<PAGE>
As filed with the Securities and Exchange Commission on October 18, 1996
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. 23 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 25 [x]
______________________________
COMPASS CAPITAL FUNDS/SM/
(Formerly, The PNC(R) Fund)
(Exact Name of Registrant as Specified in Charter)
Bellevue Corporate Center Morgan R. Jones, Esq.
400 Bellevue Parkway Drinker Biddle & Reath
Suite 100 PNB Building
Wilmington, Delaware 19809 1345 Chestnut Street
(Address of Principal Executive Philadelphia, PA 19107
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 792-2555
____________________________
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)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[x] 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 the fiscal year ended September 30, 1995 for all
investment portfolios then existing was filed on November 14, 1995.
Registrant's 24f-2 Notices for the fiscal period ended January 31, 1996 for its
International Bond, New Jersey Municipal Money Market and New
<PAGE>
Jersey Tax-Free Income Portfolios were filed on February 12, 1996 and March 28,
1996. Registrant's 24f-2 Notices for the fiscal period ended March 31, 1996 for
its Multi-Sector Mortgage Securities Portfolio III, Short Government Bond
Portfolio and Core Bond Portfolio were filed on April 25, 1996 and May 28, 1996.
This Registration Statement has also been executed by The DFA Investment
Trust Company.
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(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
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Money Market Portfolios Institutional Shares
January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes 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 in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January , 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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.
The New Jersey, North Carolina, Ohio, Pennsylvania and Vir-
ginia Municipal Money Market Portfolios may invest a signifi-
cant percentage of their assets in a single issuer and, there-
fore, investments in these Portfolios may be riskier than an
investment in other types of money market funds.
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 AC-
CURACY 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.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 15.
COMPASS LIPPER PEER GROUP
CAPITAL
PORTFOLIO
Institutional Money Market Instrument Funds
Money Market
Institutional U.S. Treasury Money Market
U.S. Treasury Funds
Money Market Institutional Tax-Exempt Money Market Funds
Municipal
Money Market NJ Tax-Exempt Money Market Funds
NJ Municipal
Money Market Other States Tax-Exempt Money Market Funds
NC Municipal
Money Market Ohio Tax-Exempt Money Market Funds
OH Municipal
Money Market PA Tax-Exempt Money Market Funds
PA Municipal
Money Market Other States Tax-Exempt Money Market Funds
VA Municipal
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 de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 4 to find descriptions of the
PORTFOLIOS Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS investment objective, or that any Portfolio will be able to
IN MONEY maintain a stable net asset value of $1.00 per share. Certain
MARKET Portfolios may invest in U.S. dollar-denominated instruments of
INVESTING 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 munici-
pal Portfolio will concentrate in the securities of issuers lo-
cated 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 Pol-
icies And Risks Apply?"
INVESTING For information on how to purchase and redeem shares of the
IN THE Portfolios, see "How Are Shares Purchased And Redeemed?"
COMPASS
CAPITAL
FUNDS
3
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 5
What Are The Portfolios' Financial Highlights?............... 7
What Are The Portfolios?..................................... 15
What Additional Investment Policies And Risks Apply?......... 19
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 25
Who Manages The Fund?........................................ 27
How Are Shares Purchased And Redeemed?....................... 30
How Is Net Asset Value Calculated?........................... 32
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 33
How Are Fund Distributions Taxed?............................ 34
How Is The Fund Organized?................................... 39
How Is Performance Calculated?............................... 40
How Can I Get More Information?.............................. 41
</TABLE>
4
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios after fee waivers for the twelve month period ended
September 30, 1996 as a percentage of average daily net assets. The figures
shown for the New Jersey Municipal Money Market Portfolio have been restated to
reflect current expenses and fee waivers. 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> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Advisory fees (after fee
waivers) (/1/) .06% .06% .06% .05%
Other operating expenses .23 .23 .23 .24
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .13 .12 .11 .02
Other expenses .10 .11 .12 .22
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .29% .29% .29% .29%
==== ====== ====== ====
<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> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Advisory fees (after fee
waivers)(/1/) .06% .06% .06% .05%
Other operating expenses .23 .23 .23 .24
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .05 .10 .12 .02
Other expenses .18 .13 .11 .22
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .29% .29% .29% .29%
==== ====== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .44% for the Money Market Portfolio
and .45% for each of the other Portfolios and administration fees would be
.17% for the Money Market Portfolio and .18% for each of the other Portfo-
lios. 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 operat-
ing expenses during the remainder of the current fiscal year at the levels
set forth in the table. Without waivers, "Other operating expenses" would
be .26%, .28%, .29%, .39%, .35%, .30%, .28% and .39%, respectively, and
"Total Portfolio operating expenses" would be .70%, .73%, .74%, .84%, .80%,
.75%, .73% and .84%, respectively.
