Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
- --------------------------------------------------
Annual Report
September 30, 1996
<PAGE>
November 1, 1996
Dear Shareholder:
We are pleased to provide the annual report to shareholders of Compass Capital
Funds Multi-Sector Mortgage Securities Portfolio III for the six months ended
September 30, 1996. BlackRock Financial Management, Inc. (the "Adviser"), has
day-to-day investment responsibility for the Portfolio.
The Fixed Income Markets
Significant swings in the pace of U.S. economic growth influenced the
performance of the fixed income markets during the year ended September 30,
1996. Throughout the fourth quarter of 1995 and through the first six weeks of
1996, weak inflationary data and sluggish retail demand spurred two reductions
of short term interest rates totaling 50 basis points (0.50%) by the Federal
Reserve to 5.25%. However, the economic climate was altered significantly during
mid-February, as data suggesting a pick-up in growth caused market participants
to consider the potential for increased inflationary pressures.
Economic growth continued to accelerate during the second quarter of 1996, as
the sharp decline in interest rates throughout 1995 further stimulated spending
and buoyed consumer confidence. Economic growth as measured by Gross Domestic
Product (GDP) was measured at an annualized 4.7% for the quarter, which led
investors to believe that the Federal Reserve would be forced to raise interest
rates for the first time in over a year to curb the pace of the economy.
However, the pace of economic growth has slowed during the past few months to
the 2.0%-2.5% level, which is considered the non-inflationary trendline pace for
the U.S. economic growth. Softer economic data and continued moderation in the
broad inflation measures during the third quarter allowed the Fed to leave
short-term interest rates unchanged at their August 1996 and September 1996
policy meetings.
Yields of most maturity Treasuries posted minimal net changes over the past
twelve months. As an example, the yield of the 10-Year Treasury note ended
October 31, 1996 at 6.34%, 32 basis points higher than the October 31, 1995
closing yield of 6.02%. However, the modest net change in yield levels masks
considerable intra-year movements. After falling to a low of 5.52% in
mid-January, the yield of the 10-year Treasury rose to 7.05% in July in response
to stronger economic data before rallying to 6.34% at the end of the fiscal
period.
Commercial Mortgage-Backed Securities Market
Investor participation in the commercial mortgage-backed securities ("CMBS")
market continues to increase and drive credit spreads tighter, as investors look
for higher yielding assets with strong prepayment protection. In the past year
CMBS spreads have tightened dramatically with single-A and triple-B securities
tightening by 30 and 55 basis points respectively. Even with this significant
tightening, yields on single-A and triple-B CMBS classes remain approximately 50
basis points higher than comparably rated corporate bonds. BlackRock has
positioned the portfolio with an overweighting of triple-B securities, as it is
our view that the 30 basis point yield spread between single-A and triple-B CMBS
represents compelling relative value and the opportunity for further credit
spread tightening. Our outlook is for continued tightening of credit spreads due
to increased investor participation despite increased issuance volume, which is
projected to be up 17% over 1995's $18.7 billion.
1
<PAGE>
<TABLE>
<CAPTION>
Portfolio Performance
- ---------------------------------------------------------------------------------------------------------------------------
Total Returns--Period Ending Salomon BIG
September 30, 1996 Portfolio Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Month 1.73% 1.74%
- ---------------------------------------------------------------------------------------------------------------------------
3 Month 2.35% 1.86%
- ---------------------------------------------------------------------------------------------------------------------------
6 Month 3.53% 2.36%
- ---------------------------------------------------------------------------------------------------------------------------
12 Month 6.45% 4.94%
- ---------------------------------------------------------------------------------------------------------------------------
Since Inception* 22.49% 20.43%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Comparison of Change in Value of $1,000,000 Investment in the Portfolio and the
Salomon Broad Investment Grade ("BIG") Index from Inception and at each Fiscal
Year End.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
Portfolio Sal BIG
--------- -------
10/4/94 $1,000,000 $1,000,000
$1,003,800 $ 999,000
$1,000,257 $ 996,303
12/31/94 $1,007,799 $1,003,875
$1,025,798 $1,024,655
$1,052,110 $1,048,632
3/31/95 $1,060,779 $1,054,714
$1,074,527 $1,069,163
$1,117,948 $1,111,609
6/30/95 $1,127,831 $1,119,390
$1,123,150 $1,117,152
$1,137,471 $1,129,999
9/30/95 $1,150,677 $1,140,621
$1,167,258 $1,155,905
$1,185,479 $1,173,937
12/31/95 $1,202,561 $1,190,138
$1,210,979 $1,198,231
$1,190,271 $1,177,861
3/31/96 $1,183,129 $1,169,380
$1,182,739 $1,168,515
$1,182,688 $1,168,456
6/30/96 $1,200,999 $1,183,529
$1,207,364 $1,186,725
$1,208,330 $1,186,547
9/30/96 $1,229,234 $1,207,193
* Investment operations commenced October 4, 1994.
