenses, as
follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $ 803,349 $ 541,066 $ 0
Municipal Money Market $ 42,931 $ 214,178 $ 0
U.S. Treasury Money Market $ 132,901 $ 289,756 $ 0
Ohio Municipal Money
Market $ 2,241 $ 72,646 $ 6,887
Pennsylvania Municipal
Money Market $ 11,758 $ 114,573 $ 6,340
North Carolina Municipal
Money Market $ 0 $ 83,304 $ 8,934
Managed Income $ 521,204 $ 277,849 $ 0
Tax-Free Income $ 0 $ 19,062 $ 14,359
Intermediate Government $ 186,742 $ 181,804 $ 0
Ohio Tax-Free Income $ 0 $ 14,284 $ 14,199
Pennsylvania Tax-Free $ 19,858 $ 90,020 $ 3,858
Income
Short Government Bond $ 14,758 $ 55,078 $ 0
Intermediate Bond $ 52,518 $ 82,428 $ 0
Value Equity $ 1,075,209 $ 61,908 $ 0
Growth Equity $ 128,262 $ 105,557 $ 0
Small Cap Growth Equity $ 20,166 $ 58,432 $ 0
Core Equity $ 52,164 $ 99,421 $ 0
Index Equity $ 27,115 $ 378,211 $ 0
Small Cap Value Equity $ 354,486 $ 41,462 $ 0
International Equity $ 502,876 $ 0 $ 0
Balanced $ 125,112 $ 119,522 $ 0
Virginia Municipal Money
Market(1) $ 0 $ 2,975 $ 1,605
International Emerging
Market(1) $ 1,259 $ 2,537 $ 0
New Jersey Municipal Money
Market(2) N/A N/A N/A
International Bond(2) N/A N/A N/A
</TABLE>
(1) Commencement of operations.
(2) Portfolio had not commenced operations.
For the years or periods ended September 30, 1993, the Fund paid PFPC and PDI
combined administration fees after waivers), and PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
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<PAGE> 468
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $ 674,120 $ 101,509 $ 0
Municipal Money Market $ 117,768 $ 21,036 $ 0
U.S. Treasury Money Market $ 157,519 $ 30,288 $ 0
Ohio Municipal Money Market(1) $ 0 $ 9,651 $ 0
Pennsylvania Municipal Money
Market(1) $ 0 $ 6,039 $ 0
North Carolina Municipal
Money Market(2) $ 0 $ 15,659 $ 0
Managed Income $ 397,750 $ 87,513 $ 0
Tax-Free Income $ 0 $ 11,914 $ 0
Intermediate Government $ 167,611 $ 24,673 $ 0
Ohio Tax-Free Income(3) $ 0 $ 85,754 $ 6,515
Pennsylvania Tax-Free Income(3) $ 0 $ 8,797 $ 5,766
Short Government Bond(4) $ 0 $ 831 $ 0
Intermediate Bond(5) $ 1,262 $ 3,084 $ 0
Value Equity $ 528,584 $ 9,382 $ 0
Growth Equity $ 101,208 $ 12,879 $ 0
Small Cap Growth Equity(6) $ 173 $ 835 $ 0
Core Equity(7) $ 4,722 $ 2,441 $ 0
Index Equity $ 195,736 $ 59,581 $ 0
Small Cap Value Equity $ 156,048 $ 5,441 $ 0
International Equity $ 123,924 $ 6,447 $ 0
Balanced $ 44,667 $ 8,046 $ 0
Virginia Municipal Money
Market(8) N/A N/A N/A
International Emerging N/A N/A N/A
Market(8)
New Jersey Municipal Money
Market(8) N/A N/A N/A
International Bond(8) N/A N/A N/A
</TABLE>
1 Commenced operations June 1, 1993.
2 Commenced operations May 3, 1993.
3 Commenced operations December 1, 1992.
4 Commenced operations September 1, 1993.
5 Commenced operations September 17, 1993.
6 Commenced operations September 14, 1993.
7 Commenced operations September 13, 1993.
8 Portfolio was not operational as of September 30, 1993.
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<PAGE> 469
For the period from October 1, 1992 to January 31, 1993, the Fund paid
PFPC and the former co-administrator combined administration fees, before
waivers, of $397,594, $74,771, $77,953, $212,227, $0, $76,317, $227,477,
$43,210, $118,702, $56,278, $41,645 and $4,938 Money Market, Municipal Money
Market, U.S. Treasury Money Market, Managed Income, Tax-Free Income,
Intermediate Government, Value Equity, Growth Equity, Index Equity, Small Cap
Value Equity, International Equity and Balanced Portfolios, respectively. For
that period, PFPC and the former co-administrator waived combined administration
fees of $0, $0, $0, $0, $5,469, $0, $0, $0, $0, $0, $0 and $4,080 for such
respective Portfolios, and reimbursed the Tax-Free Income Portfolio for certain
operational expenses totalling $0. For the period from commencement of
operations to January 31, 1993, the Fund paid PFPC and the former
co-administrator combined administration fees, before waivers, of $0 and $0 for
the Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios,
respectively. For the same period, PFPC and the former co-administrator waived
combined administration fees of $124 and $1,774 for such respective Portfolios,
and reimbursed such Portfolios for certain operational expenses totalling $1,848
and $1,859, respectively.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolios
received administrative services from SEI Financial Management Corporation
("SEI"). During the fiscal years ended February 28, 1995, 1994 and 1993, the
predecessor portfolio to the New Jersey Tax-Free Income Portfolio paid $105,029,
$79,454 and $15,884, respectively, in administrative fees to SEI pursuant to the
prior administration agreement. In addition, during the fiscal years ended
February 28, 1995, 1994 and 1993, SEI waived $77,951, $63,850 and $25,385,
respectively, in administrative fees.
The predecessor portfolio to the Core Bond Portfolio received
administrative services from State Street Bank and Trust Company ("State
Street"). During the fiscal years ended June 30, 1995 and 1994 and for the
period December 9, 1992 (commencement of operations) through June 30, 1993, the
predecessor portfolio to the Core Bond Portfolio paid $73,257, $_______ and
$_______, respectively, in administrative fees to State Street pursuant to the
prior administration agreement. In addition, during the fiscal year ended June
30, 1994 and for the period December 9, 1992 (commencement of operations)
through June 30, 1993, State Street waived $32,500 and $3,701, respectively, in
administrative fees.
CCGI serves as an Administrator to the Fund pursuant to a
Co-Administration Agreement. Under the Co-Administration Agreement, CCGI is
responsible for: (i) the supervision and coordination of the performance of the
Fund's service providers; (ii) the negotiation of service contracts and
arrangements
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<PAGE> 470
between the Fund and its service providers; (iii) acting as liaison between the
trustees of the Fund and the Fund's service providers; and (iv) providing
ongoing business management and support services in connection with the Fund's
operations.
The Co-Administration Agreement provides that CCGI will not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which the Agreement relates, except for losses
resulting from willful misfeasance, bad faith or gross negligence on the part of
CCGI in the performance of its duties under the Agreement.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank is custodian of the
Fund's assets pursuant to a custodian agreement (the "Custodian Agreement").
Under the Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a
separate account or accounts in the name of each Portfolio, (ii) holds and
transfers portfolio securities on account of each Portfolio, (iii) accepts
receipts and makes disbursements of money on behalf of each Portfolio, (iv)
collects and receives all income and other payments and distributions on account
of each Portfolio's securities and (v) makes periodic reports to the Board of
Trustees concerning each Portfolio's operations. PNC Bank is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Fund, provided that, with respect to sub-custodians other than
sub-custodians for foreign securities, PNC Bank remains responsible for the
performance of all its duties under the Custodian Agreement and holds the Fund
harmless from the acts and omissions of any sub-custodian. The Chase Manhattan
Bank, N.A., State Street Bank and Trust Company and Barclays Bank PLC serve as
the Fund's sub-custodians.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon each investment portfolio's
average gross assets, with a minimum monthly fee of $1,000 per investment
portfolio. PNC Bank is also entitled to out-of-pocket expenses and certain
transaction charges. PNC Bank currently intends to waive its custody fees with
respect to the Index Equity Portfolio.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in each Portfolio, (ii) addresses
and mails all communications by each Portfolio to record owners of its shares,
including reports to shareholders, dividend and distribution notices and proxy
materials for its meetings of shareholders, (iii) maintains shareholder accounts
and, if requested, sub- accounts and (iv) makes periodic reports to the Board of
Trustees concerning the operations of each Portfolio. PFPC may, on 30 days'
notice to the Fund, assign its duties as transfer and
-74-
<PAGE> 471
dividend disbursing agent to any other affiliate of PNC Bank Corp. For its
services with respect to the Fund's Institutional and Service Shares under the
Transfer Agency Agreement, PFPC receives fees at the annual rate of .03% of the
average net asset value of outstanding Institutional and Service Shares in each
Portfolio, plus per account fees and disbursements. For its services under the
Transfer Agency Agreement with respect to Investor Shares, PFPC receives per
account fees, with minimum annual fees of $24,000 for each Portfolio, plus
disbursements.
PNC Bank serves as the Trust's custodian and PFPC serves as the Trust's
transfer and dividend disbursing agent. The Index Equity Portfolio will bear its
pro rata portion of the Index Master Portfolio's custody and transfer and
dividend disbursing fees and expenses.
DISTRIBUTOR AND DISTRIBUTION AND SERVICE PLAN. The Fund has entered
into a distribution agreement with the Distributor under which the Distributor,
as agent, offers shares of each Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares.
Pursuant to the Fund's Amended and Restated Distribution and Service
Plan (the "Plan"), the Fund may pay the Distributor and/or CCGI or any other
affiliate of PNC Bank fees for distribution and sales support services.
Currently, as described further below, only Investor A Shares, Investor B Shares
and Investor C Shares bear the expense of distribution fees under the Plan. In
addition, the Fund may pay CCGI fees for the provision of personal services to
shareholders and the processing and administration of shareholder accounts.
CCGI, in turn, determines the amount of the service fee and shareholder
processing fee to be paid to other Service Organizations. The Plan provides,
among other things, that: (i) the Board of Trustees shall receive quarterly
reports regarding the amounts expended under the Plan and the purposes for which
such expenditures were made; (ii) the Plan will continue in effect for so long
as its continuance is approved at least annually by the Board of Trustees in
accordance with Rule 12b-1 under the 1940 Act; (iii) any material amendment
thereto must be approved by the Board of Trustees, including the trustees who
are not "interested persons" of the Fund (as defined in the 1940 Act) and who
have no direct or indirect financial interest in the operation of the Plan or
any agreement entered into in connection with the Plan (the "12b-1 Trustees"),
acting in person at a meeting called for said purpose; (iv) any amendment to
increase materially the costs which any class of shares may bear for
distribution services pursuant to the Plan shall be effective only upon approval
by a vote of a majority of the outstanding shares of such class and by a
majority of the 12b-1 Trustees; and (v) while the Plan remains in effect, the
selection and nomination of the Fund's trustees
-75-
<PAGE> 472
who are not "interested persons" of the Fund shall be committed to the
discretion of such non-interested trustees.
The Plan is terminable as to any class of Shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class. Similarly, any agreement entered into
pursuant to the Plan with a Service Organization is terminable as to a class
without penalty, at any time, by the Fund or by the Service Organization upon
written notice to the other. Each such agreement will terminate automatically in
the event of its assignment.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at an annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. These commissions approximate
the commissions payable with respect to sales of Investor A Shares. The
distribution fees payable under the Plan (at an annual rate of .75% of the
average daily net asset value of each Portfolio's outstanding Investor B Shares)
are intended to cover the expense to the Distributor of paying such up-front
commissions, and the contingent deferred sales charge is calculated to charge
the investor with any shortfall that would occur if Investor B Shares are
redeemed prior to the expiration of the conversion period, after which Investor
B Shares automatically convert to Investor A Shares.
With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. These commissions
approximate [ ].
No compensation is payable by the Fund to the Distributor for its
distribution services for Service or Institutional Shares.
Service Organizations may charge their clients additional fees for
account services.
The Fund intends to enter into service agreements with institutions
pursuant to which institutions will render certain support services to their
customers ("Customers") who are the beneficial owners of Service, Investor A,
Investor B and Investor C Shares. Such services will be provided to Customers
who are the beneficial owners of Shares of such classes and are intended
-76-
<PAGE> 473
to supplement the services provided by the Fund's Administrators and transfer
agent to the Fund's shareholders of record. In consideration for payment of up
to .25% (on an annualized basis) of the average daily net asset value of the
Investor A, Investor B and Investor C Shares owned beneficially by their
Customers and .15% (on an annualized basis) of the average daily net asset value
of the Service Shares beneficially owned by their Customers, institutions may
provide general shareholder liaison services, including, but not limited to (i)
answering shareholder inquiries regarding account status and history, the manner
in which purchases, exchanges and redemptions of shares may be effected and
certain other matters pertaining to the shareholders' investments; and (ii)
assisting shareholders in designating and changing dividend options, account
designations and addresses. In consideration for payment of a service fee of up
to a separate .15% (on an annualized basis) of the average daily net asset value
of Service, Investor A, Investor B and Investor C Shares owned beneficially by
their Customers, institutions may provide one or more of these additional
services to such Customers: (i) providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; (ii) assistance in
aggregating and processing purchase, exchange and redemption transactions; (iii)
placement of net purchase and redemption orders with the Distributor; (iv)
arranging for wiring of funds; (v) transmitting and receiving funds in
connection with Customer orders to purchase or redeem Shares; (vi) processing
dividend payments; (vii) verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; (viii) providing periodic
statements showing Customers' account balances and, to the extent practicable,
integrating such information with other Customer transactions otherwise effected
through or with a Service Organization; (ix) furnishing (either separately or on
an integrated basis with other reports sent to a shareholder by a Service
Organization) monthly and year-end statements and confirmations of purchases,
exchanges and redemptions; (x) transmitting on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other communications from
the Fund to the shareholders; (xi) receiving, tabulating and transmitting to the
Fund proxies executed by Customers with respect to shareholder meetings; (xii)
providing subaccounting with respect to Shares beneficially owned by Customers
or the information to the Fund necessary for subaccounting; (xiii) sub- transfer
agency services; and (xiv) such other similar services as the Fund or a Customer
may request.
No Investor C Shares of any Portfolio were issued during the fiscal
year ended September 30, 1995.
-77-
<PAGE> 474
For the fiscal year ended September 30, 1995, the Investor A and
Investor B Shares of the Portfolios bore the expense of distribution fees
relating to the Fund's prior distribution plans for Investor A Shares and
Investor B Shares, and the Service Shares and Investor B Shares of the
Portfolios bore the expense of servicing and shareholder processing fees
relating to the Fund's prior service plans for Service Shares and Investor B
Shares as follows:
<TABLE>
<CAPTION>
DISTRIBUTION AND
SERVICE PLAN SERVICE PLAN SERVICE PLAN
INVESTOR A INVESTOR B INVESTOR B SERVICE
PORTFOLIOS SHARES SHARES SHARES SHARES
- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
North Carolina Municipal Money
Market
Managed Income
Tax-Free Income
Intermediate Government
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Short Government Bond
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Core Equity
[]
Small Cap Value Equity
International Equity
Balanced
Virginia Municipal Money Market
International Emerging Market
New Jersey Municipal Money
Market
International Bond
</TABLE>
No Investor C Shares were offered during the fiscal year ended September 30,
1995.
-78-
<PAGE> 475
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees, fees
and expenses of officers and trustees who are not affiliated with PAMG or the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, servicing fees, fees and expenses in registering and
qualifying the Portfolios and their Shares for distribution under federal and
state securities laws, expenses of preparing prospectuses and statements of
additional information and of printing and distributing prospectuses and
statements of additional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solicitations, fidelity
bond and trustees and officers liability insurance premiums, the expense of
independent pricing services and other expenses which are not expressly assumed
by PAMG or the Fund's service providers under their agreements with the Fund.
Any general expenses of the Fund that do not belong to a particular investment
portfolio will be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board determines to be fair
and equitable.
PAMG and the sub-advisers expect to waive voluntarily a portion of
their respective advisory and sub-advisory fees during the Portfolios' current
fiscal year. In addition, if the total expenses borne by any Portfolio in a
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, PAMG, the respective sub-adviser and the Administrators
will bear the amount of the excess to the extent required by such regulations in
proportion to the advisory and administration fees otherwise payable to them for
such year.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-advisers seek
to obtain the best price and execution for a Portfolio, taking into account such
factors as the price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. While the adviser and sub-advisers generally seek
reasonably competitive commission rates, payment of the lowest commission or
spread is not necessarily consistent with obtaining the best price and execution
in particular transactions. Payments of commissions to brokers who are
affiliated persons of the Fund, or the Trust with respect to the Index Master
Portfolio, (or affiliated persons of such persons) will be made in accordance
with Rule 17e-1 under
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<PAGE> 476
the 1940 Act. With respect to the Index Master Portfolio, commissions paid on
such transactions would be commensurate with the rate of commissions paid on
similar transactions to brokers that are not so affiliated.
No Portfolio has any obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The adviser and sub-advisers
may, consistent with the interests of a Portfolio, select brokers on the basis
of the research, statistical and pricing services they provide to a Portfolio
and the adviser's or sub-adviser's other clients. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by the adviser and sub-advisers under their
respective contracts. A commission paid to such brokers may be higher than that
which another qualified broker would have charged for effecting the same
transaction, provided that the adviser or sub-adviser determines in good faith
that such commission is reasonable in terms either of the transaction or the
overall responsibility of the adviser or sub-adviser to a Portfolio and its
other clients and that the total commissions paid by a Portfolio will be
reasonable in relation to the benefits to a Portfolio over the long-term. With
respect to the Index Master Portfolio, it will seek to acquire and dispose of
securities in a manner which would cause as little fluctuation in the market
prices of stocks being purchased or sold as possible in light of the size of the
transactions being effected, and brokers will be selected with this goal in
view. DFA monitors the performance of brokers which effect transactions for the
Index Master Portfolio to determine the effect that the Index Master Portfolio's
trading has on the market prices of the securities in which they invest. DFA
also checks the rate of commission being paid by these Index Master Portfolio to
its brokers to ascertain that they are competitive with those charged by other
brokers for similar services. Transactions also may be placed with brokers who
provide DFA with investment research, such as reports concerning individual
issuers, industries and general economic and financial trends and other research
services. The Investment Management Agreement permits DFA knowingly to pay
commissions on such transactions which are greater than another broker might
charge if DFA, in good faith, determines that the commissions paid are
reasonable in relation to the research or brokerage services provided by the
broker or dealer when viewed in terms of either a particular transaction or
DFA's overall responsibilities to the Trust.