5
<PAGE>
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 $37
U.S. Treasury Money
Market 3 9 16 37
Municipal Money Market 3 9 16 37
New Jersey Municipal
Money Market 3 9 16 37
North Carolina Municipal
Money Market 3 9 16 37
Ohio Municipal Money
Market 3 9 16 37
Pennsylvania Municipal
Money Market 3 9 16 37
Virginia Municipal Money
Market 3 9 16 37
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information, and has been audited by the
Portfolios' independent accountant. 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 shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-7764.
7
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 8/2/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
--- -------- -------- --------
Income from investment operations
Net investment income 0.0564 0.0359 0.0054
Net realized gain (loss) on
investments - - - - - -
--- -------- -------- --------
Total from investment operations 0.0564 0.0359 0.0054
--- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0564) (0.0359) (0.0054)
Distributions from net realized
capital gains - - - - - -
--- -------- -------- --------
Total distributions (0.0564) (0.0359) (0.0054)
--- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
=== ======== ======== ========
Total return % 5.79% 3.64% 0.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $654,157 $502,972 $435,586
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.27% 0.25% 0.27%/2/
Before advisory/administration fee
waivers % 0.64% 0.66% 0.38%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.66% 3.64% 3.01%/2/
Before advisory/administration fee
waivers % 5.28% 3.23% 2.90%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
8
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 8/2/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
--- -------- -------- --------
Income from investment operations
Net investment income 0.0555 0.0357 0.0049
Net realized gain (loss) on
investments - - - - - -
--- -------- -------- --------
Total from investment operations 0.0555 0.0357 0.0049
--- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0555) (0.0357) (0.0049)
Distributions from net realized
capital gains - - - - - -
--- -------- -------- --------
Total distributions (0.0555) (0.0357) (0.0049)
--- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
=== ======== ======== ========
Total return % 5.69% 3.63% 0.49%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $120,540 $ 37,519 $ 13,513
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.27% 0.25% 0.25%/2/
Before advisory/administration fee
waivers % 0.69% 0.70% 0.38%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.64% 3.69% 3.01%/2/
Before advisory/administration fee
waivers % 5.22% 3.24% 2.88%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 8/2/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
--- -------- -------- --------
Income from investment operations
Net investment income 0.0364 0.0246 0.0040
Net realized gain (loss) on
investments - - - - - -
--- -------- -------- --------
Total from investment operations 0.0364 0.0246 0.0040
--- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0364) (0.0246) (0.0040)
Distributions from net realized
capital gains - - - - - -
--- -------- -------- --------
Total distributions (0.0364) (0.0246) (0.0040)
--- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
=== ======== ======== ========
Total return % 3.70% 2.48% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $ 53,778 $ 30,608 $ 39,148
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.27% 0.25% 0.25%/2/
Before advisory/administration fee
waivers % 0.71% 0.73% 0.36%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 3.64% 2.48% 2.45%/2/
Before advisory/administration fee
waivers % 3.20% 2.01% 2.34%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/10/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
--- -------- -------- --------
Income from investment operations
Net investment income 0.0363 0.0252 0.0073
Net realized gain (loss) on
investments - - - - - -
--- -------- -------- --------
Total from investment operations 0.0363 0.0252 0.0073
--- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0363) (0.0252) (0.0073)
Distributions from net realized
capital gains - - - - - -
--- -------- -------- --------
Total distributions (0.0363) (0.0252) (0.0073)
--- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
=== ======== ======== ========
Total return % 3.69% 2.55% 0.73%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $ 23,679 $ 10,521 $ 12,026
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.27% 0.13% 0.10%/2/
Before advisory/administration fee
waivers % 0.73% 0.77% 0.83%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 3.66% 2.56% 2.45%/2/
Before advisory/administration fee
waivers % 3.20% 1.93% 1.72%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/1/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
--- -------- -------- --------
Income from investment operations
Net investment income 0.0355 0.0247 0.0078
Net realized gain (loss) on
investments - - - - - -
--- -------- -------- --------
Total from investment operations 0.0355 0.0247 0.0078
--- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0355) (0.0247) (0.0078)
Distributions from net realized
capital gains - - - - - -
--- -------- -------- --------
Total distributions (0.0355) (0.0247) (0.0078)
--- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
=== ======== ======== ========
Total return % 3.61% 2.49% 0.78%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $233,414 $158,102 $ 2,242
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.26% 0.16% 0.09%/2/
Before advisory/administration fee
waivers % 0.68% 0.73% 0.97%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 3.54% 2.64% 2.15%/2/
Before advisory/administration fee
waivers % 3.12% 2.07% 1.27%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(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 YEAR 5/4/93/1/ YEAR YEAR 7/25/94/1/
ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95 9/30/94
<S> <C> <C> <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 0.0359 0.0249 0.0097 0.0368 0.0053