We appreciate your investment in the Compass Capital Funds Multi-Sector Mortgage
Securities Portfolio III and look forward to continuing to serve your financial
needs.
Sincerely,
Laurence D. Fink Ralph L. Schlosstein
Chairman President
BlackRock Financial Management, Inc. BlackRock Financial Management, Inc.
2
<PAGE>
Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
Schedule of Investments
September 30, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal
Rating* Amount
(Unaudited) (000) DESCRIPTION Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGE-BACKED SECURITIES 99.7%
Aetna Commercial Mortgage,
AAA $4,000 6.59%, Series 1995-C5, Class A2, 12/26/30 $3,925,349
AA 500 6.89%, Series 1995-C5, Class C, 12/26/30 476,868
Asset Securitization Corp.,
AA 1,000 7.36%, Series 1996-D2, Class A2 2/14/29 978,303
Carolina First Bank,
BBB 3,000 7.64%, Series 1996 C1, Class B, 03/18/27 3,030,000
Carousel Center Finance, Inc.,
BBB+ 1,494 7.53%, Series 1, Class C, 10/15/07 1,481,351
CBA Mortgage Corp.,
AAA 300 # 7.15%, Series 1993-C1, Class A2, 12/25/03 305,221
BB 2,000 7.15%, Series 1993-C1, Class C, 12/25/03 1,680,000
Central Life Assurance Co.,
AA+ 3,444 8.90%, Series 1994-1, Class A2, 11/01/20 3,587,550
Chase Commercial Mortgage Securities Corp.,
AA 2,500 7.60%, Series 1996-1, Class B, 04/18/06 2,496,730
Citibank, N.A. Multifamily Mortgage,
BBB+ 3,000 8.00%, Series 1994-1, Class M1, 01/25/19 2,889,401
CS First Boston Mortgage Securities Corp.,
AA 2,500 6.16%, Series 1994-MHC1, Class B, 04/25/11 2,500,000
AAA 2,926 6.45%, Series 1995-WF1, Class A1, 12/21/27 2,835,772
FDIC Trust,
AA 4,000 8.45%, Series 1994-C1, Class 2C, 09/25/25 4,139,375
Goldman Sachs,
AAA 2,500 7.41%, Series 1996, Class A2, 02/15/27 2,488,281
J.P. Morgan, Commercial Mortgage Finance Corp.,
BBB 2,500 7.30%, Series 1996-C2, Class D, 11/25/27 2,364,942
Kidder Peabody Acceptance Corp. 1,
A 2,500 7.00%, Series 1994-C1, Class C, 02/01/06 2,475,382
LB Commercial Conduit Mortgage Trust,
BBB 2,000 7.05%, Series 1995-C2, Class D, 09/25/25 1,876,869
Lennar United States Partners, Ltd.,
B 1,000 11.70%, Series 1995-1, Class F, 05/15/05 1,001,563
BB 1,500 9.75%, Series 1995-1, Class E, 05/15/05 1,501,406
LTC Commercial Mortgage Pass-Through Cert
A 2,125 9.50%, Series 1994-1, Class C, 06/15/26 2,253,164
BBB 2,000 7.97%, Series 1996, Class D, 04/15/28 1,978,750
LXP Funding Corp.,
BBB 3,000 8.86%, Series 1995-1, Class C, 05/26/08 3,116,204
Merrill Lynch Mortgage Investments, Inc., Pass-Through
A 1,000 7.58%, Series 1995-C1, Class C, 05/25/15 997,025
AAA 2,000 7.42%, Series 1996-C1, Class A3, 04/25/28 1,993,585
A 2,000 7.42%, Series 1996-C1, Class C, 04/25/28 1,964,813
Morgan Stanley Capital Investments, Inc., Pass-Through
BBB 3,500 7.10%, Series 1995, Class D, 02/15/27 3,535,000
BBB 1,700 7.51%, Series 1996, Class D, 02/15/06 1,568,250
Mortgage Capital Funding, Inc.,
BBB 2,000 8.52%, Series 1994-MC1, Class A5, 06/25/01 2,052,323
BBB- 2,368 7.70%, Series 1996-MC1, Class F, 05/15/06 2,237,865
Nationslink Funding Corp.,
BBB- 2,700 7.69%, Series 1996-1, Class E, 02/20/06 2,544,750