Commission rates for brokerage transactions on foreign stock exchanges
are generally fixed. In addition, the adviser or sub-adviser may take into
account the sale of shares of the Fund in allocating purchase and sale orders
for portfolio securities to brokers (including brokers that are affiliated with
them or Distributor).
-80-
<PAGE> 477
For the year or period ended September 30, 1995, the following Portfolios paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money Market
North Carolina Municipal Money Market
Managed Income
Tax-Free Income
Intermediate Government
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Short Government Bond
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Core Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
Virginia Municipal Money Market
International Emerging Market
New Jersey Municipal Money Market
International Bond
</TABLE>
For the year or period ended September 30, 1994, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Value Equity $ 431,232
Growth Equity $ 530,428
Small Cap Growth Equity $ 62,339
Core Equity $ 156,700
Index Equity $ 47,190
</TABLE>
-81-
<PAGE> 478
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Small Cap Value Equity $ 185,560
International Equity $ 1,031,631
Balanced $ 164,460
International Emerging Market $ 32,367
</TABLE>
For the year or period ended September 30, 1993, the following
Portfolios paid brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Value Equity $ 136,565
Growth Equity* $ 366,421
Small Cap Growth Equity* $ 1,186
Core Equity $ 4,770
Index Equity $ 18,386
Small Cap Value Equity* $ 105,423
International Equity $ 308,297
Balanced $ 68,556
</TABLE>
* The Growth Equity, Small Cap Growth Equity and Small Cap Value Equity
Portfolios paid Shearson Lehman Hutton Inc. ("Shearson"), as affiliate
of the Fund's former distributor $4,390, $264 and $636, respectively.
Approximately 1%, 22% and 1% of the aggregate brokerage commissions of
such respective Portfolios were paid to Shearson, representing
approximately 1%, 22% and 1% of the aggregate dollar amounts of
transactions by those respective Portfolios involving the payment of
commissions.
For the Index Master Portfolio's fiscal years ended November 30, 1993,
1994 and 1995, the Index Master Portfolio paid brokerage commissions totalling
$41,393, $10,610 and $___________, respectively.
For the fiscal years ended February 28, 1995, 1994 and 1993 the
predecessor portfolio to the New Jersey Tax-Free Income Portfolio paid no
brokerage commissions.
For the fiscal years ended June 30, 1995 and 1994 and for the period
December 9, 1992 (commencement of operations) through June 30, 1993, the Core
Bond Portfolio's predecessor portfolio
paid no brokerage commissions.
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own
-82-
<PAGE> 479
account and not as brokers. The Portfolios will primarily engage in transactions
with these dealers or deal directly with the issuer unless a better price or
execution could be obtained by using a broker. Prices paid to a dealer with
respect to both foreign and domestic securities will generally include a
"spread," which is the difference between the prices at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit.
Purchases of money market instruments by a Portfolio are made from
dealers, underwriters and issuers. The Portfolios do not currently expect to
incur any brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market Portfolio, the turnover
rates should not adversely affect the Portfolio's net asset values or net
income.
Securities purchased in underwritten offerings include a fixed amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid. It is the policy of the
Portfolios to give primary consideration to obtaining the most favorable price
and efficient execution of transactions involving money market instruments. In
seeking to implement this policy of the Portfolios, the adviser and sub-advisers
will effect transactions involving money market instruments with those dealers
they believe provide the most favorable prices and are capable of providing
efficient executions.
The adviser or sub-advisers may seek to obtain an undertaking from
issuers of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that a Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for each Portfolio and for other investment
accounts managed by the adviser or sub-advisers are
-83-
<PAGE> 480
made independently of each other in the light of differing conditions. However,
the same investment decision may be made for two or more of such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated as to amount in a manner deemed
equitable to each such account. While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as a Portfolio
is concerned, in other cases it could be beneficial to a Portfolio. A Portfolio
will not purchase securities during the existence of any underwriting or selling
group relating to such securities of which PIMC, BlackRock, PNC Bank, PCM, PEAC,
the Administrators, Distributor or any affiliated person (as defined in the 1940
Act) thereof is a member except pursuant to procedures adopted by the Board of
Trustees in accordance with Rule 10f-3 under the 1940 Act. In no instance will
portfolio securities be purchased from or sold to PIMC, BlackRock, PNC Bank,
PCM, PEAC, the Administrators, Distributor or any affiliated person of the
foregoing entities except as permitted by SEC exemptive order or by applicable
law.
The portfolio turnover rate of a Portfolio is calculated by dividing
the lesser of a Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. The Index Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Index Master Portfolio's shares.
The Fund is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held
by the Fund as of the end of its most recent fiscal year. As of September 30,
1995, the following Portfolios held the following securities:
PURCHASE AND REDEMPTION INFORMATION
COMPUTATION OF PUBLIC OFFERING PRICES FOR INVESTOR A SHARES OF THE
NON-MONEY MARKET PORTFOLIOS. An illustration of the computation of the public
offering price per Investor A Share of each Non-Money Market Portfolio, based on
the value of such Portfolios' net assets as of September 30, 1995, follows:
-84-
<PAGE> 481
<TABLE>
<CAPTION>
TABLE
-----
Value Growth Small Cap []
Equity Equity Growth Equity Core Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets............. $ $ $ $ $
Outstanding
Shares................
========= ========= ============= =========== =========
Net Asset Value
Per Share............. $ $ $ $ $
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)...... $ $ $ $ $
Offering to Public..... $ $ $ $ $
========= ========= ============= =========== =========
Small
Cap Value International Managed Tax-Free
Equity Equity Balanced Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- ------------- --------- --------- ---------
Net Assets............. $ $ $ $ $
Outstanding
Shares................
========= ============= ========= ========= =========
Net Asset Value
Per Share............. $ $ $ $ $
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)...... $ $ $ $ $
Offering to Public..... $ $ $ $ $
========= ============= ========= ========= =========
Pennsylvania Short
Intermediate Ohio Tax- Tax-Free Government Intermediate
Government Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ----------- ------------- ----------- ------------
Net Assets............. $ $ $ $ $
Outstanding
Shares................
============ =========== ============= =========== ============
Net Asset Value
Per Share............. $ $ $ $ $
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)...... $ $ $ $ $
Offering to Public..... $ $ $ $ $
============ =========== ============= =========== ============
</TABLE>
-85-
<PAGE> 482
<TABLE>
<CAPTION>
International New Jersey
Government International Emerging Tax-Free Core
Income Bond Markets Income Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
---------- ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets............. $ $ $ $ $
Outstanding
Shares................
========== ============= ============= ========== =========
Net Asset Value
Per Share............. $ $ $ $ $
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)...... $ $ $ $ $
Offering to Public..... $ $ $ $ $
========== ============= ============= ========== =========
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
---------- -----------------------
<S> <C>
Managed Income
Tax-Free Income
Intermediate Government
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Short Government Bond
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Core Equity
[]
Small Cap Value Equity
International Equity
Balanced
International Emerging Market
International Bond
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1994 were as follows:
-86-
<PAGE> 483
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
---------- -----------------------
<S> <C>
Managed Income $ 150,150
Tax-Free Income $ 37,504
Intermediate Government $ 50,694
Ohio Tax-Free Income $ 64,596
Pennsylvania Tax-Free Income $ 678,464
Short Government Bond $ 10,268
Intermediate Bond $ 2,124
Value Equity $ 195,675
Growth Equity $ 81,496
Small Cap Growth Equity $ 44,054
Core Equity $ 17,550
[] $ 38,454
Small Cap Value Equity $ 230,590
International Equity $ 303,547
Balanced $ 1,213,056
International Emerging Market $ 130,755
</TABLE>
Total front-end sales charges paid by shareholders of Portfolios for the year or
period ended September 30, 1993 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
---------- -----------------------
<S> <C>
Managed Income $ 202,926
Tax-Free Income $ 128,003
Intermediate Government $ 127,347
Ohio Tax-Free Income $ 68,959
Pennsylvania Tax-Free Income $ 1,083,103
Value Equity $ 155,096
Growth Equity $ 60,863
[] $ 37,281
Small Cap Value Equity $ 250,615
International Equity $ 86,294
Balanced $ 1,304,538
</TABLE>
Investor B Shares of the Non-Money Market Portfolios are sold at the
net asset value per share next determined after a purchase order is received.
Investor B Shares of the Non-Money Market Portfolios are subject to a contingent
deferred sales charge which is payable on redemption of such Investor B Shares.
Investor C Shares of the Non-Money Market Portfolios are sold at the
net asset value per share next determined after a purchase order is received
plus the applicable front-end sales charge. In addition, Investor C Shares of
the Non-Money Market
-87-
<PAGE> 484
Portfolios are subject to a contingent deferred sales charge which is payable on
redemption of such Investor C Shares within 12 months of purchase.
Service and Institutional Shares of each Portfolio are sold at the net
asset value per share next determined after a purchase order is received.
EXCHANGE PRIVILEGE. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states where
the exchange may legally be made.
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Investor A Shares and Investor B Shares, respectively, of a Non-Money
Market Portfolio. Holders of Investor Shares of a Money Market Portfolio who
redeem their shares and use the proceeds to purchase Investor C Shares of a
Money Market Portfolio will be subject to both a front-end and a contingent
deferred sales charge (unless an exemption from either sales charge applies).
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Investor A Shares of the Non-Money Market Portfolios at
net asset value, without a sales charge, with the proceeds from the redemption
of shares of any other investment company which were sold with a sales charge or
commission in accordance with the terms set forth in the Prospectuses. This does
not include shares of an affiliated mutual fund which were or would be subject
to a contingent deferred sales charge upon redemption. For purposes of this
restriction, the term "affiliated mutual fund" means:
i) any Portfolio of the Fund; and
ii) any other investment company, if such company and the Fund
hold themselves out to investors as related companies for
purposes of investment and investor services, and if:
a) that company and the Fund have a common investment
adviser or distributor; or
b) the investment adviser or distributor of such
company or the Fund is an "affiliated person" (as
-88-
<PAGE> 485
defined in Section 2(a)(3) of the 1940 Act) of the
investment adviser or distributor of the Fund or the
company, respectively.
MISCELLANEOUS. The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase of a Portfolio's shares by making payment in whole or in part in
securities chosen by the Fund and valued in the same way as they would be valued
for purposes of computing a Portfolio's net asset value. If payment is made in
securities, a shareholder may incur transaction costs in converting these
securities into cash. The Fund has elected, however, to be governed by Rule
18f-1 under the 1940 Act so that a Portfolio is obligated to redeem its shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for any one shareholder of a Portfolio.
With respect to the Index Master Portfolio, if the Board of Trustees of
the Trust determines that it would be detrimental to the best interests of the
remaining shareholders of the Index Master Portfolio to make payment wholly or
partly in cash, the Index Master Portfolio may pay the redemption price in whole
or in part by a distribution of portfolio securities from the Index Master
Portfolio of the shares being redeemed in lieu of cash in accordance with Rule
18f-1 under the Investment Company Act of 1940. Investors, such as the
Portfolio, may incur brokerage charges and other transaction costs selling
securities that were received in payment of redemptions.
Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the Fund
may redeem shares involuntarily to reimburse a Portfolio for any loss sustained
by reason of the failure of a shareholder to make full payment for shares
purchased by the shareholder or to collect any charge relating to a transaction
effected for the benefit of a shareholder as provided in the Prospectus from
time to time.
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<PAGE> 486
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments,
the Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined
had the matrix or formula method not been used. All cash, receivables and
current payables are carried on the Fund's books at their face value. Other
assets, if any, are valued at fair value as determined in good faith under the
supervision of the Board of Trustees.
MONEY MARKET PORTFOLIOS. The net asset value for each class of each
Share of the Money Market Portfolios for the purpose of pricing purchase and
redemption orders is determined twice each day, once as of 12:00 noon (Eastern
Time) and once as of 4:00 p.m. (Eastern Time) on each Business Day. Each
Portfolio's net asset value per share is calculated by adding the value of all
securities, cash and other assets of the respective classes of the Portfolio,
subtracting the liabilities and dividing the result by the number of outstanding
Shares of such classes. The net asset value per Share of each class of each
Portfolio is determined independently of the other classes and the other
Portfolios.
The Fund seeks to maintain for each of the Money Market Portfolios a
net asset value of $1.00 per share for purposes of purchase and redemptions and
values their portfolio securities on the basis of the amortized cost method of
valuation, described below. There can be no assurance that the net asset value
per share will not vary.
A Money Market Portfolio may use a pricing service, bank or
broker/dealer experienced in such matters to value the Portfolio's securities.
As note above, the value of the portfolio securities of each Money
Market Portfolio is calculated using the amortized cost method of valuation.
Under this method the market value of an instrument is approximated by
amortizing the difference between the acquisition cost and value at maturity of
the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account. The market value of
debt securities usually reflects yields generally available on securities of
similar quality. When such yields decline, market values can be expected to
increase, and when yields increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its
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<PAGE> 487
market price, the price a Money Market Portfolio would receive if the security
were sold prior to maturity. The Fund's Board of Trustees has established
procedures for the purpose of maintaining a constant net asset value of $1.00
per share for each Money Market Portfolio, which include a review of the extent
of any deviation of net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. Should that deviation
exceed 1/2 of 1% for a Money Market Portfolio, the Fund's Board of Trustees will
promptly consider whether any action should be initiated to eliminate or reduce
material dilution or other unfair results to shareholders. Such action may
include redeeming shares in kind, selling portfolio securities prior to
maturity, reducing or withholding dividends, shortening the average portfolio
maturity, reducing the number of outstanding shares without monetary
consideration, and utilizing a net asset value per share as determined by using
available market quotations.
Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will
limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser (depending on the Money Market
Portfolio) determines present minimal credit risks pursuant to guidelines
adopted by the Fund's Board of Trustees. There can be no assurance that a
constant net asset value will be maintained for any Money Market Portfolio.
EQUITY PORTFOLIOS. The net asset value for each Series, Investor A,
Investor B, Investor C and Institutional Shares for each Equity Portfolio is
calculated as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by adding the value of all its
securities, cash and other assets allocable to each respective class of Shares
and dividing by the respective total number of outstanding Shares of each class.
The net asset value per Share of each class of each Portfolio is determined
independently of the other classes and the other Portfolios.
Valuation of securities held by each Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market System
for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract is
valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on
the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 p.m. (Eastern Time);
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<PAGE> 488
and securities for which market quotations are not readily available are valued
at fair market value as determined in good faith by or under the direction of
the Fund's Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless the investment adviser and/or sub-adviser under the supervision
of the Board of Trustees determines such method does not represent fair value.
Valuation of securities of foreign issuers and those held by the
International Equity and International Emerging Markets Portfolios is as
follows: to the extent sale prices are available, securities which are traded on
a recognized stock exchange, whether U.S. or foreign, are valued at the latest
sale price on that exchange prior to the time when assets are valued or prior to
the close of regular trading hours on the NYSE. In the event that there are no
sales, the mean between the last available bid and asked prices will be used. If
a security is traded on more than one exchange, the latest sale price on the
exchange where the stock is primarily traded is used. An option or futures
contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as
quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices prior to 4:00 p.m. (Eastern Time). In the event that
application of these methods of valuation results in a price for a security
which is deemed not to be representative of the market value of such security,
the security will be valued by, under the direction of or in accordance with a
method specified by the Board of Trustees as reflecting fair value. The
amortized cost method of valuation will be used with respect to debt obligations
with sixty days or less remaining to maturity unless the investment adviser
and/or sub-adviser under the supervision of the Board of Trustees determines
such method does not represent fair value. All other assets and securities held
by the Portfolios (including restricted securities) are valued at fair value as
determined in good faith by the Board of Trustees or by someone under its
direction. Any assets which are denominated in a foreign currency are translated
into U.S. dollars at the prevailing market rates.
A Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities.
The valuation of securities held by the Index Master Portfolio is
discussed in its Registration Statement.
BOND PORTFOLIOS. The net asset value for each Series, Investor A,
Investor B, Investor C and Institutional Shares for each Bond Portfolio is
calculated as of the close of regular trading hours on the NYSE on each Business
Day by adding the value of all its securities, cash and other assets allocable
to each respective class of Shares and dividing by the respective
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<PAGE> 489
total number of outstanding Shares of each class. The net asset value per Share
of each class of each Portfolio is determined independently of the other classes
and the other Portfolios.
Valuation of securities held by each Bond Portfolio is as follows:
domestic securities traded on a national securities exchange or on the NASDAQ
National Market system are valued at the last reported sale price that day;
domestic securities traded on a national securities exchange or on the NASDAQ
National Market System for which there were no sales on that day are valued at
the mean of the bid and asked prices; foreign securities traded on a recognized
stock exchange, whether U.S. or foreign, are valued at the latest sale price on
that exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE (if a security is traded on more than one
exchange, the latest sale price on the exchange where the stock is primarily
traded is used); foreign securities traded on a recognized stock exchange for
which there were no sales on that day are valued at the mean of the bid and
asked prices; other securities are valued on the basis of valuations provided by
a pricing service approved by the Board of Trustees, provided that if the
investment adviser or sub-adviser concludes that the price provided by a pricing
service does not represent the fair value of a security, such security will be
valued at fair value determined by the adviser or sub-adviser based on
quotations or the equivalent thereof received from dealers; an option or futures
contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as
quoted on the principal exchange or board of trade on which such option or
futures contract is traded, or in the absence of a sale, the mean between the
last bid and asked prices prior to 4:00 p.m. (Eastern Time); the amortized cost
method of valuation is used with respect to debt obligations with sixty days or
less remaining to maturity; and securities for which market quotations are not
readily available are valued at fair market value as determined in good faith by
or under the direction of the Fund's Board of Trustees. Any securities which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
PERFORMANCE INFORMATION
MONEY MARKET PORTFOLIO YIELD. Each Money Market Portfolio's current and
effective yields for Service, Investor A, Inevstor B, Investor C and
Institutional Shares are computed separately using standardized methods required
by the SEC. The annualized yield for a class of Service, Investor A, Investor B,
Investor C or Institutional Shares is computed by: (a) determining the net
change in the value of a hypothetical account having a balance of one share at
the beginning of a seven-calendar day period; (b) dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return; and (c) annualizing the results (i.e., multiplying the base period
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<PAGE> 490
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared and all dividends
declared on both the original share and such additional shares, but does not
include realized gains and losses or unrealized appreciation and depreciation.