Net realized gain (loss)
on investments - - - - - - - - - -
--- -------- -------- -------- --- -------- --------
Total from investment
operations 0.0359 0.0249 0.0097 0.0368 0.0053
--- -------- -------- -------- --- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0359) (0.0249) (0.0097) (0.0368) (0.0053)
Distributions from net
realized capital gains - - - - - - - - - -
--- -------- -------- -------- --- -------- --------
Total distributions (0.0359) (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 % 3.65% 2.52% 0.97% % 3.74% 0.53%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $ 76,673 $ 69,673 $ 34,135 $ $ 24,409 $ 13,831
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.21% 0.10% 0.10%/2/ % 0.10% 0.10%/2/
Before
advisory/administration
fee waivers % 0.74% 0.76% 0.81%/2/ % 0.95% 1.02%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 3.61% 2.53% 2.35%/2/ % 3.71% 2.89%/2/
Before
advisory/administration
fee waivers % 3.08% 1.87% 1.64%/2/ % 2.86% 1.97%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
2/1/96 1/16/96/1/
THROUGH THROUGH
9/30/96 1/31/96
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $1.00 $ 1.00
----- ------
Income from investment operations
Net investment income - - 0.00
Net realized gain (loss) on investments - - - -
----- ------
Total from investment operations - - 0.00
----- ------
LESS DISTRIBUTIONS
Distributions from net investment income - - (0.00)
----- ------
Distributions from net realized capital gains - - - -
----- ------
Total distributions - - (0.00)
NET ASSET VALUE AT END OF PERIOD $1.00 $ 1.00
===== ======
Total return - -% 3.07%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ - - $4,195
Ratios of expenses to average net assets
After advisory/administration fee waivers - -% 0.29%/2/
Before advisory/administration fee waivers - -% 0.78%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers - -% 3.07%/2/
Before advisory/administration fee waivers - -% 2.58%/2/
</TABLE>
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Money Market Fund, a separate investment portfolio (the "Predecessor New Jersey
Municipal Money Market Portfolio") of Compass Capital Group, which was orga-
nized as a Massachusetts business trust. On January 13, 1996, the assets and
liabilities of the Predecessor New Jersey Municipal Money Market Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-ex-
isting portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY The investment objective of the Money Market Portfolio is to
MARKET provide as high a level of current interest income as is consis-
PORTFOLIO tent with maintaining liquidity and stability of principal. The
Portfolio may invest in a broad range of short-term, high quali-
ty, 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 obliga-
tions 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 is-
suers rated (at the time of purchase) A-2 or higher by Stan-
dard & 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. ("D&P"), 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 com-
parable quality as determined by the Portfolio's sub-adviser
under guidelines established by the Fund's Board of Trust-
ees;
(D) asset-backed securities (including interests in pools of as-
sets 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 instrumentali-
ties and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign 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 governmen-
tal bodies; and
(I) repurchase agreements relating to the above instruments.
15
<PAGE>
U.S. TREASURY The investment objective of the U.S. Treasury Money Market
MONEY MARKET Portfolio is to provide as high a level of current interest
PORTFOLIO income as is consistent with maintaining liquidity and stabil-
ity of principal. It pursues this objective by investing ex-
clusively in short-term bills, notes and other obligations is-
sued or guaranteed by the U.S. Treasury and repurchase agree-
ments relating to such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfo-
PORTFOLIOS lio is to provide as high a level of current interest income
exempt from Federal income taxes as is consistent with main-
taining 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, ter-
ritories and possessions of the United States, the District of
Columbia, and their political subdivisions, agencies, instru-
mentalities and authorities ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money
Market Portfolio, North Carolina Municipal Money Market Port-
folio, Ohio Municipal Money Market Portfolio, Pennsylvania Mu-
nicipal Money Market Portfolio and Virginia Municipal Money
Market Portfolio (the "State-Specific Municipal Portfolios")
is, for each Portfolio, to seek as high a level of current in-
come exempt from Federal, and to the extent possible, state
income tax of the specific state in which a Portfolio concen-
trates, as is consistent with maintaining liquidity and sta-
bility 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 in-
vesting 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 com-
parable quality as determined by the Portfolios' sub-ad-
viser under guidelines established by the Fund's Board of
Trustees; and
(E) municipal bonds and notes which are guaranteed as to prin-
cipal 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.
16
<PAGE>
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 each
State-Specific Municipal Portfolio intends to invest at least
65% of its net assets in Municipal Obligations of issuers lo-
cated in the particular state indicated by its name ("State-Spe-
cific Obligations"). The Municipal Money Market Portfolio in-
tends, on the other hand, to invest less than 25% of its total
assets in Municipal Obligations of issuers located in the same
state. During temporary defensive periods, each Municipal Port-
folio 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 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 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 (in-
cluding securities of issuers that have long-term but not short-
term ratings) but are of comparable quality as determined in ac-
cordance with guidelines approved by the Board of Trustees.