</TABLE>
See Notes to Financial Statements
3
<PAGE>
Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
Schedule of Investments
September 30, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal
Rating* Amount
(Unaudited) (000) DESCRIPTION Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NB Commercial Mortgage Certificate,
BB $2,500 8.73% Series FSI, Class E, 10/20/23 $1,955,860
Nomura Asset Capital Corp.,
BBB 1,000 7.64%,Series 1993-M1, Class A1, 11/25/03 997,324
Oregon Commercial Mortgage,
A 3,000 7.60%,Series 1995-1 Class C, 06/01/23 2,952,188
Paine Webber Mortgage Acceptance Corp.,
A 2,000 7.30%,Series 1995 MI, Class C, 01/15/07 1,990,698
A 2,000 6.90%,Series 1995 M2, Class C, 12/01/03 1,974,885
Phoenix Real Estate Securities, Inc.,
BBB+ 3,545 8.00%,Series 1993-1, Class C 11/25/23 3,571,588
Prudential Securities Secured Financing,
Pass-Through Certificates,
A 895 7.64%,Series 1995-C1, Class C, 01/25/15 881,575
Queens Center Funding Corp.,
BBB 2,000 7.72%,Series 1, Class B, 01/01/04 2,000,000
Resolution Trust Corp.,
AA+ 698 8.63%,Series 1992-M3, Class A2, 07/25/30 702,540
A 1,832 7.10%,Series 1993-C2, Class D, 03/25/23 1,796,221
A 3,000 8.00%,Series 1994-C1, Class C, 06/25/26 3,034,688
A 597 8.00%,Series 1994-C1, Class D, 06/25/26 596,842
A 2,862 8.00%,Series 1994-C2, Class D, 04/25/25 2,875,982
B+ 2,500 10.63%,Series 1994-N2, Class A, 12/14/04 2,500,000
AAA 2,000 6.90%,Series 1995-C1, Class A2C, 02/25/27 1,982,188
BBB 3,000 6.90%,Series 1995-C1, Class D, 02/25/27 2,739,844
AAA 2,500 6.55%,Series 1995-C2, Class A1C, 05/25/27 2,416,797
BBB 2,859 7.00%,Series 1995-C2, Class D, 05/25/27 2,701,140
Salomon Brothers Mortgage Securities,
AA 3,000 7.13%,Series 1996-C1, Class B, 01/20/28 2,912,344
Southern Pacific Securities,
BBB 1,000 7.20% Series 1996-C1, Class D, 09/25/26 976,719
Structured Asset Securities Corp. Multi,
BBB 3,000 7.38%,Series 1995-C1, Class D, 09/25/24 2,837,242
AA 1,900 7.00%,Series 1995-C4, Class C, 06/25/26 1,800,844
AAA 250 5.75%,Series 1996-CFL, Class AIB, 02/25/28 245,952
BBB 1,970 7.75%,Series 1996-CFL, Class E, 02/25/28 1,887,628
TVO Southwest,
A 4,500 9.38%,Series 1994-MF1, Class A2, 11/18/04 4,746,990
WHP Commercial Mortgage,
A 2,000 7.76%,Series 1995-C1, Class C, 07/20/25 2,016,250
------------
Total Commercial Mortgage-Backed
Securities (Cost $121,168,836) 121,370,421
SHORT-TERM INVESTMENTS 0.4%
Federal Home Loan Mortgage Corp. Discount Notes
460 5.70% Due 10/1/96 (Cost $460,000) 460,000
------------
Total investments (Cost $121,628,836) 100.1% 121,830,421
Other liabilities in excess of assets -0.1% (92,384)
-----------------------
NET ASSETS 100.0% $121,738,037
=======================
</TABLE>
---------------------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
# Principal amount of securities pledged as collateral of $300,000 on 265 net
Short U.S. Treasury Note and 197 long U. S. Treasury Bond futures contracts
expiring December 1996. The value of such contracts on September 30, 1996
was $68,558,781, thereby resulting in an unrealized gain of $69,844.