Compound effective yields are computed by adding 1 to the base period return
(calculated as described above) raising the sum to a power equal to 365/7 and
subtracting 1. In addition, a standardized "tax-equivalent yield" may be quoted
for Service, Investor A, Investor B, Investor C and Institutional Shares in the
Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios, which is computed
separately for each class by: (a) dividing the portion of the Portfolio's yield
for shares (as calculated above) that is exempt from Federal or state income tax
by one minus a stated Federal or state income tax rate; and (b) adding the
figure resulting from (a) above to that portion, if any, of the yield that is
not exempt from Federal and state income tax.
The annualized yield information for each Money Market Portfolio for
the seven-day period ended September 30, 1995 was as follows:
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ----- ----- ----------------
<S> <C> <C> <C>
Money Market
Service Shares % % %
Investor A Shares
Institutional Shares
Investor B Shares
Municipal Money Market
Service Shares %
Investor A Shares
Institutional Shares
U.S. Treasury Money Market
Service Shares
Investor A Shares
Institutional Shares
Ohio Municipal Money Market
Service Shares
Investor A Shares
Institutional Shares
Pennsylvania Municipal Money
Market
Service Shares
Investor A Shares
Institutional Shares
</TABLE>
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<PAGE> 491
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ----- ----- ----------------
<S> <C> <C> <C>
North Carolina Municipal
Money Market
Service Shares
Investor A Shares
Institutional Shares
Virginia Municipal Money
Market
Service Shares
Investor A Shares
Institutional Shares
New Jersey Municipal Money
Market
Service Shares
Investor A Shares
</TABLE>
The Investor C Class had not commenced operations as of September 30, 1995.
The fees which may be imposed by institutions on their Customers are
not reflected in the calculations of yields for the Money Market Portfolios.
Yields on Institutional Shares will generally be higher than yields on Service
Shares; yields on Service Shares will generally be higher than yields on
Investor A Shares; and yields on Investor A Shares will generally be higher than
yields on Investor B Shares and Investor C Shares.
From time to time, in advertisements or in reports to shareholders, the
yields of a Portfolio's Service, Investor A, Investor B, Investor C or
Institutional Shares may be quoted and compared to those of other mutual funds
with similar investment objectives and to stock or other relevant indexes. For
example, the yield of a Portfolio's Service, Investor A, Investor B, Investor C
or Institutional Shares may be compared to the Donoghue's Money Fund Average,
which is an average compiled by IBC/Donoghue's MONEY FUND REPORT, a
widely-recognized independent publication that monitors the performance of money
market funds, or to the data prepared by Lipper Analytical Services, Inc., a
widely-recognized independent service that monitors the performance of mutual
funds.
TOTAL RETURN. For purposes of quoting and comparing the performance of
shares of the Non-Money Market Portfolios to the performance of other mutual
funds and to stock or other relevant indexes in advertisements or in
communications to shareholders, performance may be stated in terms of total
return. The total return for each class of a Non-Money Market Portfolio will be
calculated independently of the other classes within that
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<PAGE> 492
Portfolio. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according
to the following formula:
T = [ ((ERV/P)(1/n power)) - 1]
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
In calculating the ending redeemable value for Investor A Shares of the
Fund's Non-Money Market Portfolios, the maximum front-end sales charge is
deducted from the initial $1,000 payment and all dividends and distributions by
the particular Portfolio are assumed to have been reinvested at net asset value
as described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor B Shares of the
Non-Money Market Portfolios, the maximum contingent deferred sales charge is
deducted at the end of the period and all dividends and distributions by the
particular Portfolio are assumed to have been reinvested at net asset value as
described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor C Shares of the
Fund's Non-Money Market Portfolios, the maximum front-end sales charge is
deducted from the initial $1,000 payment, the maximum contingent deferred sales
charge is deducted at the end of the period, and all dividends and distributions
by the particular Portfolio are assumed to have been reinvested at net asset
value as described in the particular Prospectus on the reinvestment dates during
the period. Total return, or "T" in the formula above, is computed by finding
the average annual compounded rates of return over the specified periods that
would equate the initial amount invested to the ending redeemable value.
Based on the foregoing calculation, the average annual total returns
for each Non-Money Market Portfolio for periods ended September 30, 1995 were as
follows:
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<PAGE> 493
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE 5 SINCE
FOR THE YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 9/30/95 9/30/95 OF OPERATIONS
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
Managed Income
Service Shares(1)
Investor A Shares(2)
Institutional Shares(3)
Investor B Shares(4)
Tax-Free Income
Service Shares(1)
Investor A Shares(5)
Institutional Shares(6)
Investor B Shares(7)
Intermediate Government
Service Shares(1)
Investor A Shares(8)
Institutional Shares(9)
Investor B Shares(10)
Ohio Tax-Free Income
Service Shares(1)
Investor A Shares(11)
Institutional Shares(11)
Investor B Shares(12)
Pennsylvania Tax-Free Income
Service Shares(1)
Investor A Shares(11)
Institutional Shares(11)
Investor B Shares(13)
Short Government Bond
Service Shares(14)
Investor A Shares(15)
Institutional Shares(14)
Investor B Shares(16)
Intermediate Bond Service Shares(17)
Investor A Shares(18)
Institutional Shares(19)
Investor B Shares(20)
Government Income
Service Shares
Investor A Shares(21)
Institutional Shares
Investor B Shares(22)
Value Equity
Service Shares(1)
Investor A Shares(23)
Institutional Shares(24)
Investor B Shares(25)
Growth Equity Service Shares(26)
Investor A Shares(27)
Institutional Shares(3)
Investor B Shares(28)
</TABLE>
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<PAGE> 494
Small Cap Growth Equity
Service Shares(29)
Investor A Shares(29)
Institutional Shares(30)
Investor B Shares(31)
Core Equity Service Shares(29)
Investor A Shares(32)
Institutional Shares(33)
Investor B Shares(34)
[](35)
Service Shares(1)
Investor A Shares(36)
Institutional Shares(9)
Investor B Shares(37)
Small Cap Value Equity
Service Shares(1)
Investor A Shares(36)
Institutional Shares(38)
Investor B Shares(39)
International Equity
Service Shares(1)
Investor A Shares(36)
Institutional Shares(40)
Investor B Shares(41)
International Emerging
Markets
Service Shares(42)
Investor A Shares(42)
Institutional Shares(42)
Investor B Shares(43)
Balanced
Service Shares(1)
Investor A Shares(44)
Institutional Shares(45)
Investor B Shares(46)
International Bond
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
- -------------------------------------
(1) Commenced operations on July 29, 1993.
(2) Commenced operations on February 5, 1992.
(3) Commenced operations on November 1, 1989.
(4) [Class had not commenced operations at September 30, 1995.]
(5) Commenced operations on May 14, 1990.
(6) Commenced operations on January 21, 1993.
(7) [Class had not commenced operations at September 30, 1995.]
(8) Commenced operations on May 11, 1992.
(9) Commenced operations on April 20, 1992.
(10) [Class had not commenced operations at September 30, 1995.]
(11) Commenced operations on December 1, 1992.
(12) Commenced operations on October 13, 1994.
(13) Commenced operations on October 3, 1994.
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<PAGE> 495
(14) Commenced operations on September 1, 1993.
(15) Commenced operations on November 17, 1993.
(16) [Class had not commenced operations at September 30, 1995.]
(17) Commenced operations on September 23, 1993.
(18) Commenced operations on May 20, 1994.
(19) Commenced operations on September 17, 1993.
(20) [Class had not commenced operations at September 30, 1995.]
(21) Commenced operations on October 4, 1994.
(22) Commenced operations on October 3, 1994.
(23) Commenced operations on May 2, 1992.
(24) Commenced operations on May 20, 1992.
(25) [Class had not commenced operations at September 30, 1995.]
(26) Commenced operations on July 28, 1993.
(27) Commenced operations on March 14, 1992.
(28) [Class had not commenced operations at September 30, 1995.]
(29) Commenced operations on September 15, 1993.
(30) Commenced operations on September 14, 1993.
(31) [Class had not commenced operations at September 30, 1995.]
(32) Commenced operations on October 13, 1993.
(33) Commenced operations on September 13, 1993.
(34) [Class had not commenced operations at September 30, 1995.]
(35) Reflects total returns prior to investing all of its assets in
the Index Master Portfolio.
(36) Commenced operations on June 2, 1992.
(37) [Class had not commenced operations at September 30, 1995.]
(38) Commenced operations on April 13, 1992.
(39) Commenced operations on October 3, 1994.
(40) Commenced operations on April 27, 1992.
(41) Commenced operations on October 3, 1994.
(42) Commenced operations on June 17, 1994.
(43) [Class had not commenced operations at September 30, 1995.]
(44) Commenced operations on May 14, 1990.
(45) Commenced operations on May 1, 1992.
(46) Commenced operations on October 3, 1994.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio
offered and sold only one class of shares. Based on the foregoing calculation,
the average annual total return for the predecessor portfolio to the New Jersey
Tax-Free Income Portfolio for periods ended February 28, 1995 were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------
FOR THE FOR THE 5
YEAR YEARS
ENDED ENDED SINCE COMMENCEMENT
PORTFOLIO 2/28/95 2/28/95 OF OPERATIONS(1)
- --------- ------- ------- ------------------
<S> <C> <C> <C>
Predecessor Portfolio to the (2.31)% N/A 6.47%
New Jersey Tax-Free Income
Portfolio(1)
</TABLE>
(1) Commenced operations on July 1, 1991.
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<PAGE> 496
The predecessor portfolio to the Core Bond Portfolio also offered and
sold only one class of shares. Based on the foregoing calculation, the average
annual total return for the Predecessor Portfolio for periods ended June 30,
1995 were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------
FOR THE FOR THE 5
YEAR YEARS
ENDED ENDED SINCE COMMENCEMENT
PORTFOLIO 6/30/95 6/30/95 OF OPERATIONS
- --------- ------- --------- ------------------
<S> <C> <C> <C>
Predecessor Portfolio(1) to the 12.44% N/A 7.17%
Core Bond Portfolio
</TABLE>
(1) Commenced operations on December 9, 1992.
Each class of the Non-Money Market Portfolios may also from time to
time include in advertisements and communications to shareholders a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of each class of a Non-Money Market
Portfolio's shares with other performance measures. For example, in comparing
the total return of a Non-Money Market Portfolio's shares with data published by
Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the performance of the Standard
& Poor's 500 Stock Index, EAFE, the Dow Jones Industrial Average or the Shearson
Lehman Hutton Government Corporate Bond Index, as appropriate, a Non-Money
Market Portfolio may calculate the aggregate total return for its shares of a
certain class for the period of time specified in the advertisement or
communication by assuming the investment of $10,000 in such Non-Money Market
Portfolio's shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. A Non-Money
Market Portfolio does not, for these purposes, deduct from the initial value
invested or the ending value any amount representing front-end, deferred sales
charges or both, respectively, charged to purchasers of Investor A, Investor B
and Investor C Shares, respectively. The Investor A, Investor B and Investor C
classes of the Portfolio will, however, disclose the maximum applicable sales
charge and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
NON-MONEY MARKET PORTFOLIO YIELD. The Balanced, Managed Income,
Tax-Free Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short Government Bond, Intermediate
Bond, Government Income and International Bond Portfolios may
advertise their yields on their Service, Investor A, Investor B,
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<PAGE> 497
Investor C and Institutional Shares. Under the rules of the SEC, each such
Portfolio advertising the respective yields for its Service, Investor A,
Investor B, Investor C and Institutional Shares must calculate yield using the
following formula:
YIELD = 2[ ( ( (a-b)/cd +1 )(6th power) ) - 1]
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360th of the stated dividend rate of
the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium,
the formula generally calls for amortization of the discount or premium.
However, interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the
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<PAGE> 498
original issue discount (market discount), the yield to maturity is the imputed
rate based on the original issue discount calculation. On the other hand, in the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. In the case of Investor A Shares of a
Non-Money Market Portfolio, a Portfolio's maximum offering price per share for
purposes of the formula includes the maximum front-end sales charge imposed by
the Portfolio -- currently 4.50% of the per share offering price.
Each of the Tax-Free Income, Ohio Tax-Free Income and Pennsylvania
Tax-Free Income Portfolios may advertise the tax-equivalent yield for its
shares of a specified class. Under the rules of the SEC, such a Portfolio
advertising its tax-equivalent yield must calculate such tax-equivalent yield
by dividing that portion of the yield of the Portfolio which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the yield of the Portfolio which is not tax-exempt.
The annualized yield information for the 30-day period ended September
30, 1995 for the Portfolios referenced below was as follows:
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL INCOME
PORTFOLIO YIELD TAX RATE OF 28%)
- --------- ----- -------------------------
-102-
<PAGE> 499
Managed Income
Service Shares %
Investor A Shares
Institutional Shares
Investor B Shares
Tax-Free Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Intermediate Government
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Ohio Tax-Free income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Pennsylvania Tax-Free Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Short Government Bond
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Intermediate Bond
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Government Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
The Investor C Class had not commenced operations as of September 30, 1995.
The annualized yield information for the 30-day period ended
February 28, 1995 for the predecessor portfolio to the New Jersey Tax-Free
Income Portfolio was as follows:
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL INCOME
PORTFOLIO YIELD TAX RATE OF 28%)
- --------- ----- -------------------------
-103-
<PAGE> 500
<TABLE>
<S> <C> <C>
Predecessor 4.40% 7.29%
Portfolio to the New
Jersey Tax-Free
Income Portfolio
</TABLE>
The annualized yield information for the 30-day period ended June 30,
1995 for the predecessor portfolio to the Core Bond Portfolio was as follows:
<TABLE>
<CAPTION>
PORTFOLIO YIELD
- --------- -----
<S> <C>
Predecessor Portfolio to 6.63%
the Core Bond Portfolio
</TABLE>
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to
providing performance information that demonstrates the total return or yield of
shares of a particular class of a Portfolio over a specified period of time, the
Fund may provide certain other information demonstrating hypothetical investment
returns. Such information may include, but is not limited to, illustrating the
compounding effects of a dividend in a dividend reinvestment plan or the impact
of tax-free investing. As illustrated below, the Fund may demonstrate, using
certain specified hypothetical data, the compounding effect of dividend
reinvestment on investments in a Non-Money Market Portfolio.
-104-
<PAGE> 501
The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising or sales literature the benefits of tax-free investing. For example,
Table 1 shows taxpayers how to translate Federal tax savings from investments
the income on which is not subject to Federal income tax into an equivalent
yield from a taxable investment. Similarly, Tables 2, 3, 4, 5 and 6 show
Pennsylvania, Ohio, North Carolina, Virginia and New Jersey shareholders the
approximate yield that a taxable investment must earn at various income brackets
to produce after-tax yields equivalent to those of the Pennsylvania Municipal
Money Market and Pennsylvania Tax-Free Income Portfolios, the Ohio Municipal
Money Market and Ohio Tax-Free Income Portfolios, the North Carolina Municipal
Money Market Portfolio, the Virginia Municipal Money Market Portfolio, and the
New Jersey Municipal Money Market Portfolio, respectively. The yields below are
for illustration purposes only and are not intended to represent current or
future yields for the Money and Non-Money Market Municipal Portfolios, which may
be higher or lower than the yields shown.
-105-
<PAGE> 502
TABLE 1
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1995 Taxable Marginal
Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0 - $23,350 $ 0 - $39,000 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$23,351 - $56,550 $39,001 - $94,250 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$56,551 -$117,950 $94,251 -$143,600 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$117,951-$256,500 $143,601-$256,500 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $256,500 Over $256,500 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%
</TABLE>
*Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1995, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $114,700 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $114,700 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone. For
single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1995 is estimated to be from $114,700 to $237,201 and for married
taxpayers filing a joint return from $172,050 to $294,551. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1995.
-106-
<PAGE> 503
TABLE 2
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1995 Federal Marginal
Taxable Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0 - $ 23,350 $ 0 - $39,000 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$23,351 - $ 56,550 $ 39,001 - $94,250 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$56,551 - $117,950 $ 94,251 -$143,600 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$117,951- $256,500 $143,601 -$256,500 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $256,500 Over $256,500 41.291% 5.110% 5.962% 6.813% 7.665% 8.517% 9.368% 10.220%
</TABLE>
*The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income taxes). If the standard deduction is taken for
Federal income tax purposes, the taxable equivalent yield required to equal a
specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1995, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $114,700 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $114,700 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1995 is
estimated to be from $114,700 to $237,201 and for married taxpayers filing a
joint return from $172,050 to $294,551. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1995.