17
<PAGE>
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 securi-
ties 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 gen-
erally 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 portfo-
lios, and the State-Specific Municipal Portfolios are classi-
fied as non-diversified portfolios, under the Investment Com-
pany 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 di-
versified portfolio. In addition, because the State-Specific
Municipal Portfolios concentrate their investments in obliga-
tions of issuers located in particular states, investments in
these Portfolios may be riskier than an investment in other
money market funds.
18
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign 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 obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the 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. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration 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. Sec-
tion 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 investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain 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 Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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.
19
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position 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 Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
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
service providers 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. Although under normal market conditions they do
not expect to do so, 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 mort-
gage 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. In periods of falling inter-
est rates, the rate of mortgage prepayments tends to increase. During these pe-
riods, the reinvestment of prepayment proceeds by the particular Portfolio will
generally be at lower rates than the rates on the prepaid obligations.
20
<PAGE>
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand 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 in-
terest 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 expose the Portfo-
lio 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 con-
tributions 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 Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing 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 pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained 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 securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable 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
21
<PAGE>
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 repur-
chase 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 po-
sitions, the Portfolios 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 ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory 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 nor-
mal 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 repur-
chase 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% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines 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 re-
stricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration 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 sub-
divisions 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.
22
<PAGE>
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing 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 im-
portant 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 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 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 govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal 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 op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund has a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing 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 mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January 1995, but the Commonwealth is likely to continue to show
fiscal restraint.
North Carolina. Growth of North Carolina tax revenues slowed considerably dur-
ing 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 bal-
anced budget. Fiscal years 1993, 1994 and 1995, however, ended with a positive
General Fund balance each year. 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 bal-
ance at the end of each such year available for future appropriations.
Virginia. Because of Northern Virginia, with its proximity to Washington, DC,
and Hampton Roads, which has the nation's largest concentration of military in-
stallations, the Federal govern-
23
<PAGE>
ment has a greater impact on Virginia relative to its size than any states
other than Alaska and Hawaii. Virginia's economy has continued to grow over the
last decade, and while per capita income has grown both faster and slower than
the U.S. average from year to year, per capita income continues to be above the
national average. Virginia's unreserved general fund balances have continued to
grow in recent years from a low in 1991. The Virginia Constitution requires a
balanced budget and, since 1993, the funding of a Revenue Stabilization Fund.
Current debt levels are well below limits established by the Constitution.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though 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 instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases 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.
24
<PAGE>
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
given at least 30 days' notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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 repur-
chase 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 ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(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 the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax or in instruments which are subject to AMT, ex-
cept during defensive periods or during periods of unusual market condi-
tions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal 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 Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities 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.
25
<PAGE>
Government securities and related repurchase agreements) 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 invest-
ments in Eligible Securities that are not in the highest rating category as de-
termined 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 as-
sets, 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 se-
curities 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 de-
scribed 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.
26
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund are managed under the di-
rection of the Fund's Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT The Adviser to Compass Capital Funds is PNC Asset Management
ADVISER AND Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform ad-
SUB-ADVISER visory 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. PNC Institutional Management Corpo-
ration ("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.
As adviser, PAMG is responsible for the overall investment man-
agement 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 Portfo-
lios. 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, 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.
27
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH
PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Average Daily Net Investment Sub-Advisory
Assets Advisory Fee Fee
----------------- ------------ ------------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfo-
lios (other than the New Jersey Municipal Money Market Port-
folio) paid investment advisory fees at the following annual
rates (expressed as a percentage of average daily net assets)
after voluntary fee waivers: Money Market Portfolio, .06%;
U.S. Treasury Money Market Portfolio, .06%; Municipal Money
Market Portfolio, .06%; Ohio Municipal Money Market Portfo-
lio, .06%; Pennsylvania Municipal Money Market Portfolio,
.06%; North Carolina Municipal Money Market Portfolio, .06%;
and Virginia Municipal Money Market Portfolio, .05%. For the
period from February 1, 1996 to September 30, 1996, the New
Jersey Municipal Money Market Portfolio paid investment advi-
sory fees, after voluntary fee waivers, at the annual rate of
.06% of its average daily net assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). 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 relat-
ing to the maintenance of financial records and fund account-
ing. As compensation for these services, CCG is entitled to
receive a fee, computed daily and payable monthly, at an an-
nual rate of .03% of each Portfolio's average daily net as-
sets, and PFPC and CDI 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 Port-
folio's average daily net assets, .11% of
28
<PAGE>
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 paid
for the most recent fiscal year, see "What Are The Expenses Of
The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
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 Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing 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 dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, 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 gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
29
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI 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 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Institutional Shares.