See Notes to Financial Statements
4
<PAGE>
Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
Statement of Assets and Liabilities
September 30, 1996
- --------------------------------------------------------------------------------
Assets
Investments, at value (cost $121,628,836) $121,830,421
Cash 370
Interest receivable 740,538
Investments sold receivable 977,610
Other assets 5,429
------------
123,554,368
------------
Liabilities
Investments purchased payable 976,388
Dividends payable 751,410
Accrued expenses payable 81,064
Futures margin payable 7,469
------------
1,816,331
------------
Net Assets $121,738,037
============
Net assets were comprised of:
Common stock, at par $ 12
Paid-in capital in excess of par 120,565,575
Accumulated net realized gain 898,357
Net unrealized appreciation 274,093
------------
Net assets $121,738,037
============
Net asset value per share $ 1,016.08
============
Total shares outstanding at September 30, 1996 119,812
============
- --------------------------------------------------------------------------------
See Notes to Financial Statements
5
<PAGE>
Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
Statements of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period For the Period
04/01/96 07/01/95
through through
09/30/96 03/31/96
<S> <C> <C>
Investment Income:
Interest $ 4,737,656 $ 7,051,694
----------- -----------
Expenses:
Investment advisory fee 174,126 216,699
Administration fee 94,877 78,011
Custodian fee 7,774 --
Transfer agent fee 9,095 --
Legal and audit 11,004 18,783
Printing 1,266 --
Registration fees 11 1,042
Trustees fees 1,977 1,878
Other 5,794 7,953
----------- -----------
Total expenses 305,924 324,366
Less fees voluntarily waived (85,659) (3,652)
----------- -----------
Total expenses 220,265 320,714
----------- -----------
Net investment income 4,517,391 6,730,980
----------- -----------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on:
Investment transactions 363,535 1,982,535
Futures contracts (210,591) (481,631)
----------- -----------
152,944 1,500,904
----------- -----------
Net change in unrealized appreciation (depreciation) on:
Investment transactions (698,827) (2,814,093)
Futures contracts 186,779 103,678
(512,048) (2,710,415)
----------- -----------
Net loss on investments and futures contracts (359,104) (1,209,511)
----------- -----------
Net increase in net assets resulting from operations $ 4,158,287 $ 5,521,469
=========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
For the Period For the Period For the Period
04/01/96 07/01/95 10/4/94*
through through through
Increase (decrease) in net assets: 09/30/96 03/31/96 06/30/95
<S> <C> <C> <C>
Operations:
Net investment income $ 4,517,391 $ 6,730,980 $ 5,719,137
Net realized gain on investments
and futures contracts 152,944 1,500,904 3,568,972
Net change in unrealized appreciation
(depreciation) on investments and
futures contracts (512,048) (2,710,415) 3,496,556
------------- ------------- -------------
Net increase in net assets resulting from operations 4,158,287 5,521,469 12,784,665
------------- ------------- -------------
Distributions to shareholders from:
Net investment income (4,517,391) (6,730,980) (5,719,137)
Net realized gain -- (4,324,463) --
------------- ------------- -------------
(4,517,391) (11,055,443) (5,719,137)
------------- ------------- -------------
Capital share transactions:
Proceeds from shares subscribed -- -- 100,000,000
Net asset value of shares issued in reinvestment
of dividend distributions 4,527,992 10,293,458 5,719,137
------------- ------------- -------------
Total increase in net assets 4,168,888 4,759,484 112,784,665
Net Assets:
Beginning of period 117,569,149 112,809,665 25,000
------------- ------------- -------------
End of period $ 121,738,037 $ 117,569,149 $ 112,809,665
============= ============= =============
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
7
<PAGE>
Compass Capital Funds
The Multi-Sector Mortgage Securities Portfolio III
Financial Highlights
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout the period: For the Period For the Period For the Period
4/1/96 7/1/95 10/4/94 (a)
through through through
09/30/96 03/31/96 06/30/95
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $1,019.41 $1,068.11 $1,000.00
--------- --------- ---------
Net investment income (b) 38.33 61.37 55.81
Net realized and unrealized gain (loss) on investments (3.33) (9.06) 68.11
--------- --------- ---------
Net increase from investment operations 35.00 52.31 123.92
--------- --------- ---------
Distributions from net investment income (38.33) (61.37) (55.81)
Distributions from net realized capital gains -- (39.64) --
--------- --------- ---------
Total dividends and distributions (38.33) (101.01) (55.81)
--------- --------- ---------
Net asset value, end of period $1,016.08 $1,019.41 $1,068.11
========= ========= =========
TOTAL RETURN (c) 3.53% 5.02% 12.78%
Net assets, end of period (in thousands) $121,738 $117,569 $112,810
Ratio of expenses to average net assets (b)(d) 0.37% 0.37% 0.37%
Ratio of net investment income to average net assets (b) 7.60% 7.77% 7.54%
Portfolio turnover 24% 119% 215%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of investment operations.
(b) The Adviser and administrators waived fees amounting to $85,659, $3,652 and
$56,269 for the periods ended September 30, 1996, March 31, 1996 and June
30, 1995, respectively without such waivers: (i) net investment income
would have been $37.38, $61.37 and $55.28 on a per share basis for the
periods ended September 30,1996, March 31, 1996, and June 30,1995,
respectively; (ii) the ratio of net operating expenses to average netassets
would have been 0.51%, 0.37% and 0.45% for the periods ended September 30,
1996, March 31, 1996 and June 30, 1995 respectively; (iii) the net
investment income ratios would have been 7.45%, 7.76%, and 7.46% for the
periods ended September 30, 1996, March 31, 1996 and June 30, 1995,
respectively.
(c) Total investment return is calculated assuming a purchase of shares 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.
(d) Annualized
See Notes to Financial Statements
8
<PAGE>
Compass Capital Funds
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Accounting Policies
Compass Capital FundsSM (the "Fund") (formerly The PNC(R) Fund) was
organized on December 22, 1988 as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund currently has 29 investment portfolios.
These financial statements relate to the Fund's Multi-Sector Mortgage Securities
Portfolio III (the "Portfolio"). The Portfolio is authorized to issue an
unlimited number of shares with a par value of $0.001.
As of September 30, 1996, 99.98% of the shares of capital stock of the
Portfolio are owned by Ameritech Pension/VEBA Fund.
The following is a summary of significant accounting policies followed by
the Fund.
Securities Valuation: The Fund values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Fund's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades. Any securities or other assets for
which such current market quotations are not readily available are valued at
fair value as determined in good faith under procedures established by and under
the general supervision and responsibility of the Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity from date of purchase exceeded 60
days.