-107-
<PAGE> 504
TABLE 3
<TABLE>
<CAPTION>
Weighted Approximate
Federal Ave.Ohio Combined Federal Tax-Exempt Yield
1995 Marginal Marginal and Ohio
Income Bracket* Tax Rate Tax Rate* Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -------------- -------- -------- ----------------- ---- ----- ----- ------ ------ ----- -----
Single Return Taxable Yield - Single Return
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 23,350 15.0% 2.549% 17.166% 3.622% 4.225% 4.829% 5.433% 6.036% 6.640% 7.243%
23,351 - 56,550 28.0% 4.828% 31.476% 4.378% 5.108% 5.837% 6.567% 7.297% 8.026% 8.756%
56,551 - 100,000 31.0% 5.543% 34.824% 4.603% 5.370% 6.137% 6.904% 7.672% 8.439% 9.206%
100,001 - 117,950 31.0% 6.900% 35.761% 4.670% 5.448% 6.227% 7.005% 7.783% 8.562% 9.340%
117,951 - 200,000 36.0% 6.900% 40.416% 5.035% 5.874% 6.713% 7.552% 8.392% 9.231% 10.070%
200,001 - 256,500 36.0% 7.500% 40.800% 5.068% 5.912% 6.757% 7.601% 8.446% 9.291% 10.135%
Over 256,500 39.6% 7.500% 44.130% 5.370% 6.265% 7.159% 8.054% 8.949% 9.844% 10.739%
Joint Return Taxable Yield - Joint Return
- ------------
0 - 39,000 15.0% 2.711% 17.304% 3.628% 4.232% 4.837% 5.442% 6.046% 6.651% 7.255%
39,001 - 94,250 28.0% 4.881% 31.514% 4.380% 5.111% 5.841% 6.571% 7.301% 8.031% 8.761%
94,251 - 100,000 31.0% 5.646% 34.896% 4.608% 5.376% 6.144% 6.912% 7.680% 8.448% 9.216%
100,001 - 143,600 31.0% 6.555% 35.523% 4.653% 5.428% 6.204% 6.979% 7.755% 8.530% 9.306%
143,601 - 200,000 36.0% 6.555% 40.195% 5.016% 5.852% 6.688% 7.524% 8.361% 9.197% 10.033%
200,001 - 219,900 36.0% 7.125% 40.560% 5.047% 5.888% 6.729% 7.571% 8.412% 9.253% 10.094%
219,901 - 256,500 36.0% 7.500% 40.800% 5.068% 5.912% 6.757% 7.601% 8.446% 9.291% 10.135%
Over 256,500 39.6% 7.500% 44.130% 5.370% 6.265% 7.159% 8.054% 8.949% 9.844% 10.739%
</TABLE>
*The income brackets applicable to the state of Ohio do not correspond to the
Federal taxable income brackets. In addition, Ohio taxable income will likely be
different than Federal taxable income because it is computed by reference to
Federal adjusted gross income with specifically-defined Ohio modifications and
exemptions, and does not consider many of the deductions allowed from Federal
adjusted gross income in computing Federal taxable income. In arriving at the
combined marginal tax rate, a weighted average of Ohio's marginal tax rate was
used within each Federal taxable income bracket up to $100,000, at which point
Ohio's actual 6.9% marginal rate was applied up to taxable income of $200,000,
at which point Ohio's top actual marginal rate of 7.5% was applied. The Ohio
joint filing credit has been taken into account in determining the
-108-
<PAGE> 505
marginal tax rate for the taxable yield on joint returns up to the maximum
credit amount allowed. However, no other state tax credits, exemptions, or local
taxes have been taken into account in arriving at the combined marginal tax
rate. The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1994, taxpayers with adjusted gross income in
excess of a $111,800 threshold amount are subject to an overall limitation on
certain itemized deductions, requiring a reduction in such deductions equal to
the lesser of (i) 3% of adjusted gross income in excess of the $111,800
threshold or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased out at the rate of
two percentage points for each $2,500 (or fraction thereof) of adjusted gross
income in the phase-out zone. For single taxpayers the range of adjusted gross
income comprising the phase-out zone for 1994 is from $111,800 to $234,301 and
for married taxpayers filing a joint return the range is from $167,700 to
$290,201. The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1994.
-109-
<PAGE> 506
TABLE 4
<TABLE>
<CAPTION>
Combined
Federal
1995 Taxable North and North
Income Bracket Federal Carolina Carolina Tax-Exempt Yield
Marginal Marginal Marginal
Single Return Joint Return Tax Rate Tax Rate Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------- ------------ -------- -------- --------- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 12,750 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%
12,751 - 23,350 21,251 - 39,000 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
23,351 - 56,550 39,001 - 94,250 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
56,551 - 60,000 94,251 -100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 117,950 100,001 -143,600 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
117,951 - 256,500 143,601- 256,500 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 256,500 Over 256,500 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 8.076% 8.974% 9.871% 10.768%
</TABLE>
*The taxable income brackets applicable to North Carolina do not correspond to
the Federal taxable income brackets. The taxable income brackets presented in
this table represent the breakpoints for both the Federal and North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable income
may be different than North Carolina taxable income. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at the
combined marginal tax rate. The income amount shown is income subject to Federal
income tax reduced by adjustments to income, exemptions, and itemized deductions
(including the deduction for state and local income taxes). If the standard
deduction is taken for Federal income tax purposes, the taxable equivalent yield
required to equal a specified tax-exempt yield is at least as great as that
shown in the table. It is assumed that the investor is not subject to the
alternative minimum tax. Where applicable, investors should consider that the
benefit of certain itemized deductions and the benefit of personal exemptions
are limited in the case of higher-income individuals. For 1995, taxpayers with
adjusted gross income in excess of $114,700 are subject to an overall limitation
on certain itemized deductions, requiring a reduction in such deductions equal
to the lesser of (i) 3% of adjusted gross income in excess of $114,700 or (ii)
80% of the amount of such itemized deductions otherwise allowable. The benefit
of each personal exemption is phased out at the rate of two percentage points
for each $2,500 (or fraction thereof) of adjusted gross income in the phase-out
zone. For single taxpayers the range of adjusted gross income comprising the
phase-out zone for 1995 is from $114,700 to $237,201, and for married taxpayers
filing a joint return the range is from $172,050 to $294,551. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1995.
-110-
<PAGE> 507
TABLE 5
<TABLE>
<CAPTION>
1995 Taxable Combined Federal
Income Bracket Federal Virginia and Virginia Tax-Exempt Yield
Marginal Marginal Marginal
Single Return Joint Return Tax Rate Tax Rate Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------- ------------ -------- -------- ---------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 22,750 0 - 38,000 15.0% 5.75% 19.888% 3.745% 4.369% 4.993% 5.617% 6.241% 6.865% 7.489%
22,751 - 55,100 38,001 - 91,850 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631% 7.368% 8.105% 8.842%
55,101 - 115,000 91,851 - 140,000 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920% 7.688% 8.457% 9.226%
115,001 - 250,000 140,001 - 250,000 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460% 8.289% 9.118% 9.947%
OVER 250,000 OVER 250,000 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905% 8.783% 9.661% 10.540%
</TABLE>
*The taxable income brackets applicable to Virginia do not correspond to the
Federal taxable income brackets. Because Virginia imposes a maximum tax rate of
5.75% on taxable income over $17,000, the taxable income brackets presented in
this table represent the breakpoints only for the Federal marginal tax rate
changes. When applying these brackets, Federal taxable income may be different
than Virginia taxable income. No state tax credits, exemptions, or local taxes
have been taken into account in arriving at the combined marginal tax rate. The
income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1995, taxpayers with adjusted gross income in
excess of $114,700 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser of (i)
3% of adjusted gross income excess of $114,700 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1995 is
from $114,700 to $237,201 and for married taxpayers filing a joint return from
$172,050 to $294,551. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1995.
-111-
<PAGE> 508
TABLE 6
<TABLE>
<CAPTION>
Approximate
Federal NJ Combined Federal Tax-Exempt Yield
1995 Taxable Marginal Marginal and NJ
Income Bracket* Tax Rate Tax Rate Marginal Tax Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- --------------- -------- -------- ----------------- ---- ---- ---- ----- ---- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 20,000 15.0% 1.700% 16.445% 3.590% 4.189% 4.787% 5.386% 5.984% 6.582% 7.181% 7.779% 8.378%
20,001 - 23,350 15.0% 2.125% 16.806% 3.606% 4.207% 4.808% 5.409% 6.010% 6.611% 7.212% 7.813% 8.414%
23,251 - 35,000 28.0% 2.125% 29.530% 4.257% 4.967% 5.676% 6.386% 7.095% 7.805% 8.514% 9.224% 9.933%
35,001 - 40,000 28.0% 4.250% 31.060% 4.352% 5.077% 5.802% 6.527% 7.253% 7.978% 8.703% 9.428% 10.154%
40,001 - 56,550 28.0% 6.013% 32.329% 4.433% 5.172% 5.911% 6.650% 7.389% 8.128% 8.866% 9.605% 10.344%
56,551 - 75,000 31.0% 6.013% 35.149% 4.626% 5.397% 6.168% 6.939% 7.710% 8.481% 9.252% 10.023% 10.794%
75,001 - 117,950 31.0% 6.580% 35.540% 4.654% 5.430% 6.205% 6.981% 7.757% 8.532% 9.308% 10.084 10.859%
117,951 - 256,500 36.0% 6.580% 40.211% 5.018% 5.854% 6.690% 7.526% 8.363% 9.199% 10.035% 10.872% 11.708%
OVER 256,500 39.6% 6.580% 43.574% 5.317% 6.203% 7.089% 7.975% 8.861% 9.747% 10.633% 11.520% 12.406%
Joint Return Taxable Yield - Joint Return
------------
0 - 20,000 15.0% 1.700% 16.445% 3.590% 4.189% 4.787% 5.386% 5.984% 6.582% 7.181% 7.779% 8.378%
20,001 - 39,000 15.0% 2.125% 16.806% 3.606% 4.207% 4.808% 5.409% 6.010% 6.611% 7.212% 7.813% 8.414%
39,001 - 50,000 28.0% 2.125% 29.530% 4.257% 4.967% 5.676% 6.386% 7.095% 7.805% 8.514% 9.224% 9.933%
50,001 - 70,000 28.0% 2.975% 30.142% 4.294% 5.010% 5.726% 6.442% 7.157% 7.873% 8.589% 9.305% 10.020%
70,001 - 80,000 28.0% 4.250% 31.060% 4.352% 5.077% 5.802% 6.527% 7.253% 7.978% 8.703% 9.428% 10.154%
80,001 - 94,250 28.0% 6.013% 32.329% 4.433% 5.172% 5.911% 6.650% 7.389% 8.128% 8.866% 9.605% 10.344%
94,251 - 143,600 31.0% 6.013% 35.149% 4.626% 5.397% 6.168% 6.939% 7.710% 8.481% 9.252% 10.023% 10.794%
143,601 - 150,000 36.0% 6.013% 39.848% 4.987% 5.819% 6.650% 7.481% 8.312% 9.144% 9.975% 10.806 11.637%
150,001 - 256,500 36.0% 6.580% 40.211% 5.018% 5.854% 6.690% 7.526% 8.363% 9.199% 10.035% 10.872% 11.708%
OVER 256,500 39.6% 6.580% 43.574% 5.317% 6.203% 7.089% 7.975% 8.861% 9.747% 10.633% 11.520% 12.406%
</TABLE>
-112-
<PAGE> 509
* The taxable income brackets applicable to New Jersey do not correspond
to the Federal taxable income brackets. The taxable income brackets
presented in this table represent the breakpoints for both the Federal
and New Jersey marginal tax rate changes. When applying these brackets,
Federal taxable income will be different than New Jersey taxable income
because New Jersey does not start with Federal taxable income in
computing its own state income tax base. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. The income amount shown is income
subject to Federal income tax reduced by adjustments to income,
exemptions, and itemized deductions (including the deduction for state
and local income taxes). If the standard deduction is taken for Federal
income tax purposes, the taxable equivalent yield required to equal a
specified tax-exempt yield is at least as great as that shown in the
table. It is assumed that the investor is not subject to the
alternative minimum tax. Where applicable, investors should consider
that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher-income
individuals. For 1995, taxpayers with adjusted gross income in excess
of $114,700 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the
lesser of (i) 3% of adjusted gross income in excess of $114,700 or (ii)
80% of the amount of such itemized deductions otherwise allowable. The
benefit of each personal exemption is phased out at the rate of two
percentage points for each $2,500 (or fraction thereof) of adjusted
gross income in the phase-out zone. For single taxpayers the range of
adjusted gross income comprising the phase-out zone for 1995 is from
$114,700 to $237,201, and for married taxpayers filing a joint return
the range is from $172,050 to $294,551. The Federal tax brackets, the
threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out
will be further adjusted for inflation for each year after 1995.
-113-
<PAGE> 510
MISCELLANEOUS. Yields on shares of a Portfolio may fluctuate daily and
do not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one fund to another,
consideration should be given to each fund's investment policies, including the
types of investments made, lengths of maturities of the portfolio securities,
and whether there are any special account charges which may reduce the effective
yield. The fees which may be imposed by Authorized Dealers, Service
Organizations and other institutions on their customers are not reflected in the
calculations of total returns or yields for the Portfolios.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of a Portfolio, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Portfolio), as well as the
views of the Portfolios' adviser and/or sub-advisers as to current market,
economy, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio. In addition, selected indices may be used to
illustrate historic performance of select asset classes. The Fund may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of a
Portfolio. In addition, advertisement or shareholder communications may include
a discussion of certain attributes or benefits to be derived by an investment in
a Portfolio. Such advertisements or communicators may include symbols, headlines
or other material which highlight or summarize the information discussed in more
detail therein.
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TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.
Please note that for purposes of satisfying certain of the requirements
for taxation as a regulated investment company described below, the Index Equity
Portfolio will be deemed to own a proportionate share of the assets and gross
income of the Index Master Portfolio in which the Index Equity Portfolio invests
all of its assets. Also, with respect to the Index Equity Portfolio, the
discussion below that relates to the taxation of futures contracts and other
rules pertaining to the timing and character of income apply to the Index Master
Portfolio.
Each Portfolio has elected and qualified, and intends to continue to
qualify, for taxation as a regulated investment company under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, each Portfolio generally is exempt from Federal
income tax on its net investment income and realized capital gains that it
distributes to shareholders, provided that it distributes an amount equal to at
least the sum of (a) 90% of its investment company taxable income (net
investment income and the excess of net short-term capital gain over net
long-term capital loss, if any, for the year) and (b) 90% of its net tax-exempt
interest income, if any, for the year (the "Distribution Requirement") and
satisfies certain other requirements of the Code that are described below.
Distributions of investment company taxable income and net tax-exempt interest
income made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year will satisfy the Distribution
Requirement.
In addition to satisfaction of the Distribution Requirement, each
Portfolio must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (including, but
not limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement") and derive less than 30% of
its gross income from the sale or other disposition of stock, securities and
certain other investments (including foreign currencies or options, futures or
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forward contracts on foreign currencies but only to the extent that such
currencies or options, futures or forward contracts are not directly related to
the Portfolio's principal business of investing in stock or securities) held for
less than three months (the "Short-Short Gain Test"). Future Treasury
regulations may provide that foreign currency gains that are not "directly
related" to a Portfolio's principal business of investing in stock or securities
will not satisfy the Income Requirement. Interest (including original issue
discount and "accrued market discount") received by a Portfolio at maturity or
upon disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security held for less than three months for purposes of the Short-Short Gain
Test. However, any other income that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each of the Money and Non-Money Market Municipal Portfolios is designed
to provide investors with tax-exempt interest income. Shares of the Money and
Non-Money Market Municipal Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Portfolio's dividends being
tax-exempt but also such dividends would be taxable when distributed to the
beneficiary. In addition, the Money and Non-Money Market Municipal Portfolios
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by private activity bonds or "related person" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his trade or
business and (a) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, (b)
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who occupies more than 5% of the entire usable area of such facilities, or (c)
for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
corporation and its shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, all shareholders
required to file a Federal income tax return are required to report the receipt
of exempt interest dividends and other exempt interest on their returns.
Moreover, while such dividends and interest are exempt from regular Federal
income tax, they may be subject to alternative minimum tax (currently imposed at
the rate of 26% (28% on the taxable excess over $175,000) in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers) in two circumstances. First, exempt interest dividends derived from
certain "private activity" bonds issued after August 7, 1986, generally will
constitute an item of tax preference for both corporate and non-corporate
taxpayers. Second, exempt interest dividends derived from all bonds, regardless
of the date of issue, must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum tax purposes. In
addition, exempt interest dividends paid to corporate taxpayers may in these two
circumstances be subject to tax under the environmental tax under Section 59A of
the Code, which is imposed at the rate of 0.12% on the excess of the modified
alternative minimum taxable income of a corporate taxpayer over $2 million for
taxable years beginning before January 1996. Receipt of exempt interest
dividends may result in collateral Federal income tax consequences to certain
other taxpayers, including financial institutions, property and casualty
insurance companies, individual recipients of Social Security or Railroad
Retirement benefits, and foreign corporations engaged in trade or business in
the United States. Prospective investors should consult their own tax advisors
as to such consequences.
If a Money or Non-Money Market Municipal Portfolio distributes exempt
interest dividends during the shareholder's taxable year, no deduction generally
will be allowed for any interest expense on indebtedness incurred to purchase or
carry shares of such Portfolio.
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The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios are
not subject to the Ohio personal income tax, school district income taxes in
Ohio, the Ohio corporation franchise tax, or the Ohio dealers intangibles tax,
provided that, with respect to the Ohio corporation franchise tax and the Ohio
dealers intangibles tax, the Fund timely files the annual report required by
Section 5733.09 of the Ohio Revised Code. Distributions with respect to the Ohio
Municipal Money Market and Ohio Tax-Free Income Portfolios properly attributable
to proceeds of insurance paid to those Portfolios that represent maturing or
matured interest on defaulted Obligations held by those Portfolios and that are
excluded from gross income for federal income tax purposes will not be subject
to Ohio personal income tax or municipal or school district income taxes in Ohio
if, and to the same extent as, such interest would not have been subject to such
taxes if paid in the normal course by the issuer of such defaulted Obligations.
An investment in a Portfolio (including the North Carolina Municipal
Money Market Portfolio) by a corporation subject to the North Carolina franchise
tax will be included in the capital stock, surplus and undivided profits base in
computing the North Carolina franchise tax. Investors in a Portfolio including,
in particular, corporate investors which may be subject to the North Carolina
franchise tax, should consult their tax advisors with respect to the effects on
such tax of an investment in a Portfolio and with respect to their North
Carolina tax situation in general.
Distributions of investment company taxable income will be taxable
(other than interest on tax-exempt Municipal Obligations held by the Money
Market and Non-Money Market Municipal Portfolios and the possible allowance of
the dividends received deduction described below) to shareholders as ordinary
income, regardless of whether such distributions are paid in cash or are
reinvested in shares. Shareholders receiving any distribution from a Portfolio
in the form of additional shares will be treated as receiving a taxable
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. The Money Market and Non-Money Market
Municipal Portfolios may each purchase securities that do not bear Tax-Exempt
Interest. Any income on such securities recognized by such a Portfolio will be
distributed and will be taxable to its shareholders.