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 deter-
mined after an order is received by PFPC. Shares may be purchased on any Busi-
ness 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 Port-
folio may be placed by telephoning PFPC at (800) 441-7450 not later than 12:00
noon (Eastern Time) on a Business Day. Orders received before 12:00 noon (East-
ern Time) will be executed at 12:00 noon (Eastern Time). If payment for an or-
der 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 re-
ceived 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) 441-7450 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 plac-
ing the order. Orders will not be accepted after 4:00 p.m. (Eastern Time). Un-
der 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 permis-
sible investments for the respective Portfolios. For further information, see
the Statement of Additional Information. The minimum initial investment for in-
stitutions is $5,000. There is no minimum subsequent investment requirement.
30
<PAGE>
Compass Capital 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) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. 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 accordance with such procedures. 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 or-
ders 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 wir-
ing 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, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
31
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio 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 its Institutional Shares, less the liabili-
ties charged to its Institutional Shares, by the number of its Institutional
Shares that are outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
32
<PAGE>
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 divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing 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 re-
alize 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.
33
<PAGE>
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 the 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 re-
ceipt 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 mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum and environmen-
tal 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 divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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 on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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
34
<PAGE>
on obligations which, if realized directly, would be exempt from such income
taxes. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative 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 are properly attributable to 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 subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Municipal Money Market Portfo-
lio 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 for Federal income tax purposes or are properly at-
tributable to interest on Ohio Municipal Obligations or U.S. Obligations. How-
ever, 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 properly attributable to gain on the sale, ex-
change 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 Per-
sonal Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt 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 Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position 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 im-
posed by the Commonwealth of Pennsylvania
35
<PAGE>
on banks and other financial institutions or with respect to any privilege, ex-
cise, franchise or other tax imposed on business entities not discussed above
(including the Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania state-specific obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
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 obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments 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. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment 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 share-
holders by the Portfolio and derived from interest on debt obligations of cer-
tain 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 ob-
ligations 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 Fed-
eral 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 por-
tion of the dividends are derived from taxable interest for Virginia purposes
or from net short-term capital gains, such portion will be
36
<PAGE>
taxable to the shareholders as ordinary income. The character of long-term cap-
ital 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 is-
sued pursuant to special Virginia enabling legislation which provides a spe-
cific exemption for such gains will be exempt from Virginia income tax. Gener-
ally, interest on indebtedness incurred by shareholders to purchase or carry
shares of the Portfolio will not be deductible for Virginia income tax purpos-
es.
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 to-
tal assets consists of obligations the interest on which is exempt from taxa-
tion under Federal law. If the Portfolio fails to qualify, no part of its divi-
dends 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 sharehold-
ers unless the portion of income that is exempt from Virginia income tax can be
determined with reasonable certainty and substantiated. Generally, this deter-
mination 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 distribu-
tions 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 ex-
clude 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 Jer-
sey 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. Gov-
ernment obligations. Distributions by a qualified investment fund that are at-
tributable to most other sources will be subject to the New Jersey personal in-
come 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 obli-
gations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
37
<PAGE>
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 Corpora-
tion Business Tax.
38
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Institutional Shares of the eight money market portfo-
lios 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 generally offered in connection with its Institu-
tional and Service Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Service or Investor Share classes, contact PFPC at (800) 441-7764 (Service
Shares) or (800) 441-7762 (Investor Shares).
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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, and may be deemed a controlling person of the Fund under the 1940 Act. PNC
Bank is a subsidiary of PNC Bank Corp.
39
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield" and "effective yield" for Institu-
tional 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 invest-
ment in a Portfolio's Institutional Shares is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the com-
pounding 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 Institutional Shares of a Portfolio may be compared to the
performance of mutual funds with similar investment objectives and to relevant
indices, 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 in-
formation may also include evaluations of the Portfolios published in nation-
ally recognized ranking services, and information as reported by financial pub-
lications such as Business Week, Fortune, Institutional Investor, Money Maga-
zine, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
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 necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
40
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current
dividend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
41
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS 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 REPRESENTA-
TIONS 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.
----------------
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
THE MONEY
MARKET
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(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
FORM N-1A ITEM LOCATION
- -------------- ----------
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
<PAGE>
The Money Market Portfolios Service Shares
January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes 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 in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January , 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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.
The New Jersey, North Carolina, Ohio, Pennsylvania and Vir-
ginia Municipal Money Market Portfolios may invest a signifi-
cant percentage of their assets in a single issuer and, there-
fore, investments in these Portfolios may be riskier than an
investment in other types of money market funds.
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 AC-
CURACY 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.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 16.