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
Futures Transactions: The Portfolio may enter into futures contracts subject to
certain limitations. Upon entering into a futures contract, the Portfolio is
required to deposit cash or pledge U.S. Government securities of an initial
margin. Subsequent payments, which are dependent on the daily fluctuations in
the value of the underlying security or securities, are made or received by the
Portfolio each day (daily variation margin) and are recorded as unrealized gains
or losses until the contracts are closed. When the contracts are closed, the
Portfolio records a
9
<PAGE>
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Portfolio's basis in the contracts. Risks of
entering into futures contracts include the possibility that there will not be a
perfect price correlation between the futures contracts and the underlying
securities. Second, it is possible that a lack of liquidity for futures
contracts could exist in the secondary market, resulting in an inability to
close a futures position prior to its maturity date. Third, the purchase of a
futures contract involves the risk that a Portfolio could lose more than the
original margin deposit required to initiate a futures transaction.
Security Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains or losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Fund accretes premium or amortizes discount on securities
purchased using the interest method.
Taxes: It is the Fund's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income or excise tax provision is required.
Dividends to Shareholders: Dividends from net investment income are declared
daily and paid monthly. Net realized capital gains, if any, will be distributed
at least annually.
Note 2. Transactions with Affiliates and Related Parties
Pursuant to an Investment Advisory Agreement, BlackRock Financial
Management, Inc. ("BlackRock"), an indirect wholly-owned subsidiary of PNC Bank
Corp., serves as investment adviser to the Portfolio. For its advisory services,
BlackRock is entitled to receive fees, computed daily and paid monthly, at the
annual rate of .25% of the Portfolio's average daily net assets.
BlackRock may, at its discretion, waive all or any portion of its advisory
fee for the Portfolio and may reimburse the Portfolio for certain operating
expenses. For the six-month period ended September 30, 1996, advisory fees and
waivers for the Portfolio were as follows:
<TABLE>
<CAPTION>
Gross Advisory Fee Waiver Net Advisory Fee
----------------- ------- ----------------
<S> <C> <C> <C>
Multi-Sector Mortgage
Securities Portfolio III $174,126 $31,407 $142,719
</TABLE>
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
Compass Capital Group, Inc. ("CCG"), an indirect wholly-owned subsidiary of PNC
Bank Corp., and Compass Distributors, Inc. ("CDI") act as co-administrators for
the Fund. The combined administration fee is computed daily and payable monthly,
based on a percentage of the average daily net assets of the Portfolio, at the
following annual rates: .23% of the first $500 million, .21% of the next $500
million, .19% of the next $1 billion and .18% of the average daily net assets in
excess of $2 billion.
PFPC, CCG and CDI may, at their discretion, voluntarily waive all or any
portion of their administration fees for the Portfolio. For the six-month period
ended September 30, 1996, administration fees and waivers for the Portfolio were
as follows:
10
<PAGE>
<TABLE>
<CAPTION>
Gross Net
Administration Administration
Fee Waiver Fee
-------------- ------- --------------
<S> <C> <C> <C>
Multi-Sector Mortgage
Securities Portfolio III $94,877 $54,252 $40,625
</TABLE>
In addition, PNC Bank, National Association serves as custodian for the
Portfolio. PFPC serves as transfer and dividend disbursing agent.
BlackRock voluntarily agreed to waive fees and reimburse expenses to the
extent necessary to cap the Portfolio's expenses (exclusive of advisory fees) at
no more than .12% of its average daily net assets for the six-months ended
September 30, 1996.
BlackRock, PFPC, CCG and CDI also agreed for the six-month period ended
September 30, 1996 to reimburse the Portfolio for the amount, if any, by which
the total operating and management expenses of the Portfolio exceed the most
restrictive state blue sky expense limitation in effect from time to time, to
the extent required by such limitation. No such reimbursements were necessary
for the six-month period ended September 30, 1996.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments and government securities, for the six months ended September 30,
1996 were $31,976,071 and $25,401,378, respectively. Purchases and sales of
government securities for the six months ended September 30, 1996 were
$9,611,076 and $5,569,069, respectively. The federal income tax basis of the
investments of the Portfolio at September 30, 1996 was $121,628,836 and,
accordingly, as of September 30, 1996 net unrealized appreciation for federal
income tax purposes aggregated $201,585 of which $1,461,926 related to
appreciated securities and $1,260,341 related to depreciated securities.