Each Portfolio intends to distribute to shareholders any of its excess
of net long-term capital gain over net short-term capital loss ("net capital
gain") for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless of
the length of time the shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a
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shareholder acquired shares of the Portfolio and whether the distribution was
paid in cash or reinvested in shares.
In the case of corporate shareholders, distributions (other than
capital gain dividends) of a Non-Money Market Portfolio for any taxable year
generally qualify for the dividends received deduction to the extent of the
gross amount of "qualifying dividends" received by such Portfolio for the year.
Generally, a dividend will be treated as a "qualifying dividend" if it has been
received from a domestic corporation. Distributions of net investment income
from debt securities and of net realized short-term capital gains will be
taxable to shareholders as ordinary income and will not be treated as
"qualifying dividends" for purposes of the dividends received deduction.
Ordinary income of individuals will be taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's long-term
capital gains will be taxable at a maximum rate of 28%. Capital gains and
ordinary income of corporate taxpayers are both taxed at a maximum nominal rate
of 35%, but at marginal rates of 39% for taxable income between $100,000 and
$335,000 and 38% for taxable income between $15,000,000 and 18,333,333.
Investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gain dividends have been paid
with respect to such shares. For shareholders of the Non-Money Market
Portfolios, any loss incurred on sale or exchange of a Portfolio's shares, held
six months or less, will be disallowed to the extent of exempt-interest
dividends paid with respect to such shares, and any loss not so disallowed will
be treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
Generally, futures contracts held by a Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time a Portfolio holds the futures contract ("the 40-60
rule"). The amount of any capital gain or loss actually realized by a Portfolio
in a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by the Portfolio
in a prior year as a result of the constructive sale of the contracts. With
respect
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to futures contracts to sell, which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by the Portfolio, losses as to such contracts to sell will be
subject to certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which also will
be applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed not
to begin prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Portfolio may make an election
which will exempt (in whole or in part) those identified futures contracts from
being treated for Federal income tax purposes as sold on the last business day
of the Fund's taxable year, but gains and losses will be subject to such short
sales, wash sales, loss deferral rules and the requirement to capitalize
interest and carrying charges. Under temporary regulations, a Portfolio would be
allowed (in lieu of the foregoing) to elect either (1) to offset gains or losses
from portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40-60 rule
will apply to the net gain or loss attributable to the futures contracts, but in
the case of a mixed straddle account election, not more than 50% of any net gain
may be treated as long-term and no more than 40% of any net loss may be treated
as short-term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
Under the Federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income for a taxable
year must be derived from gains realized on the sale or other disposition of
securities held for less than three months. The Internal Revenue Service has
issued a private letter ruling with respect to certain other investment
companies to the following effect: gains realized from a futures contract to
purchase or to sell will be treated as being derived from a security held for
three months or more regardless of the actual period for which the contract is
held if the gain arises as a result of a constructive sale of the contract at
the end of the taxable year as described above, and will be treated as being
derived from a security held for less than three months only if the contract is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months elapses between the date the contract
is acquired and the
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termination date. Although private letter rulings are not binding on the
Internal Revenue Service with respect to the Portfolios, the Fund believes that
the Internal Revenue Service would take a comparable position with respect to
the Portfolios. In determining whether the 30% test is met for a taxable year,
increases and decreases in the value of a Portfolio's futures contracts and
securities that qualify as part of a "designated hedge," as defined in the Code,
may be netted.
Special rules govern the Federal income tax treatment of the portfolio
transactions of the International Equity, International Emerging Markets and
International Bond Portfolios and certain transactions of the other Portfolios
that are denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, certain preferred stock); (ii) the accruing of certain trade
receivables and payables; (iii) the entering into or acquisition of any forward
contract or similar financial instruments; and (iv) the entering into or
acquisition of any futures contract, option or similar financial instrument, if
such instrument is not marked-to-market. The disposition of a currency other
than the U.S. dollar by a U.S. taxpayer also is treated as a transaction subject
to the special currency rules. With respect to such transactions, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts that are capital assets
in the hands of the taxpayer and which are not part of a straddle ("Capital
Asset Election"). In accordance with Treasury regulations, certain transactions
with respect to which the taxpayer has not made the Capital Asset Election and
that are part of a "Section 988 hedging transaction" (as defined in the Code and
the Treasury regulations) are integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" (as identified by such Treasury regulations) are not subject to
the mark-to-market or loss deferral rules under the Code. Some of the non-U.S.
dollar-denominated investments that the Portfolios may make (such as non-U.S.
dollar-denominated debt securities and obligations and preferred stock) and some
of the foreign currency contracts the International Equity, International
Emerging Markets and International Bond Portfolios may enter into will be
subject to the special currency rules described above. Gain or loss attributable
to the foreign currency component of transactions engaged in by a Portfolio
which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital
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gain or loss and will not be segregated from the gain or loss on
the underlying transaction.
In addition, certain forward foreign currency contracts held by a
Portfolio at the close of the Fund's taxable year will be subject to
"mark-to-market" treatment. If the Fund makes the Capital Asset Election with
respect to such contracts, the contract will be subject to the 40-60 rule
described above. Otherwise, such gain or loss will be ordinary in nature. To
receive such Federal income tax treatment, a foreign currency contract must meet
the following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under these
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information the Treasury has not issued any such
regulations. Forward foreign currency contracts entered into by the
International Equity, International Emerging Markets and International Bond
Portfolios also may result in the creation of one or more straddles for Federal
income tax purposes, in which case certain loss deferral, short sales, and wash
sales rules and requirements to capitalize interest and carrying charges may
apply.
If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal Obligations)
will be taxable as ordinary dividends to the extent of such Portfolio's current
and accumulated earnings and profits. Such distributions will be eligible for
the dividends received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Portfolio intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of the each calendar year to avoid liability for this
excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue
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Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectus, shares will be fully
paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
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The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be paid in cash or by distribution of the securities or
other consideration received from the sale and conveyance; (ii) sell and convert
the assets belonging to one or more classes of shares into money and, in
connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of shares
if the Board of Trustees reasonably determines that such combination will not
have a material adverse effect on the shareholders of any class participating in
such combination and, in connection therewith, to cause all outstanding shares
of any such class to be redeemed or converted into shares of another class of
shares at their net asset value. However, the exercise of such authority may be
subject to certain restrictions under the 1940 Act. The Board of Trustees may
authorize the termination of any class of shares after the assets belonging to
such class have been distributed to its shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel. The law
firm of Stradley, Ronon, Stevens & Young, 2600 One Commerce Square,
Philadelphia, Pennsylvania 19103, serves as the Trust's counsel.
INDEPENDENT ACCOUNTANTS. ___________________________________________,
serves as the Fund's and the Trust's independent accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of each
person that on ___________, 1995 owned of record or beneficially 5% or more of
the outstanding shares of a Portfolio which had commenced operations as of that
date was as follows:
[NEED UPDATED INFORMATION]
On ____________, 1995, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a
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national bank organized under the laws of the United States. All of the capital
stock of PNC Bank is owned by PNC Bancorp, Inc. All of the capital stock of PNC
Bancorp, Inc. is owned by PNC Bank Corp., a publicly-held bank holding company.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. PAMG, PIMC, BlackRock, PCM, PEAC, PNC Bank and
Institutions that are banks or bank affiliates are subject to such banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
PAMG, PIMC, BlackRock, PCM, PEAC and PNC Bank believe they may perform
the services for the Fund contemplated by their respective agreements with the
Fund without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent these companies from continuing
to perform such services for the Fund. If such were to occur, it is expected
that the Board of Trustees would recommend that the Fund enter into new
agreements or would consider the possible termination of the Fund. Any new
advisory or sub-advisory agreement would be subject to shareholder approval.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of Investor Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Investor
Shares. It is not anticipated, however, that any change in the Fund's method of
operations would affect its net asset value per share or result in a financial
loss to any customer.
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SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended
September 30, 1995 (the "1995 Annual Report") and its Semi-Annual Report to
Shareholders dated March 31, 1995 (the "1995 Semi-Annual Report") are
_________________________ in this Statement of Additional Information. The
financial statements and notes thereto in the 1995 Annual Report and the 1995
SemiAnnual Report are ____________ in this Statement of Additional Information
by reference. The financial statements included in the 1995 Annual Report have
been audited by the Fund's independent accountants, _________________________,
whose reports thereon are ________________________________. Such financial
statements have been ___________________ in reliance upon such report given upon
their authority as experts in accounting and auditing. Additional copies of the
1995 Annual Report and the 1995 Semi-Annual Report may be obtained at no charge
by telephoning the Distributor at the telephone number appearing on the front
page of this Statement of Additional Information.
With respect to the Master Portfolio, the financial statements and
notes thereto included in the Trust's Annual Report with respect to the Master
Portfolio for the fiscal year ended November 30, 1995 (the "1995 Master
Portfolio Annual Report") and the financial statements and notes thereto
included in its Semi-Annual Report with respect to the Master Portfolio dated
May 31, 1995 (the "1995 Master Portfolio Semi-Annual Report") are
_________________________ in this Statement of Additional Information. The
financial statements and notes thereto in the 1995 Master Portfolio Annual
Report have been audited by the Trust's independent accountants,
_________________________, whose reports thereon are ____________
___________________. Such financial statements have been ___________________ in
reliance upon such reports given upon their authority as experts in accounting
and auditing.
-126-
<PAGE> 523
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
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"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
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year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial conditions.
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"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
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principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality.
They carry the smallest degree of investment risk and are
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generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
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higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong
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as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's
lowest investment grade category and indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB"
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are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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THE PNC(R) FUND
(TO BE RENAMED THE COMPASS CAPITAL FUNDS(R))
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
To be filed by Amendment.
(b) Exhibits:
(1) (a) Declaration of Trust of the Registrant dated
December 22, 1988 is incorporated herein by
reference to Exhibit (1) of Registrant's
Registration Statement on Form N-1A filed on
December 23, 1988.
(b) Amendment No. 1 to Declaration of Trust is
incorporated herein by reference to Exhibit
(1)(b) of Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1989.
(c) Amendment No. 2 to the Declaration of Trust
dated December 23, 1993 is incorporated
herein by reference to Exhibit (1)(c) of
Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form
N-1A filed on July 8, 1994.
(2) Registrant's Code of Regulations is
incorporated herein by reference to Exhibit
(2) of Form N-1A, filed on December 23, 1988.
(3) None.
(4) (a) Specimen Copies of Share Certificates for
Shares of beneficial interest in Class A-1,
Class A-2, Class A-3, Class B-1, Class B-2,
Class B-3, Class C-1, Class C-2, Class C-3,
Class D-1, Class D-2, Class D-3, Class E-1,
Class E-2, Class E-3, Class F-1, Class F-2,
Class F-3, Class G-1, Class G-2, Class G-3,
Class H-1, Class H-2, Class H-3, Class I-1,
Class I-2, Class I-3, Class J-1,
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<PAGE> 536
Class J-2, Class J-3, Class K-1, Class K-2,
Class K-3, Class L-1, Class L-2, Class L-3,
Class M-1, Class M-2, Class M-3, Class N-1,
Class N-2, Class N-3, Class O-1, Class O-2,
Class O-3, Class P-1, Class P-2, Class P-3 of
the Registrant are incorporated herein by
reference to Exhibit 4 of Post- Effective
Amendment No. 6 to Registrant's Registration
Statement on Form N-1A filed on May 8, 1992.
(b) Form of Share Certificates for Shares of
beneficial interest in Class Q-1, Class Q-2,
Class Q-3, Class R-1, Class R-2, Class R-3,
Class S-1, Class S-2, Class S-3, Class T-1,
Class T-2, Class T-3, Class U-1, Class U-2,
Class U-3 of the Registrant are incorporated
herein by reference to Exhibit 4(b) of
Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form
N-1A filed on January 22, 1993.
(c) Form of Share Certificates for Shares of
beneficial interest in Class V-1, Class V-2,
Class V-3, Class W-1, Class W-2, Class W-3,
Class X-1, Class X-2, Class X-3, Class Y-1,
Class Y-2 and Class Y-3 of the Registrant is
incorporated herein by reference to Exhibit
(4)(c) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(d) Form of Share Certificates for Shares of
beneficial interest in Class Z-1, Class Z-2
and Class Z-3 of the Registrant is
incorporated herein by reference to Exhibit
(4)(d) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(e) Form of Share Certificates for Shares of
beneficial interest in Class AA-1, Class
AA-2, Class AA-3; Class AA-4; Class BB-1,
Class BB-2, Class BB-3 and Class BB-4; and
Class CC-1, Class CC-2, Class CC-3 and Class
CC-4 is incorporated herein by reference to
Exhibit (4)(e) of Post-Effective Amendment
No. 18 to
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<PAGE> 537
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(5) (a) Investment Advisory Agreement between
Registrant and PNC Institutional Management
Corporation with respect to the Money Market,
Government Money Market, Municipal Money
Market, Managed Income, Growth Equity,
International Equity and Balanced Portfolios
is incorporated herein by reference to
Exhibit 5(a) of Post-Effective Amendment No.
1 to Registrant's Registration Statement on
Form N-1A filed on December 29, 1989.
(b) Letter Agreement between Registrant and PNC
Institutional Management Corporation relating
to advisory services for the Tax-Free Income
Portfolio is incorporated herein by reference
to Exhibit 5(b) of Post-Effective Amendment
No. 2 to Registrant's Registration Statement
on Form N-1A filed on April 30, 1990.
(c) Sub-Advisory Agreement between PNC
Institutional Management Corporation and PNC
Bank, National Association with respect to
the Money Market Portfolio and Government
Money Market Portfolio is incorporated herein
by reference to Exhibit 5(c) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed on December 29, 1989.
(d) Sub-Advisory Agreement between PNC
Institutional Management Corporation and PNC
Bank, National Association with respect to
the Balanced and Tax-Free Income Portfolios
is incorporated herein by reference to
Exhibit 5(d) of Post-Effective Amendment No.
2 to Registrant's Registration Statement on
Form N-1A filed on April 30, 1990.
(e) Sub-Advisory Agreement dated April 20, 1992
between PNC Institutional Management
Corporation and Provident Capital Management,
Inc. with respect to the International Equity
Portfolio is
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<PAGE> 538
incorporated herein by reference to Exhibit
(5)(f) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(f) Investment Advisory Agreement dated February
3, 1992 between Registrant and PNC
Institutional Management Corporation relating
to the Intermediate Government, Value Equity,
Small Cap Value Equity, Pennsylvania Tax-Free
Income, Ohio Tax-Free Income, Pennsylvania
Municipal Money Market and Ohio Municipal
Money Market Portfolios is incorporated
herein by reference to Exhibit (5)(g) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(g) Investment Advisory Agreement dated December
17, 1993 between the Registrant and PNC
Institutional Management Corporation relating
to the Virginia Municipal Money Market,
Government Income, International Fixed Income
and International Emerging Markets Portfolios
is incorporated herein by reference to
Exhibit (5)(h) of Post-Effective Amendment
No. 12 to Registrant's Registration Statement
on Form N-1A filed on July 8, 1994.
(h) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management
Corporation and PNC Bank, National
Association with respect to the Ohio
Municipal Money Market Portfolio is
incorporated herein by reference to Exhibit
(5)(h) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(i) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management
Corporation and PNC Bank, National
Association with respect to the Pennsylvania
Municipal Money Market Portfolio is
incorporated herein by reference to Exhibit
(5)(i) of Post-Effective Amendment No. 10 to
C-4
<PAGE> 539
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(j) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management
Corporation and Provident Capital Management,
Inc. with respect to the Value Equity
Portfolio is incorporated herein by reference
to Exhibit (5)(m) of Post-Effective Amendment
No. 10 to Registrant's Registration Statement
on Form N-1A filed on November 10, 1993.
(k) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management
Corporation and Provident Capital Management,
Inc. with respect to the Small Cap Value
Equity Portfolio is incorporated herein by
reference to Exhibit (5)(n) of Post-Effective
Amendment No. 10 to Registrant's Registration
Statement on Form N-1A filed on November 10,
1993.
(l) Investment Advisory Agreement dated March 1,
1993 between Registrant and PNC Institutional
Management Corporation relating to the
Short-Term Bond, Intermediate-Term Bond, Core
Equity, Small Cap Growth Equity and North
Carolina Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit
(5)(p) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(m) Sub-Advisory Agreement dated March 1, 1993
between PNC Institutional Management
Corporation and PNC Bank, National
Association relating to the North Carolina
Municipal Money Market Portfolio is
incorporated herein by reference to Exhibit
(5)(r) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(n) Sub-Advisory Agreement dated September 10,
1993 between PNC Institutional Management
Corporation and
C-5
<PAGE> 540
PNC Bank, National Association relating to
the Municipal Money Market Portfolio is
incorporated herein by reference to Exhibit
(5)(s) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(o) Sub-Advisory Agreement dated December 17,
1993 between PNC Institutional Management
Corporation and PNC Bank, National
Association with respect to the Virginia
Municipal Money Market Portfolio is
incorporated herein by reference to Exhibit
(5)(x) of Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form
N-1A filed on July 8, 1994.
(p) Sub-Advisory Agreement dated December 17,
1993 between PNC Institutional Management
Corporation and Provident Capital Management,
Inc. with respect to the International Fixed
Income Portfolio is incorporated herein by
reference to Exhibit (5)(z) of Post-Effective
Amendment No. 12 to Registrant's Registration
Statement on Form N-1A filed on July 8, 1994.
(q) Sub-Advisory Agreement dated December 17,
1993 between PNC Institutional Management
Corporation and Provident Capital Management,
Inc. with respect to the International
Emerging Markets Portfolio is incorporated
herein by reference to Exhibit (5)(aa) of
Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form
N-1A filed on July 8, 1994.