COMPASS
CAPITAL
PORTFOLIO LIPPER PEER GROUP
Money Market Money Market Instrument Funds
U.S. Treasury U.S. Treasury Money Market Funds
Money Market
Municipal Tax-Exempt Money Market Funds
Money Market
NJ Municipal NJ Tax-Exempt Money Market Funds
Money Market
NC Municipal Other States Tax-Exempt Money Market Funds
Money Market
OH Municipal Ohio Tax-Exempt Money Market Funds
Money Market
PA Municipal PA Tax-Exempt Money Market Funds
Money Market
VA Municipal Other States Tax-Exempt Money Market Funds
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 de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 5 to find descriptions of the
PORTFOLIOS Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective, or that any Portfolio will be able
MONEY MARKET to maintain a stable net asset value of $1.00 per share. Cer-
INVESTING tain Portfolios may invest in U.S. dollar-denominated instru-
ments of foreign issuers or municipal securities backed by the
credit of foreign banks, which may be subject to risks in ad-
dition to those inherent in U.S. investments. Each state-spe-
cific municipal Portfolio will concentrate in the securities
of issuers located in a particular state, and is non-diversi-
fied, 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 And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?" and
CAPITAL FUNDS "What Special Purchase And Redemption Procedures May Apply?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 16
What Additional Investment Policies And Risks Apply?......... 20
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 26
Who Manages The Fund?........................................ 28
How Are Shares Purchased And Redeemed?....................... 32
What Special Purchase And Redemption Procedures May Apply?... 35
How Is Net Asset Value Calculated?........................... 37
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 38
How Are Fund Distributions Taxed?............................ 39
How Is The Fund Organized?................................... 44
How Is Performance Calculated?............................... 45
How Can I Get More Information?.............................. 46
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios after fee waivers for the twelve month period ended September
30, 1996 as a percentage of average daily net assets. The figures shown for the
New Jersey Municipal Money Market Portfolio have been restated to reflect cur-
rent expenses and fee waivers. An example based on the summary is also shown.
<TABLE>
<CAPTION>
NEW NORTH
U.S. JERSEY CAROLINA OHIO PENNSYLVANIA VIRGINIA
TREASURY MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees
(after fee
waivers)(/1/) .06% .06% .06% .05% .06% .06% .06% .05%
Other operating expenses .53 .53 .53 .54 .53 .53 .53 .54
---- ---- ---- ---- ---- ---- ------ ----
Administration fees
(after fee
waivers)(/1/) .13 .12 .11 .02 .05 .10 .12 .02
Shareholder servicing
fee .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .25 .26 .27 .37 .33 .28 .26 .37
---- ---- ---- ---- ---- ---- ------ ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .59% .59% .59% .59% .59% .59% .59% .59%
==== ==== ==== ==== ==== ==== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .44% for the Money Market Portfolio
and .45% for each of the other Portfolios and administration fees would be
.17% for the Money Market Portfolio and .18% for each of the other Portfo-
lios. 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 operat-
ing expenses during the remainder of the current fiscal year at the levels
set forth in the table. Without waivers, "Other operating expenses" would
be .56%, .58%, .59%, .69%, 65%, .60%, .58% and .69%, respectively, and "To-
tal Portfolio operating expenses" would be 1.00%, 1.03%, 1.04%, 1.14%,
1.04%, 1.05%, 1.03% and 1.14%, respectively.
6
<PAGE>
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment 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 $33 $74
U.S. Treasury Money
Market 6 19 33 74
Municipal Money Market 6 19 33 74
New Jersey Municipal
Money Market 6 19 33 74
North Carolina Municipal
Money Market 6 19 33 74
Ohio Municipal Money
Market 6 19 33 74
Pennsylvania Municipal
Money Market 6 19 33 74
Virginia Municipal Money
Market 6 19 33 74
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information, and has been audited by the
Portfolio's independent accountant. This financial information
should be read together with those financial statements. Fur-
ther 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 shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7764.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 10/4/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <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 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
Net realized gain (loss)
on investments - - - - - - - - - - - -
--------- ---------- -------- -------- -------- -------- --------
Total from investment
operations 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
--------- ---------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0534) (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
Distributions from net
realized capital gains - - - - - - - - - - - -
--------- ---------- -------- -------- -------- -------- --------
Total distributions (0.0534) (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 5.48% 3.37% 2.77% 4.05% 6.64% 8.07%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,194,017 $575,948 $415,328 $838,012 $637,076 $628,075
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.51% 0.59% 0.61% 0.62% 0.62%/2/
Before
advisory/administration
fee waivers 0.94% 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 5.35% 3.35% 2.73% 3.86% 6.45% 7.83%/2/
Before
advisory/administration