Note 4. Capital Shares
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Period For the Period For the Period
04/01/96 07/01/95 10/04/94*
Through Through Through
09/30/96 03/31/96 06/30/95
----------- ----------- -----------
<S> <C> <C> <C>
Shares subscribed .................................... -- -- 100,000
Shares issued in connection with the reinvestment
of dividends and distributions ....................... 4,481 9,740 5,591
------ ------ -------
4,481 9,740 105,591
Shares redeemed ...................................... -- -- --
------ ------ -------
Net Increase ......................................... 4,481 9,740 105,591
====== ====== =======
</TABLE>
*Commencement of investment operations
11
<PAGE>
Note 5. Merger
On September 28, 1995 and September 29, 1995, respectively, the Board of
Directors of The BFM Institutional Trust, Inc. ("BIT") and the Board of Trustees
of the Fund approved an asset purchase agreement between BIT and the Fund
providing for the acquisition by the Fund of all of the assets and liabilities
of the BIT Multi-Sector Mortgage Securities Portfolio III (the "BIT Predecessor
Portfolio") in exchange for shares of the Portfolio. At a special meeting of
shareholders held on December 20, 1995, the shareholders of the BIT Predecessor
Portfolio approved the asset purchase agreement. Pursuant to the asset purchase
agreement, on April 25, 1996, all of the assets and liabilities of the BIT
Predecessor Portfolio were transferred to the Fund in a tax-free exchange for
Institutional shares of the Portfolio. The details of this business combination
are set forth below.
The following table summarizes certain relevant information of the Fund
prior to and immediately after the above-referenced combination. The BIT
Predecessor Portfolio was the accounting survivor in this business combination,
and the Portfolio maintains all of the operating history of the BIT Predecessor
Portfolio.
<TABLE>
<CAPTION>
BFM Institutional Trust, Inc. The Compass Capital Funds
- -------------------------------------------------------------- ------------------------------------------------------------------
Combined
Unrealized Shares Net Assets
Net Asset Appreciation New Issued in After NAV
Shares at Value at (Depreciation) Portfolio Business Business per
Fund Name 4/25/96 4/25/96 at 4/25/96 Name Combination Combination Share
- ---------- -------- ------- ------------ ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BFM Multi-Sector Compass Capital
Mortgage Portfolio III 116,079 $117,356,191 ($623,301) Multi-Sector Mortgage
Portfolio III 116,079 $117,356,191 $1,011
</TABLE>
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments of The Multi-Sector Mortgage Securities
Portfolio III of the Compass Capital Funds, as of September 30, 1996, and the
related statement of operations for the period from April 1, 1996 to September
30, 1996, the statements of changes in net assets for the period from April 1,
1996 to September 30, 1996, and financial highlights for the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statements
of operations, changes in net assets and the financial highlights for the
periods ended June 30, 1995 and March 31, 1996, of The Multi-Sector Mortgage
Securities Portfolio III of the Compass Capital Fund (formerly the BFM
Institutional Trust Inc.) were audited by other auditors, whose report dated May
22, 1996 expressed an unqualified opinion thereon.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Multi-Sector Mortgage Securities Portfolio III of the Compass Capital Fund, as
of September 30, 1996 and the results of their operations, the changes in their
net assets and financial highlights for the period April 1, 1996 to September
30, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
13
<PAGE>
Compass BOARD
Investment Adviser
BlackRock Financial Management, Inc.
New York, NY 10154
Custodian
PNC Bank, National Association
Philadelphia, PA 19101
Co-Administrator and Transfer Agent
PFPC Inc.
Wilmington, DE 19809
Co-Administrator and Distributor
Compass Distributors, Inc.
Radnor, PA 19087
Co-Administrator
Compass Capital Group, Inc.
New York, NY 10154
Counsel
Drinker, Biddle & Reath
Philadelphia, PA 19107
Independent Accountants
Coopers & Lybrand, L.L.P.
Philadelphia, PA 19103
This report is for shareholder information.
This is not a prospectus intended for use in
the purchase or sale of Fund shares.
Compass Capital Funds
400 Bellevue Parkway
Wilmington, DE 19809
- --------------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE NOT FEDERALLY
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 SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
14