(r) Form of Investment Advisory Agreement between
the Registrant and PNC Institutional
Management Corporation relating to the New
Jersey Municipal Money Market Portfolio is
incorporated herein by reference to Exhibit
(5)(r) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
C-6
<PAGE> 541
(s) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and PNC
Bank, National Association with respect to
the New Jersey Municipal Money Market
Portfolio is incorporated herein by reference
to Exhibit (5)(s) of Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(t) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and PNC
Equity Advisors Company with respect to the
Core Equity Portfolio is incorporated herein
by reference to Exhibit (5)(t) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(u) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and PNC
Equity Advisors Company with respect to the
Growth Equity Portfolio is incorporated
herein by reference to Exhibit (5)(u) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(v) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and PNC
Equity Advisors Company with respect to the
Small Cap Growth Equity Portfolio is
incorporated herein by reference to Exhibit
(5)(v) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(w) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Managed Income Portfolio is
incorporated herein by reference to Exhibit
(5)(x) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(x) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation
C-7
<PAGE> 542
and BlackRock Financial Management, Inc. with
respect to the Intermediate Government
Portfolio is incorporated herein by reference
to Exhibit (5)(y) of Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(y) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Ohio Tax-Free Income Portfolio
is incorporated herein by reference to
Exhibit (5)(z) of Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(z) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Pennsylvania Tax-Free Income
Portfolio is incorporated herein by reference
to Exhibit (5)(aa) of Post-Effective
Amendment No. 15 to Registrant's Registration
Statement on Form N-1A filed on May 11, 1995.
(aa) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Short-Term Bond Portfolio is
incorporated herein by reference to Exhibit
(5)(bb) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(bb) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Intermediate-Term Bond
Portfolio is incorporated herein by reference
to Exhibit (5)(cc) of Post-Effective
Amendment No. 15 to Registrant's Registration
Statement on Form N-1A filed on May 11, 1995.
(cc) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Government Income
C-8
<PAGE> 543
Portfolio is incorporated herein by reference
to Exhibit (5)(dd) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A filed on
May 11, 1995.
(dd) Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit
(5)(dd) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(ee) Form of Investment Advisory Agreement between
Registrant and PNC Asset Management Group,
Inc. relating to all Portfolios except the
Multi-Sector Mortgage Securities Portfolio
III and Index Equity Portfolio is
incorporated herein by reference to Exhibit
(5)(ee) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(ff) Form of Investment Advisory Agreement between
Registrant and BlackRock Financial
Management, Inc. with respect to the
Multi-Sector Mortgage Securities Portfolio
III is incorporated herein by reference to
Exhibit (5)(ff) of Post-Effective Amendment
No. 18 to Registrants' Registration Statement
on Form N-1A filed on October 12, 1995.
(gg) Form of Sub-Advisory Agreement between PNC
Asset Management Group, Inc. and BlackRock
Financial Management, Inc./ Provident Capital
Management, Inc./ PNC Equity Advisors
Company/ and PNC Institutional Management
Corporation is incorporated herein by
reference to Exhibit (5)(gg) to
Post-Effective Amendment No. 18 of
Registrant's Registration Statement on Form
N-1A filed October 12, 1995.
(hh) Form of Sub-Advisory Agreement between PNC
Asset Management Group, Inc. and Morgan
Grenfell Investment Services,
C-9
<PAGE> 544
Ltd. with respect to the International Fixed
Income Portfolio is incorporated herein by
reference to Exhibit (5)(hh) of
Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(6) (a) Distribution Agreement between Registrant and
Provident Distributors, Inc. dated January
31, 1994 is incorporated herein by reference
to Exhibit (6)(a) of Post-Effective Amendment
No. 12 to Registrant's Registration Statement
on Form N-1A filed on July 8, 1994.
(b) Form of Appendix A to the Distribution
Agreement between Registrant and Provident
Distributors, Inc. is incorporated herein by
reference to Exhibit (6)(b) of Post-Effective
Amendment No. 18 to Registrants Registration
Statement on Form N-1A filed on October 12,
1995.
(c) Amendment No. 2 to the Distribution Agreement
between Registrant and Provident
Distributors, Inc. dated October 18, 1994 is
incorporated herein by reference to Exhibit
6(c) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form
N-1A filed on January 18, 1995.
(7) Fund Office Retirement Profit-Sharing Plan
and Related Adoption Agreement is
incorporated herein by reference to Exhibit
(7) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(8) (a) Custodian Agreement dated October 4, 1989
between Registrant and PNC Bank, National
Association is incorporated herein by
reference to Exhibit 8(a) of Post-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1A filed on December 29,
1989.
(b) Amendment No. 1 to Custodian Agreement
between Registrant and PNC Bank,
C-10
<PAGE> 545
National Association is incorporated herein
by reference to Exhibit 8(b) of
Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form
N-1A filed on December 13, 1991.
(c) Amendment No. 2 dated March 1, 1993 to
Custodian Agreement between Registrant and
PNC Bank, National Association with respect
to the Short-Term Bond, Intermediate-Term
Bond, Core Equity, Small Cap Growth Equity
and North Carolina Municipal Money Market
Portfolios is incorporated herein by
reference to Exhibit (8)(c) of Post-Effective
Amendment No. 10 to Registrant's Registration
Statement on Form N-1A filed on November 10,
1993.
(d) Form of Appendix B to Custodian Agreement
dated October 4, 1989 between Registrant and
PNC Bank, National Association is
incorporated herein by reference to Exhibit
(8)(d) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(e) Sub-Custodian Agreement dated April 27, 1992
among the Registrant, PNC Bank, National
Association and The Chase Manhattan Bank is
incorporated herein by reference to Exhibit
(8)(e) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(f) Global Sub-Custody Agreement between Barclays
Bank PLC and PNC Bank, National Association
dated October 28, 1992 is incorporated herein
by reference to Exhibit (8)(e) of
Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form
N-1A filed on January 18, 1995.
(g) Custodian Agreement between State Street Bank
and Trust Company and PNC Bank, National
Association dated June 13, 1983 is
incorporated herein by reference to Exhibit
(8)(f) of Post-Effective Amendment No. 14 to
Registrant's
C-11
<PAGE> 546
Registration Statement on Form N-1A filed on
January 18, 1995.
(h) Amendment No. 1 to Custodian Agreement
between State Street Bank and Trust Company
and PNC Bank dated November 21, 1989 is
incorporated herein by reference to Exhibit
(8)(g) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form
N-1A filed on January 18, 1995.
(i) Letter Agreement between Registrant and PNC
Bank, National Association relating to
custodian services with respect to the
Tax-Free Income Portfolio is incorporated
herein by reference to Exhibit 8(d) of
Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form
N-1A filed on December 1, 1992.
(j) Letter Agreement between Registrant and PNC
Bank, National Association relating to
custodian services with respect to the Ohio
Municipal Money Market, Pennsylvania
Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Value Equity,
Index Equity and Small Cap Value Equity
Portfolios is incorporated herein by
reference to Exhibit (8)(e) of Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A filed on December 1,
1992.
(k) Letter Agreement dated March 1, 1993 between
Registrant and PNC Bank, National Association
relating to custodian services with respect
to the North Carolina Municipal Money Market,
Short- Term Bond, Intermediate-Term Bond,
Small Cap Growth Equity and Core Equity
Portfolios is incorporated herein by
reference to Exhibit (8)(h) of Post-Effective
Amendment No. 10 to Registrant's Registration
Statement on Form N-1A filed on November 10,
1993.
(9) (a) Administration Agreement dated January 18,
1993 among Registrant, PFPC Inc. and
Provident Distributors, Inc. is
C-12
<PAGE> 547
incorporated herein by reference to Exhibit
9(a) of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form
N-1A filed on January 22, 1993.
(b) Amendment No. 1 to the Administration
Agreement dated January 18, 1993 among
Registrant, PFPC Inc. and Provident
Distributors, Inc. dated September 23, 1994
is incorporated herein by reference to
Exhibit (9)(b) of Post-Effective Amendment
No. 14 to Registrant's Registration Statement
on Form N-1A filed on January 18, 1995.
(c) Form of Appendix A to the Administration
Agreement among Registrant, PFPC Inc. and
Provident Distributors, Inc. is incorporated
herein by reference to Exhibit (9)(c) of
Post-Effective Amendment No. 18 to
Registrants Registration Statement on Form
N-1A filed on October 12, 1995.
(d) Amendment No. 2 to the Administration
Agreement dated January 18, 1993 among
Registrant, PFPC Inc. and Provident
Distributors, Inc. is incorporated herein by
reference to Exhibit (9)(d) of Post-
Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A filed on
January 18, 1995.
(e) Form of Co-Administration Agreement among
Registrant and Compass Capital Group, Inc. is
incorporated herein by reference to Exhibit
(9)(e) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(f) Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC Inc. is
incorporated herein by reference to Exhibit
9(e) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed on December 29, 1989.
(g) Amendment No. 1 to Transfer Agency Agreement
dated October 4, 1989 between
C-13
<PAGE> 548
Registrant and PFPC Inc. relating to the
Tax-Free Income Portfolio is incorporated
herein by reference to Exhibit 9(h) of
Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form
N-1A filed on February 5, 1992.
(h) Amendment No. 2 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and
PFPC Inc. relating to the Pennsylvania
Municipal Money Market, Ohio Municipal Money
Market, Intermediate Government, Ohio
Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Index Equity and Small
Cap Value Equity Portfolios is incorporated
herein by reference to Exhibit 9(h) of
Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form
N-1A filed on December 13, 1991.
(i) Amendment No. 3 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and
PFPC Inc. relating to the Short-Term Bond,
Intermediate-Term Bond, Core Equity, Small
Cap Growth Equity and North Carolina
Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit
(9)(e) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(j) Amendment No. 4 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and
PFPC Inc. relating to Series B Investor
Shares of the Money Market, Managed Income,
Tax-Free Income, Intermediate Government,
Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Growth Equity, Index
Equity, Small Cap Value Equity,
Intermediate-Term Bond, Small Cap Growth
Equity, Core Equity, International Fixed
Income, Government Income, International
Emerging Markets, International Equity and
Balanced Portfolios is incorporated herein by
reference to Exhibit (9)(i) of Post-Effective
Amendment No. 14 to Registrant's Registration
Statement on Form N-1A filed on January 18,
1995.
C-14
<PAGE> 549
(k) Form of Appendix C to Transfer Agency
Agreement between Registrant and PFPC Inc. is
incorporated herein by reference to Exhibit
(9)(k) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(l) Amended and Restated Service Plan dated
January 21, 1993 for Service Shares and Form
of Servicing Agreement for Service Shares is
incorporated herein by reference to Exhibit
9(f) of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form
N-1A filed on January 22, 1993.
(m) Series B Service Plan dated September 23,
1994 is incorporated herein by reference to
Exhibit 9(1) of Post-Effective Amendment No.
15 to Registrant's Registration Statement on
Form N-1A filed on January 18, 1995.
(n) Trademark License Agreement between
Registrant and PNC Bank Corp. is incorporated
herein by reference to Exhibit 9(h) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A filed on December 29, 1989.
(10) Opinion and Consent of Counsel.(1)
(11) (a) Consent of Independent Accountant to be filed
by Amendment.
(b) Consent of Drinker Biddle & Reath.
(12) None.
(13) (a) Purchase Agreement between Registrant and
Shearson Lehman Hutton Inc. ("Shearson")
relating to Classes A-1, B-1, C-1, D-2, E-2,
F-2 and G-2 is incorporated herein by
reference to Exhibit 13(a) of Post-Effective
Amendment No. 1 to Registrant's
- --------------------------
1. Filed on October 7, 1994 under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
C-15
<PAGE> 550
Registration Statement on Form N-1A filed on
December 29, 1989.
(b) Purchase Agreement between Registrant and
Shearson relating to shares of Class H-2 is
incorporated herein by reference to Exhibit
13(b) of Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A filed on April 30, 1990.
(c) Purchase Agreement between Registrant and
Shearson relating to shares of Class I-1,
Class I-2, Class J-1, Class J-2, Class K-2,
Class L-2, Class M-2, Class N-2, Class O-2
and Class P-2 is incorporated herein by
reference to Exhibit 13(c) of Post-Effective
Amendment No. 4 to Registrant's Registration
Statement on Form N-1A filed on December 13,
1991.
(d) Purchase Agreement between Registrant and
Shearson relating to shares of Class D-1,
Class E-1, Class F-1, Class G-1, Class H-1,
Class K-1, Class L-1, Class M-1, Class N-1,
Class O-1, Class P-1, Class A-2, Class B-2,
Class C-2, Class I-2, Class J-2, Class A-3,
Class B-3, Class C-3, Class D-3, Class E-3,
Class F-3, Class G-3, Class H-3, Class I-3,
Class J-3, Class K-3, Class L-3, Class M-3,
Class N-3, Class O-3 and Class P-3 is
incorporated herein by reference to Exhibit
(13)(d) of Post- Effective Amendment No. 7 to
Registrant's Registration Statement on Form
N-1A filed on December 1, 1992.
(e) Purchase Agreement between the Registrant and
Pennsylvania Merchant Group Ltd relating to
shares of Class Q-1, Class Q-2, Class Q-3,
Class R-1, Class R-2, Class R-3, Class S-1,
Class S-2, Class S-3, Class T-1, Class T-2,
Class T-3, Class U-1, Class U-2 and Class U-3
is incorporated herein by reference to
Exhibit (13)(e) of Post-Effective No. 10 to
Registrant's Registration Statement on Form
N-1A as filed on November 10, 1993.
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<PAGE> 551
(f) Purchase Agreement dated September 30, 1994
between the Registrant and Provident
Distributors, Inc. relating to shares of
Class A-4, Class D-4, Class E-4, Class F-4,
Class G-4, Class H-4, Class K-4, Class L-4,
Class M-4, Class N-4, Class O-4, Class P-4,
Class R-4, Class S-4, Class T-4, Class U-4,
Class W-4, Class X-4, Class Y-4 is
incorporated herein by reference to Exhibit
(13)(f) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form
N-1A filed on January 18, 1995.
(g) Purchase Agreement dated February 1, 1994
between the Registrant and Provident
Distributors, Inc. relating to shares of
Class V-1, Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1, Class X-2,
Class X-3, Class Y-1, Class Y-2 and Class Y-3
is incorporated herein by reference to
Exhibit (13)(g) of Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(h) Purchase Agreement dated August 1, 1995
between Registrant and Provident
Distributors, Inc. relating to shares of
Class Z-1, Class Z-2 and Class Z-3 is
incorporated herein by reference to Exhibit
(13)(h) of Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form
N-1A filed on May 11, 1995.
(i) Form of Purchase Agreement between Registrant
and Provident Distributors, Inc. relating to
shares of Class AA-1, Class AA-2, Class AA-3,
Class AA-4; Class BB-1, Class BB-2, Class
BB-3 and Class BB-4; and Class CC-1, Class
CC-2, Class CC-3 and Class CC-4 is
incorporated herein by reference to Exhibit
(13)(i) of Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(14) None.
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<PAGE> 552
(15) (a) Amended and Restated Distribution and Service
Plan dated January 21, 1993 and Form of
Distribution and Servicing Agreement is
incorporated herein by reference to Exhibit
15(a) of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form
N-1A filed January 22, 1993.
(b) Series B Distribution Plan dated September
23, 1994 is incorporated herein by reference
to Exhibit 15(b) of Post-Effective Amendment
No. 14 to Registrant's Registration Statement
on Form N-1A filed January 18, 1995.
(c) Form of Amended and Restated Distribution and
Service Plan for Service, Series A Investor,
Series B Investor, Series C Investor and
Institutional Shares.
(16) Schedules for computation of performance
quotations are incorporated herein by
reference to Exhibit (16) of Post-Effective
Amendment No. 5 to Registrant's Registration
Statement on Form N-1A filed on February 5,
1992.
(18) Plan Pursuant to 18f-3 for Operation of a
Multi-Class Distribution System is
incorporated herein by reference to Exhibit
(18) of Post-Effective Amendment No. 17 to
the Registrant's Registration Statement on
Form N-1A filed on October 6, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant is controlled by its Board of Trustees.
Item 26. Number of Holders of Securities
Provident Distributors, Inc. has provided the initial
capitalization for and holds all of the outstanding shares of beneficial
interest of the following classes as of September 29, 1995: D-4, F-4, H-4, K-4,
N-4, O-4, R-4, S-4, T-4, U-4, V-2, X-1, X-3 and Y-4.
With regard to the other portfolios, the following information is
as of September 29, 1995.
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<PAGE> 553
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A-1 29
Class B-1 48
Class C-1 11
Class D-1 6
Class E-1 1
Class F-1 5
Class G-1 6
Class H-1 2
Class I-1 2
Class J-1 7
Class K-1 1
Class L-1 1
Class M-1 1
Class N-1 7
Class O-1 1
Class P-1 6
Class Q-1 3
Class R-1 1
Class S-1 1
Class T-1 6
Class U-1 6
Class V-1 1
Class W-1 0
Class Y-1 6
Class A-2 357
Class B-2 44
Class C-2 8
Class D-2 352
Class E-2 2055
Class F-2 270
Class G-2 654
Class H-2 211
Class I-2 3
Class J-2 26
Class K-2 125
Class L-2 42
Class M-2 525
Class N-2 517
Class O-2 203
Class P-2 735
Class Q-2 2
Class R-2 16
Class S-2 24
Class T-2 249
Class U-2 57
Class W-2 0
Class X-2 21
Class Y-2 90
Class A-3 4
Class B-3 2
</TABLE>
C-19
<PAGE> 554
<TABLE>
<S> <C>
Class C-3 3
Class D-3 10
Class E-3 6
Class F-3 21
Class G-3 23
Class H-3 2
Class I-3 5
Class J-3 20
Class K-3 8
Class L-3 2
Class M-3 1
Class N-3 31
Class O-3 6
Class P-3 26
Class Q-3 14
Class R-3 2
Class S-3 9
Class T-3 23
Class U-3 18
Class V-3 5
Class W-3 0
Class Y-3 6
Class A-4 1
Class E-4 359
Class G-4 263
Class L-4 7
Class M-4 139
Class P-4 246
Class W-4 0
Class X-4 522
</TABLE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter against
certain losses is provided for in Section 7 of the Distribution Agreement filed
herein as Exhibit (6)(a). Indemnification of PFPC Inc. and Provident
Distributors, Inc. in their capacity as co-administrators is provided for in
Section 7 of the Administration Agreement filed herein as Exhibit 9(e).