fee waivers 4.98% 2.95% 2.62% 3.81% 6.40% 7.75%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <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 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
Net realized gain (loss)
on investments - - - - - - - - - - - -
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0525) (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
Distributions from net
realized capital gains - - - - - - - - - - - -
-------- -------- -------- -------- -------- -------- --------
Total distributions (0.0525) (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 5.38% 3.36% 2.72% 4.01% 6.46% 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $550,959 $372,883 $185,400 $160,269 $180,776 $146,148
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.52% 0.60% 0.62% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 0.98% 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 5.27% 3.42% 2.68% 3.91% 6.27% 7.62%/2/
Before
advisory/administration
fee waivers 4.85% 2.97% 2.55% 3.86% 6.22% 7.57%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <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 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
Net realized gain (loss)
on investments - - - - - - - - - - - -
-------- -------- -------- ------- -------- ------- --------
Total from investment
operations 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
-------- -------- -------- ------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0334) (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
Distributions from net
realized capital gains - - - - - - - - - - - -
-------- -------- -------- ------- -------- ------- --------
Total distributions (0.0334) (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 3.39% 2.20% 2.10% 2.85% 4.47% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $265,629 $133,358 $93,937 $125,152 $89,312 $112,108
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.51% 0.61% 0.63% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 1.01% 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 3.35% 2.18% 2.02% 2.78% 4.40% 5.31%/2/
Before
advisory/administration
fee waivers 2.91% 1.71% 1.91% 2.73% 4.35% 5.26%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/1/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
------- -------- -------- --------
Income from investment operations
Net investment income 0.0333 0.0225 0.0074
Net realized gain (loss) on
investments - - - - - -
------- -------- -------- --------
Total from investment operations 0.0333 0.0225 0.0074
------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0333) (0.0225) (0.0074)
Distributions from net realized
capital gains - - - - - -
------- -------- -------- --------
Total distributions (0.0333) (0.0225) (0.0074)
------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ========
Total return % 3.38% 2.27% 0.75%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $ 49,857 $ 44,066 $ 15,239
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.57% 0.40% 0.23%/2/
Before advisory/administration fee
waivers % 1.03% 1.04% 0.96%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 3.35% 2.29% 2.23%/2/
Before advisory/administration fee
waivers % 2.89% 1.65% 1.50%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/11/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00
--------- -------- ------- --------
Income from investment operations
Net investment income 0.0325 0.0221 0.0074
Net realized gain (loss) on
investments - - - - - -
--------- -------- ------- --------
Total from investment operations 0.0325 0.0221 0.0074
--------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0325) (0.0221) (0.0074)
Distributions from net realized
capital gains - - - - - -
--------- -------- ------- --------
Total distributions (0.0325) (0.0221) (0.0074)
--------- -------- ------- --------
NET ASSET VALUE AT END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00
========= ======== ======= ========
Total return % 3.33% 2.24% 0.74%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $147,739 $60,560 $ 8,919
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.57% 0.42% 0.32%/2/
Before advisory/administration fee
waivers % 0.99% 0.99% 1.20%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 3.29% 2.31% 2.42%/2/
Before advisory/administration fee
waivers % 2.87% 1.75% 1.54%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(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
YEAR 11/01/94/4/ 4/29/94/1/ YEAR 10/11/94/1/
ENDED THROUGH THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 1.00 $ 1.00 $ $ 1.00
--------- -------- -------- --------- --------
Income from investment
operations
Net investment income 0.0305 0.0099 0.0330
Net realized gain (loss)
on investments - - - - - -
--------- -------- -------- --------- --------
Total from investment
operations 0.0305 0.0099 0.0330
--------- -------- -------- --------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0305) (0.0099) (0.0330)
Distributions from net
realized capital gains - - - - - -
--------- -------- -------- --------- --------
Total distributions (0.0305) (0.0099) (0.0330)
--------- -------- -------- --------- --------
NET ASSET VALUE AT END OF
PERIOD $ $ 1.00 $ 1.00 $ $ 1.00
========= ======== ======== ========= ========
Total return % 3.11% 0.99% % 3.35%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $ 1,841 $ - - /3/ $ $ 821
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.55%/2/ 0.36%/2/ % 0.40%/2/
Before
advisory/administration
fee waivers % 1.08%/2/ 1.02%/2/ % 1.25%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 3.34%/2/ 2.54%/2/ % 3.50%/2/
Before
advisory/administration
fee waivers % 2.81%/2/ 1.87%/2/ % 2.65%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/There were no Service Shares outstanding as of September 30, 1994.