Indemnification of Registrant's Custodian and Transfer Agent is provided for,
respectively, in Section 22 of the Custodian Agreement filed herein as Exhibit
8(a) and Section 17 of the Transfer Agency Agreement filed herein as Exhibit
9(e). Registrant intends to obtain from a major insurance carrier a trustees'
and officers' liability policy covering certain types of errors and omissions.
In addition, Section 9.3 of the Registrant's Declaration of Trust incorporated
by reference herein as Exhibit 1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives and
Employees. The Trust shall indemnify each of its Trustees against all
liabilities and expenses (including
C-20
<PAGE> 555
amounts paid in satisfaction of judgments, in compromise, as fines and
penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be
involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee
except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties, provided that as to
any matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification either
for said payment or for any other expenses shall be provided unless
the Trust shall have received a written opinion from independent legal
counsel approved by the Trustees to the effect that if either the
matter of willful misfeasance, gross negligence or reckless disregard
of duty, or the matter of bad faith had been adjudicated, it would in
the opinion of such counsel have been adjudicated in favor of such
person. The rights accruing to any person under these provisions
shall not exclude any other right to which he may be lawfully
entitled, provided that no person may satisfy any right of indemnity
or reimbursement hereunder except out of the property of the Trust.
The Trustees may make advance payments in connection with the
indemnification under this Section 9.3, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust
in the event it is subsequently determined that he is not entitled to
such indemnification.
The Trustee shall indemnify officers, representatives and
employees of the Trust to the same extent that Trustees are entitled
to indemnification pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a trustee, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as
C-21
<PAGE> 556
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed
herein as Exhibit 1(a), also provides for the indemnification of shareholders
of the Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by
reason of his being or having been a Shareholder and not because of
his acts or omissions or for some other reason, the Shareholder or
former Shareholder (or his heirs, executors, administrators or other
legal representatives or, in the case of a corporation or other
entity, its corporate or other general successor) shall be entitled
out of the assets belonging to the classes of Shares with the same
alphabetical designation as that of the Shares owned by such
Shareholder to be held harmless from and indemnified against all loss
and expense arising from such liability. The Trust shall, upon
request by the Shareholder, assume the defense of any claim made
against any Shareholder for any act or obligations of the Trust and
satisfy any judgment thereon from such assets.
Item 28. Business and Other Connections of Investment Advisers
PNC Asset Management Group, Inc. ("PAMG") performs investment
advisory services for Registrant. PAMG was organized in 1994 for the purpose
of providing advisory services to investment companies.
(a) To Registrant's knowledge, none of the directors or
officers of PAMG, except those set forth below, is, or has been at any time
during Registrant's past two fiscal years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers and certain executives of PAMG also hold various
positions with, and engage in business for, PNC Bank Corp, which indirectly
owns all the outstanding stock of PAMG, or other subsidiaries of PNC Bank Corp.
Set forth below are the names and principal businesses of the directors and
certain executives of PAMG who are engaged in any other business, profession,
vocation or employment of a substantial nature.
(b) To Registrant's knowledge, none of the directors or
officers of PNC Institutional Management Corporation ("PIMC"), except those set
forth below, is, or has been at any time during Registrant's past two fiscal
years, engaged in any other business, profession, vocation or employment of a
substantial nature, except that certain directors and officers and certain
C-22
<PAGE> 557
executives of PIMC also hold various positions with, and engage in business
for, PNC Bank Corp., which indirectly owns all the outstanding stock of PIMC,
or other subsidiaries of PNC Bank Corp. Set forth below are the names and
principal businesses of the directors and certain executives of PIMC who are
engaged in any other business, profession, vocation or employment of a
substantial nature.
(c) Provident Capital Management, Inc. ("PCM") is an
indirect wholly-owned subsidiary of PNC Bank Corp. PCM currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. To Registrant's
knowledge, none of the directors or officers of PCM, except those set forth
below, is, or has been at any time during the Registrant's past two fiscal
years, engaged in any business, profession, vocation or employment of a
substantial nature. Set forth below are the names and principal businesses of
the directors and certain executives of PCM who are engaged in any other
business, profession, vocation or employment of a substantial nature.
(d) BlackRock Financial Management, Inc. ("BlackRock") is an
indirect wholly-owned subsidiary of PNC Bank Corp. BlackRock currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. To Registrant's
knowledge, none of the directors or officers of BlackRock, except those set
forth below, is, or has been at any time during the Registrant's past two
fiscal years, engaged in any business, profession, vocation or employment of a
substantial nature. Set forth below are the names and principal businesses of
the directors and certain executives of BlackRock who are engaged in any other
business, profession, vocation or employment of a substantial nature.
(e) PNC Equity Advisors Company ("PEAC") is an indirect
wholly-owned subsidiary of PNC Bank Corp. PEAC currently offers investment
advisory services to institutional investors such as pension and profit-sharing
plans or trusts, insurance companies and banks. To Registrant's knowledge,
none of the directors or officers of PEAC, except those set forth below, is, or
has been at any time during the Registrant's past two fiscal years, engaged in
any business, profession, vocation or employment of a substantial nature. Set
forth below are the names and principal businesses of the directors and certain
executives of PEAC who are engaged in any other business, profession, vocation
or employment of a substantial nature.
(f) Morgan Grenfell Investment Services Limited ("MGIS") is a
subsidiary of Morgan Grenfell Asset Management. The list required by this Item
28 of officers and directors of MGIS, together with information as to any other
business,
C-23
<PAGE> 558
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by MGIS pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-12880).
C-24
<PAGE> 559
PNC ASSET MANAGEMENT GROUP, INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Chairman and Director Richard C. Caldwell Director, PNC Institutional Investment
Management Corporation (29) Advisory
Executive Vice President Banking
PNC Bank, National
Association (1)
Director, PNC Equity Advisors Investment
Company* Advisory
Director, PNC Bank, New Banking
England (26)
Director, PNC Bank, FSB (27) Fiduciary
Activities
Director, BlackRock Financial Investment
Management, Inc. (15) Advisory
Director Banking
PNC National Bank (2)
Director Fiduciary
PNC Trust Company of New York Activities
(11)
Director, Provident Capital Advisory
Management Inc. (5)
Executive Vice President Bank Holding
PNC Bank Corp. (14) Company
Director Banking
PNC Bank, New Jersey,
National Association (16)
Director Financial-
PFPC Inc. (3) Related Services
Director J. Richard Carnall Chairman and Director, PNC Investment
Institutional Management Advisory
Corporation (29)
</TABLE>
C-25
<PAGE> 560
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Executive Vice President Banking
PNC Bank, National
Association (1)
Director Banking
PNC National Bank (2)
Chairman and Director Financial-
PFPC Inc. (3) Related Services
Director Fiduciary
PNC Trust Company of New York Activities
(11)
Director Equipment
Hayden Bolts, Inc.*
Director Real Estate
Parkway Real Estate Company*
Director Investment
Provident Capital Management Advisory
Inc. (5)
Director Young D. Chin Director, President & CEO, Investment
Provident Capital Management, Advisory
Inc. (5)
Director Investment
PNC Equity Advisors Company Advisory
(28)
Senior Vice President Banking
Investment Strategy, PNC
Bank, National Association
(1)
Director Robert J. Christian Director, Provident Capital Investment
Management, Inc. (5) Advisory
Chairman, Director Investment
PNC Equity Advisors Company Advisory
(28)
Chief Investment Officer, PNC Banking
Bank, National Association
(1)
</TABLE>
C-26
<PAGE> 561
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Director Vincent J. Ciavardini President and Chief Financial Financial-
Officer, PFPC, Inc. (3) Related Services
Senior Vice President of PIMC Banking
(29)
Director Laurence D. Fink Chairman and CEO of BlackRock Investment
Financial Management Inc. Advisor
(15)
Director Ralph L. Schlosstein President of BlackRock Investment
Financial Management Inc. Advisor
(15)
Senior Vice President Thomas Whitford None
</TABLE>
C-27
<PAGE> 562
PNC INSTITUTIONAL MANAGEMENT CORPORATION
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Chairman and J. Richard Carnall See PAMG List
Director
Director Richard C. Caldwell See PAMG List
Director Richard L. Smoot President and Chief Banking
Executive Officer
PNC Bank, National
Association (1)
Senior Vice President Bank
PNC Bank Corp. (14) Holding
Company
Director Financial-
PFPC Inc. (3) Related
Services
Director Fiduciary
PNC Trust Company of NY (11) Activities
Director, Chairman and Banking
President
PNC Bank, New Jersey,
National Association (16)
Director, Chairman, and CEO Banking
PNC National Bank (2)
Chairman & Director Leasing
PNC Credit Corp (13)
Secretary Michelle L. Petrilli Chief Counsel Banking
PNC Bank, DE (20)
Secretary Financial-
PFPC Inc. (3) Related
Services
President and Thomas H. Nevin None.
Chief Investment
Officer
Chief Financial Nicholas M. Marsini,Jr. Senior Vice President Banking
Officer PNC Bank, National
Association (1)
Director Financial
PFPC Inc. (3) Related
Services
Senior Vice President and Banking
Chief Financial Officer
PNC Bank, Delaware (20)
</TABLE>
C-28
<PAGE> 563
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C>
Director, Vice President and Banking
Treasurer
PNC National Bank (2)
Director Banking
PNC Bank, New Jersey
National Association (16)
Director Fiduciary
PNC Trust Company of Activities
New York (11)
Director and Treasurer Holding
PNC Bancorp, Inc. (9) Company
Director and Treasurer Investment
PNC Capital Corp. (17) Activities
Director and Treasurer Banking
PNC Holding Corp. (18)
Director and Treasurer Investment
PNC Venture Corp. (19) Activities
Executive Vice Charles B. Landreth Vice President
President PNC Bank, National Association (1) Banking
Senior Vice Vincent J. Ciavardini President and Chief Financial-
President Financial Officer Related
PFPC Inc. (3) Services
Senior Vice Scott Moss None.
President
Senior Vice John N. Parthemore None.
President
Senior Vice Dushyant Pandit None.
President
Senior Vice James R. Smith None.
President
Group Vice William F. Walsh None.
President
Vice President, Stephen M. Wynne Executive Vice President and Financial-
Chief Chief Accounting Officer Related
Accounting PFPC Inc. (3) Services
Officer and
Assistant Secretary
Controller Pauline M. Heintz Vice President Financial-
PFPC Inc. (3) Related
Services
</TABLE>
C-29
<PAGE> 564
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C>
Vice President John R. Antczak None.
Vice President Jeffrey W. Carson None.
Vice President Katherine A. Chuppe None.
Vice President Mary J. Coldren None.
Vice President Michele C. Dillion None.
Vice President Patrick J. Ford None.
Vice President Richard Hoerner None.
Vice President Michael S. Hutchinson None.
Vice President Michael J. Milligan None.
Vice President Allyn Plambeck None.
Vice President W. Don Simmons None.
Vice President Charles Allen Stiteler None.
</TABLE>
- -------
*Information regarding this corporation can be obtained from the office of the
Secretary.
C-30
<PAGE> 565
PROVIDENT CAPITAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
OTHER BUSINESS
NAME TITLE CONNECTIONS
---- ----- --------------
<S> <C> <C>
Richard C. Caldwell Director See PIMC list
Ernest E. Cecilia Director Director, CIO, President, CEO, PNC
Equity Advisors Company (28)
Director, Equity Research, PNC
Asset Management Group,
Inc. (30)
Director, Equity Research, PNC
Bank, National Association (1)
Robert J. Christian Director See PAMG List.
Young D. Chin Director See PAMG List.
</TABLE>
C-31
<PAGE> 566
<TABLE>
<CAPTION>
OTHER BUSINESS
NAME TITLE CONNECTIONS
---- ----- ---------------
<S> <C> <C>
Timothy M. Alles Treasurer Director, PNC Trust Company of New
York (11)
Treasurer, PNC Service Corp. (4)
Vice President, PNC Bank Corp. (14)
Vice President and Controller, PNC
Bank, FSB (27)
Controller, Provident National
Financial Corp.*
Treasurer, Provident Realty Inc.
(8)
Treasurer, PNC New Jersey Credit
Corp. (10)
Beth Wagner-Coyne Vice President None
Lynn K. Shipman Secretary None
Earl J. Gaskins Vice President None
Larry Bernstein Vice President None
J. H. Hill, Jr. Vice President None
Susan D. Menzies Vice President None
Edwin B. Powell Vice President None
Herve Van Caloen Vice President None
</TABLE>
C-32
<PAGE> 567
BLACKROCK FINANCIAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
OTHER BUSINESS
NAME TITLE CONNECTIONS
---- ----- --------------
<S> <C> <C>
Scott M. Amero Managing Director VP of 10 BlackRock closed end funds
Keith T. Anderson Managing Director VP of 21 BlackRock closed end funds
Richard C. Caldwell Director See PIMC List
Wesley R. Edens Managing Director COO & Director of 4 BlackRock
closed end funds
Laurence D. Fink Chairman and Director Chairman & Director of 25 BlackRock
closed end funds; and Director of
PNC Asset Management Group, Inc.
Hugh R. Frater Managing Director None
Henry Gabbay Chief Operating Officer and Managing Treasurer of 25 BlackRock closed
Director end funds
Bennett W. Golub, Ph.D. Managing Director None
Charles S. Hallac Managing Director None
Michael C. Huebsch Managing Director VP of 21 BlackRock closed end funds
Robert S. Kapito Managing Director VP of 21 BlackRock closed end funds
P. Phillip Matthews Managing Director None
Barbara G. Novick Managing Director Secretary of 21 BlackRock closed
end funds
Karen H. Sabath Managing Director Assistant Secretary of 21 BlackRock
closed end funds
Ralph L. Schlosstein President & Director President & Director of 21
BlackRock closed end funds; and
President of 4 BlackRock closed end
funds
Joel M. Shaiman Managing Director None
J. Robert Small Principal & Controller Assistant Secretary of 4 BlackRock
closed end funds
Susan L. Wagner Managing Director Secretary of 4 BlackRock closed end
funds
</TABLE>
C-33
<PAGE> 568
PNC EQUITY ADVISORS COMPANY
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
OTHER BUSINESS
NAME TITLE CONNECTIONS
---- ----- --------------
<S> <C> <C>
Timothy M. Alles CFO, Treasurer See Provident Capital Management
List
Richard C. Caldwell Director See PIMC List
Ernest E. Cecilia Director, CIO, President & CEO See Provident Capital Management
List
Young D. Chin Director See Provident Capital Management
List
Robert J. Christian Chairman and Director See Provident Capital Management
List
Lisa P. Howard Chief Compl. Officer None
Leah L. Tompkins Secretary, Chief Legal Counsel Senior Counsel, PNC Bank, National
Association (1)
Thomas H. O'Brien CEO, PNC Bank Corp.
</TABLE>
C-34
<PAGE> 569
(1) PNC Bank, National Association, 120 S. 17th Street, Philadelphia, PA
19103; Broad & Chestnut Streets, Philadelphia, PA 19101; and 17th and
Chestnut Streets, Philadelphia, PA 19103.
(2) PNC National Bank, 103 Bellevue Parkway, Wilmington, DE 19809.
(3) PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
(4) PNC Service Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(5) Provident Capital Management, Inc., 30 S. 17th Street, Suite 1500,
Philadelphia, PA 19103.
(6) PNC Investment Corp., Broad and Chestnut Streets, Philadelphia, PA
19101.
(7) Provident Realty Management, Inc., Broad and Chestnut Streets,
Philadelphia, PA 19101.
(8) Provident Realty, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(9) PNC Bancorp, Inc., 3411 Silverside Road, Wilmington, DE 19810.
(10) PNC New Jersey Credit Corp, 1415 Route 70 East, Suite 604, Cherry
Hill, NJ 08034.
(11) PNC Trust Company of New York, 40 Broad Street, New York, NY 10084.
(12) Provcor Properties, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(13) PNC Credit Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(14) PNC Bank Corp., 5th Avenue and Wood Streets, Pittsburgh, PA 15265.
(15) BlackRock Financial Management Inc., 435 Park Avenue, New York, NY
10154.
(16) PNC Bank, New Jersey, National Association, Woodland Falls Corporate
Park, 210 Lake Drive East, Cherry Hill, NJ 08002.
(17) PNC Capital Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(18) PNC Holding Corp, 222 Delaware Avenue, P.O. Box 791, Wilmington, DE
19899.
(19) PNC Venture Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(20) Bank of Delaware, 200 Delaware Avenue, Wilmington, DE 19801.
(21) Bank of Delaware Corp., 300 Delaware Avenue, Wilmington, DE 19801.
(22) Del-Vest, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(23) Marand Corp., 222 Delaware Avenue, Wilmington, DE 19801.
(24) Millsboro Insurance Agency, 300 Delaware Avenue, Wilmington, DE
19801.
(25) Roney-Richards, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(26) PNC Bank, New England (f/k/a The Massachusetts Company), 125 High
Street, Boston, MA.
(27) PNC Bank, FSB, P.O. Box 4026, Vero Beach, FL.
(28) PNC Equity Advisors Company, 1835 Market Street, 15th Floor, Eleven
Penn Center, Philadelphia, PA 19103.
C-35
<PAGE> 570
(29) PNC Institutional Management Corporation 400 Bellevue Parkway,
Wilmington, DE 19809.
(30) PNC Asset Management Group, Inc. 1835 Market Street, 15th Floor,
Eleven Penn Center, Philadelphia, PA 19103.
(31) Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19102.
(32) Agnes Irwin School, Ithan Avenue and Conestoga Road, P. O. Box 407,
Rosemont, PA 19010.
(33) Episcopal Community Services, 225 South 3rd Street, Philadelphia, PA
19106.
(34) Greater Philadelphia Chamber of Commerce, 1234 Market Street,
Philadelphia, PA 19107.
(35) The Greater Philadelphia First Corporation, 1818 Market Street,
Philadelphia, PA 19103.
(36) Pennsylvania Ballet, 1101 South Broad Street, Philadelphia, PA 19147.
(37) The Philadelphia Orchestra, 1420 Locust Street, Philadelphia, PA
19102.
(38) Police Athletic League of Philadelphia, 3201 North 5th Street,
Philadelphia, PA 19140.
(39) Settlement Music School, 416 Queen Street, Philadelphia, PA 19147.
(40) Widener University, One University Plaza, Chester, PA 19013.
(41) United Negro College Fund Inc., 1650 Arch Street, Philadelphia, PA
19103.
(42) The Greater Philadelphia Urban Affairs Coalition, 1207 Chestnut
Street, Philadelphia, PA 19107.
C-36
<PAGE> 571
Item 29. Principal Underwriter
(a) Provident Distributors, Inc. currently acts as
distributor for, in addition to the Registrant, Temporary Investment Fund,
Inc., Municipal Fund for Temporary Investment, Portfolios for Diversified
Investment, Municipal Fund for California Investors, Inc., and Municipal Fund
for New York Investors, Inc.
(b) The information required by this Item 29 with respect
to each director, officer or partner of Provident Distributors, Inc. is
incorporated by reference to Schedule A of FORM BD filed by Provident
Distributors, Inc. with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) PNC Bank, National Association, Broad and
Chestnut Streets, Philadelphia, Pennsylvania
19102 (records relating to its functions as
custodian).
(2) Provident Capital Management, Inc., 30 South
17th Street, Philadelphia, Pennsylvania 19103
(records relating to its functions as
investment sub-adviser).
(3) Provident Distributors, Inc., 259
Radnor-Chester Road, Suite 135, Radnor,
Pennsylvania 19807 (records relating to its
functions as distributor and
co-administrator).
(4) PNC Asset Management Group, Inc., 1835 Market
Street, 15th Floor, Eleven Penn Center,
Philadelphia, PA 19103 (records relating to
its functions as investment adviser).
(5) PNC Institutional Management Corporation,
Bellevue Corporate Center, 103 Bellevue
Parkway, Wilmington, Delaware 19809 (records
relating to its functions as investment
sub-adviser).
(6) BlackRock Financial Management, Inc., 345
Park Avenue, New York, New York 10154
(records relating to its functions as
investment sub-adviser).
C-37
<PAGE> 572
(7) PNC Equity Advisors Company, 1835 Market
Street, 15th Floor, Philadelphia,
Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
(8) PFPC Inc., Bellevue Corporate Center, 400
Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as
co-administrator, transfer agent and dividend
disbursing agent).
(9) The Chase Manhattan Bank, N.A., 1285 Avenue
of the Americas, New York, New York 10019
(records relating to its function as
sub-custodian).
(10) State Street Bank and Trust Company, P.O. Box
1631, Boston, Massachusetts (records relating
to its function as sub-custodian).
(11) Barclays Bank PLC, 75 Wall Street, New York,
New York 10265 (records relating to its
function as sub-custodian).
(12) Morgan Grenfell Investment Services Limited,
20 Finsbury Circus, London, England EC2M1NB
(records relating to its functions as
investment sub-adviser).
(13) Compass Capital Group, Inc., 345 Park Avenue,
New York, New York 10154 (records relating to
its functions as co-administrator).
(14) Drinker Biddle & Reath, Philadelphia National
Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496
(registrant's declaration of trust, code of
regulations and minute books).
Item 31. Management Services
None.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest
annual report to shareholders upon request and without charge.
C-38
<PAGE> 573
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 19 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia and the Commonwealth of Pennsylvania on the 16th day of
November, 1995.
THE PNC FUND
Registrant
By /s/ G. Willing Pepper
--------------------------------
G. Willing Pepper, Chairman of
the Board and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 19 to the Registration Statement has been
signed by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the
/s/ G. Willing Pepper Board and President November 16, 1995
- ------------------------ (Principal Executive
(G. Willing Pepper) Officer)
*David R. Wilmerding, Jr. Vice-Chairman of November 16, 1995
- -------------------------- the Board
(David R. Wilmerding, Jr.)
Vice-President
/s/ Edward J. Roach and Treasurer
- ---------------------- (Principal
(Edward J. Roach) Financial and
Accounting Officer) November 16, 1995
*Robert R. Fortune Trustee November 16, 1995
- ------------------------
(Robert R. Fortune)
*Philip E. Coldwell Trustee November 16, 1995
- ------------------------
(Philip E. Coldwell)
*Rodney D. Johnson Trustee November 16, 1995
- ------------------------
(Rodney D. Johnson)
*Anthony M. Santomero Trustee November 16, 1995
- ------------------------
(Anthony M. Santomero)
</TABLE>
*By:/s/ Edward J. Roach
---------------------------------
Edward J. Roach, Attorney-in-Fact
<PAGE> 574
The PNC(R) Fund
POWER OF ATTORNEY
Robert R. Fortune, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Robert R. Fortune
---------------------
Date: January 21, 1993
<PAGE> 575
The PNC(R) Fund
POWER OF ATTORNEY
G. Willing Pepper, whose signature appears below, hereby
constitutes and appoints Edward J. Roach his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable The PNC Fund
(the "Company") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/ G. Willing Pepper
---------------------
Date: January 21, 1993
<PAGE> 576
The PNC(R) Fund
POWER OF ATTORNEY
David R. Wilmerding, Jr., whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ David R. Wilmerding, Jr.
----------------------------
Date: January 21, 1993
<PAGE> 577
The PNC(R) Fund
POWER OF ATTORNEY
Philip E. Coldwell, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Philip E. Coldwell
----------------------
Date: September 15, 1993
<PAGE> 578
The PNC(R) Fund
POWER OF ATTORNEY
Rodney D. Johnson, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Rodney D. Johnson
---------------------
Date: September 15, 1993
<PAGE> 579
The PNC(R) Fund
POWER OF ATTORNEY
Anthony M. Santomero, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Anthony Santomero
---------------------
Date: March 30, 1994
<PAGE> 580
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C>
(11) (b) Consent of Drinker Biddle & Reath.
(15) (c) Form of Amended and Restated Distribution and Service Plan for Service, Series A Investor,
Series B Investor, Series C Investor and Institutional Shares.
</TABLE>
C-1
<PAGE> 1
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Counsel" in the Statement of Additional Information
that is included in Post-Effective Amendment No. 19 to the Registration
Statement (File No. 33-26305) on Form N-1A of The PNC(R) Fund under the
Securities Act of 1933 and the Investment Company Act of 1940, respectively.
This consent does not constitute a consent under Section 7 of the Securities Act
of 1933, and in consenting to the use of our name and the reference to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under Section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ DRINKER BIDDLE & REATH
---------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
November 16, 1995
<PAGE> 1
EXHIBIT 15-C
DRAFT - 10/05/95
THE PNC(R) FUND
AMENDED AND RESTATED
DISTRIBUTION AND SERVICE PLAN
____________, 1995
This Distribution and Service Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by The PNC(R) Fund, a Massachusetts business
trust (the "Fund"), with respect to the various classes of shares (each, a
"Class") of the portfolios of the Fund (each, a "Portfolio") listed on Appendix
A hereto, as amended from time to time, subject to the terms and conditions set
forth herein. The Service Fees and Shareholder Processing Fees (each as
defined herein) payable pursuant to the Plan are intended to be fees payable
for the administration and servicing of shareholder accounts, as more fully
described in Section 2 below, and not costs which are primarily intended to
result in the sale of the Fund's shares and which would require approval
pursuant to the Rule.
Section 1. Distribution Fees
(a) Pursuant to the Plan, the Fund may pay to (i) the
Distributor of its shares, Provident Distributors, Inc., or any entity that may
in the future act as a distributor for its shares (collectively, the
"Distributor"), and/or (ii) PNC Mutual Fund Company or any other affiliate of
PNC Bank, National Association (collectively, "PMFCo"), with respect to and at
the expense of each Class of each Portfolio listed on Appendix A hereto, a fee
for distribution and sales support services, as applicable, and as more fully
described in Section 1(b) hereof (the "Distribution Fee"), such fee in the
aggregate to be at the annual rate specified with respect to such Class of such
Portfolio under the column "Distribution Fee" on Appendix A hereto.
(b) Payments of the Distribution Fee under the Plan shall be
used primarily to compensate the Distributor for distribution services and
sales support services provided, and/or to PMFCo for sales support services
provided, respectively, in connection with the offering and sale of shares of
the applicable Class of the applicable Portfolio, and to reimburse the
Distributor and/or PMFCo for related expenses incurred, including payments by
the Distributor and/or PMFCo to compensate or reimburse brokers, dealers, other
financial institutions or other industry professionals (collectively, "Selling
Agents"), for sales support services provided and related expenses incurred by
<PAGE> 2
such Selling Agents. The services and expenses described in this Section 1(b)
may include, but are not limited to, the following: (i) the development,
formulation and implementation of marketing and promotional activities,
including direct mail promotions and television, radio, magazine, newspaper,
electronic and other mass media advertising, (ii) the preparation, printing and
distribution of prospectuses and reports (other than prospectuses or reports
used for regulatory purposes or for distribution to existing shareholders);
(iii) the preparation, printing and distribution of sales literature; (iv)
expenditures for sales or distribution support services such as for telephone
facilities and in- house telemarketing; (v) preparation of information,
analyses and opinions with respect to marketing and promotional activities;
(vi) commissions, incentive compensation or other compensation to, and expenses
of, account executives or other employees of the Distributor, PMFCo or Selling
Agents, attributable to distribution or sales support activities, as
applicable, including interest expenses and other costs associated with
financing of such commissions, compensation and expenses; (vii) travel,
equipment, printing, delivery and mailing costs, overhead and other office
expenses of the Distributor, PMFCo or Selling Agents, attributable to
distribution or sales support activities, as applicable, (viii) the costs of
administering the Plan; (ix) expenses of organizing and conducting sales
seminars; and (x) any other costs and expenses relating to distribution or
sales support activities.
(c) Payments of the Distribution Fee on behalf of a particular
Portfolio must be in consideration of services rendered for or on behalf of
such Portfolio. However, joint distribution or sales support financing with
respect to the shares of the Portfolios (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a
person, or affiliated persons of the Distributor or PMFCo, shall be permitted
in accordance with applicable law. Payments of the Distribution Fee under
Section 1 of the Plan may be made without regard to expenses actually incurred.
(d) The Distributor, PMFCo and other affiliates of PNC Bank,
National Association and other parties that receive fees from the Fund may each
make payments without limitation as to amount relating to distribution or sales
support activities, as applicable, in connection with each Class of each
Portfolio out of any portion of any fees other than the Distribution Fee paid
by the Fund to it or its affiliate, its past profits or any other sources
available to it.
Section 2. Service Fees and Shareholder Processing Fees
(a) Pursuant to the Plan, the Fund shall pay to PMFCo, with
respect to and at the expense of each Class of each
-2-
<PAGE> 3
Portfolio listed on Appendix A hereto, (i) a fee in respect of the provision of
personal services to shareholders of such Class of such Portfolio, as more
fully described in Section 2(b) hereof (the "Service Fee"), such fee to be at
the annual rate specified with respect to such Class of such Portfolio under
the column "Service Fee" on Appendix A hereto, and (ii) a fee in respect of the
provision of certain activities relating to the processing and administration
of shareholder accounts in such Class of such Portfolio, as more fully
described in Section 2(c) hereof (the "Shareholder Processing Fee"), such fee
to be at the annual rate specified with respect to such Class of such Portfolio
under the column "Shareholder Processing Fee" on Appendix A hereto. PMFCo
shall determine the amount of the Service Fee and the Shareholder Processing
Fee to be paid to one or more brokers, dealers, other financial institutions or
other industry professionals (collectively, "Service Agents") and the basis on
which such payments will be made. Payments to a Service Agent will be subject
to compliance by the Service Agent with the terms of any related Plan agreement
entered into by the Service Agent.
(b) Payments of the Service Fee shall be used to compensate
PMFCo and Service Agents for general shareholder liaison services provided with
respect to shareholders in the related Class of the related Portfolio,
including, but not limited to, (i) answering shareholder inquiries regarding
account status and history, the manner in which purchases, exchanges and
redemptions of shares may be effected and certain other matters pertaining to
the shareholders' investments; and (ii) assisting shareholders in designating
and changing dividend options, account designations and addresses.
(c) Payments of the Shareholder Processing Fee shall be used to
compensate PMFCo and Service Agents for certain services relating to the
processing and administration of shareholder accounts with respect to
shareholders in the related Class of the related Portfolio, which may include
some or all of the following: (i) providing necessary personnel and facilities
to establish and maintain shareholder accounts and records; (ii) assisting in
aggregating and processing purchase, exchange and redemption transactions;
(iii) placing net purchase and redemption orders with the Distributor; (iv)
arranging for wiring of funds; (v) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (vi) processing
dividend payments; (vii) verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; (viii) providing periodic
statements showing a customer's account balance and, to the extent practicable,
integrating such information with other customer transactions otherwise
effected through or with a Service Agent; (ix) furnishing (either separately or
on an integrated basis with other reports sent to a shareholder by a Service
Agent) monthly and year-end statements
-3-
<PAGE> 4
and confirmations of purchases, exchanges and redemptions; (x) transmitting on
behalf of the Fund, proxy statements, annual reports, updating prospectuses and
other communications from the Fund to the shareholders; (xi) receiving,
tabulating and transmitting to the Fund proxies executed by shareholders with
respect to shareholder meetings; (xii) providing subaccounting with respect to
shares beneficially owned by customers or the information to the Fund necessary
for subaccounting; (xiii) sub-transfer agency services; and (xiv) providing
such other similar services as the Fund or a shareholder may request. It is
intended that none of the services provided in consideration of the Shareholder
Processing Fee be of a nature so as to render the Shareholder Processing Fee a
"service fee" as defined in Article III, Section 26, of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
(d) Payments of the Service Fee and the Shareholder Processing
Fee under Section 2 of the Plan may be made without regard to expenses actually
incurred.
Section 3. Calculation and Payment of Fees
The amount of the Distribution Fee, Service Fee and Shareholder
Processing Fee payable with respect to each Class of each Portfolio listed on
Appendix A hereto shall be calculated daily and paid monthly, at the applicable
annual rates indicated on Appendix A. The Distribution Fee, Service Fee and
Shareholder Processing Fee shall be calculated and paid separately for each
Class of each Portfolio.
Section 4. Approval of Plan
The Plan will become effective immediately, as to any Class of any
Portfolio, upon its approval by (a) a majority of the outstanding shares of
such Class of such Portfolio, and (b) a majority of the Board of Trustees,
including a majority of the trustees who are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements entered into in
connection with the Plan, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of the Plan.
Section 5. Continuance of the Plan
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Trustees in the
manner described in Section 4 above.
-4-
<PAGE> 5
Section 6. Additional Classes and Portfolios
The Plan shall become effective with respect to Classes of Portfolios
not currently listed on Appendix A hereto upon obtaining the requisite
approvals with respect to such Classes of Portfolios in accordance with Section
4 above.
Section 7. Termination
The Plan may be terminated at any time with respect to any Class of
any Portfolio without penalty at any time by (a) a vote of a majority of the
Trustees who are not "interested persons" (as defined in the Act) of the Fund
and who have no direct or indirect financial interest in the operation of the
Plan or in any agreements entered into in connection with the Plan, or (b) a
vote of a majority of the outstanding shares of such Class of such Portfolio.
The termination of the Plan with respect to any Class of any Portfolio shall
not result in the termination of the Plan with respect to any other Class of
that Portfolio or any other Portfolio.
Section 8. Amendments
The Plan may not be amended with respect to any Class of any
Portfolio so as to increase materially the amount of the Distribution Fee
described in Section 1 above with respect to such Class of such Portfolio
unless the amendment is approved by a vote of at least a majority of the
outstanding shares of such Class of such Portfolio. In addition, no material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 9. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not "interested persons" of the Fund (as defined in the
Act) will be committed to the discretion of the Trustees then in office who are
not "interested persons" (as so defined) of the Fund.
Section 10. Written Reports
While the Plan is in effect, the Fund's Board of Trustees shall
receive, and the Trustees shall review, at least quarterly, written reports
complying with the requirements of the Rule, which set out the amounts expended
under the Plan and the purposes for which those expenditures were made.
Section 11. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to
-5-
<PAGE> 6
Section 10 above, for a period of not less than six years (the first two years
in an easily accessible place) from the date of the Plan, agreement or report.
Section 12. Limitation of Liability
The names "The PNC Fund" and "Trustees of The PNC Fund" refer
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of "The
PNC Fund" entered into in the name or on behalf thereof by any of the Trustees,
officers, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons
dealing with any class of shares of the Fund must look solely to the Trust
Property belonging to such class for the enforcement of any claims against the
Fund.
Section 13. Miscellaneous
The captions in the Plan are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
IN WITNESS WHEREOF, the Fund has executed the Plan as of
____________, 1995 on behalf of each Class of each Portfolio listed on Appendix
A hereto.
THE PNC FUND
By:____________________________
Vice President and Treasurer
-6-
<PAGE> 7
APPENDIX A
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Small Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Small Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Growth Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Value Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Index Equity Institutional ___% ___% ___%
Portfolio Service ___% ___% ___%
Investor A ___% ___% ___%
Investor B ___% ___% ___%
Investor C ___% ___% ___%
International Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Emerging Service 0% .15% .15%
Markets Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-1
<PAGE> 8
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Balanced Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Short-Term Bond Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate-Term Institutional 0% 0% 0%
Bond Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Government Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Fixed-Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Managed Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Fixed- Institutional 0% 0% 0%
Income Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-2
<PAGE> 9
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Tax-Free Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Pennsylvania Institutional 0% 0% 0%
Tax-Free Service 0% .15% .15%
Income Fund Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Tax- Institutional 0% 0% 0%
Free Income Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Tax-Free Institutional 0% 0% 0%
Income Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Money Market Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Municipal Money Institutional 0% 0% 0%
Market Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Municipal Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-3
<PAGE> 10
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Pennsylvania Institutional 0% 0% 0%
Municipal Money Service 0% .15% .15%
Market Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
North Carolina Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Virginia Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Multi-Sector Institutional 0% 0% 0%
Mortgage Service 0% .15% .15%
Securities Investor A .10% .25% .15%
Portfolio III Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-4