/4/Reissuance of shares.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
2/1/96 3/1/95 FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91/1/
THROUGH THROUGH ENDED ENDED ENDED TO
9/30/96 1/31/96 02/28/95 02/28/94 02/28/93 02/28/92
<S> <C> <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 0.03 0.02 0.02 0.02 0.02
Net realized gain (loss)
on investments - - - - - - - - - -
-------- ------- ------- ------- ------- -------
Total from investment
operations 0.03 0.02 0.02 0.02 0.02
-------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.03) (0.02) (0.02) (0.02) (0.02)
-------- ------- ------- ------- ------- -------
Distributions from net
realized capital gains - - - - - - - - - -
-------- ------- ------- ------- ------- -------
Total distributions (0.03) (0.02) (0.02) (0.02) (0.02)
NET ASSET VALUE AT END OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ======= =======
Total return % 3.23% 2.46% 1.79% 2.19% 3.53%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $56,958 $43,610 $39,408 $38,836 $35,005
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.70%/2/ 0.63% 0.65% 0.73% 0.47%/2/
Before
advisory/administration
fee waivers % 0.74%/2/ 0.70% 0.72% 0.76% 0.62%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 3.17%/2/ 2.46% 1.77% 2.17% 3.44%/2/
Before
advisory/administration
fee waivers % 3.13%/2/ 2.39% 1.70% 2.14% 3.29%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Money Market Fund, a separate investment portfolio (the "Predecessor New
Jersey Municipal Money Market Portfolio") of Compass Capital Group, which was
organized as a Massachusetts business trust. On January 13, 1996, the assets
and liabilities of the Predecessor New Jersey Municipal Money Market Portfo-
lio were transferred to this Portfolio, and were combined with the assets of
a pre-existing portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
15
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent 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 govern-
ment, bank, commercial and other obligations, that are avail-
able 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 institu-
tions 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. ("D&P"), 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 inter-
est by the U.S. Government or by its agencies or instru-
mentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign 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 govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
16
<PAGE>
U.S. The investment objective of the U.S. Treasury Money Market Port-
TREASURY folio is to provide as high a level of current interest income
MONEY as is consistent with maintaining liquidity and stability of
MARKET principal. It pursues this objective by investing exclusively in
PORTFOLIO short-term bills, notes and other obligations issued or guaran-
teed by the U.S. Treasury and repurchase agreements relating to
such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfolio
PORTFOLIOS is to provide as high a level of current interest income exempt
from Federal income taxes as is consistent with maintaining li-
quidity and stability of principal. It pursues this objective by
investing substantially all of its assets in short-term obliga-
tions issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authori-
ties ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market Port-
folio (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
specific state in which a Portfolio concentrates, as is consis-
tent with maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal 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 compa-
rable quality as determined by the Portfolios' sub-adviser
under guidelines established by the Fund's Board of Trust-
ees; and
(E) municipal bonds and notes which are guaranteed as to princi-
pal and interest by the U.S. Government or an agency or in-
strumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
17
<PAGE>
During normal market conditions, at least 80% of each Munici-
pal Portfolio's net assets will be invested in securities
which are Municipal Obligations. In addition, under normal
conditions 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"). The Municipal Money Mar-
ket Portfolio intends, on the other hand, to invest less than
25% of its total assets in Municipal Obligations of issuers
located in the same state. During temporary defensive periods,
each Municipal Portfolio may invest without limitation in ob-
ligations 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 Paper that is received by taxpayers subject to the Fed-
eral alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its 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 activ-
ity 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, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, under
DIVERSIFICATION 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 organi-
zations ("NRSROs") (or one NRSRO if the security is rated by
only one NRSRO), or (ii) are comparable in priority and secu-
rity with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including secu-
rities of issuers that have long-term but not short-term rat-
18
<PAGE>
ings) 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 ex-
ceed 90 days. In no event will a Portfolio purchase securities
which mature more than 397 days from the date of purchase (ex-
cept for certain variable and floating rate instruments and se-
curities collateralizing repurchase agreements). Securities in
which the Portfolios invest may not earn as high a level of in-
come 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 port-
folio typically are dependent upon the performance of a smaller
number of securities relative to the number held in a diversi-
fied portfolio. Consequently, the change in value of any one se-
curity may affect the overall value of a non-diversified portfo-
lio more than it would a diversified portfolio. In addition, be-
cause the State-Specific Municipal Portfolios concentrate their
investments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than an
investment in other Money Market funds.
19
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign 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 obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the 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. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration 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. Sec-
tion 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 investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain 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 Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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.
20
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position 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 Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
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
service providers 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. Although under normal market conditions they do
not expect to do so, 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 mort-
gage 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. In periods of falling inter-
est rates,
21
<PAGE>
the rate of mortgage prepayments tends to increase. During these 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 matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand 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 instru-
ments may include variable amount master demand notes that permit the indebt-
edness 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 Portfo-
lio.
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 maturi-
ties exceeding 13 months, so long as the repurchase agreement itself matures
in less than 13 months. Default by or bankruptcy of the seller would 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 con-
tributions 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 Port-
folio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing 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 pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield avail-
able in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a
22
<PAGE>
current basis equal in value to at least the market value of the loaned securi-
ties. 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 addi-
tional 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 repur-
chase 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 po-
sitions, the Portfolios 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 ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory 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 nor-
mal 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 repur-
chase 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% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines 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 re-
stricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration 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 sub-
divisions could adversely affect the value of a Portfolio's shares.
23
<PAGE>
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 Addi-
tional 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 manufac-
turing 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 im-
portant 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 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 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 govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal 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 op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund has a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing 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 mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January 1995, but the Commonwealth is likely to continue to show
fiscal restraint.
North Carolina. Growth of North Carolina tax revenues slowed considerably dur-
ing 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 bal-
anced budget. Fiscal years 1993, 1994 and 1995, however, ended with a positive
General Fund balance each year. 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
24
<PAGE>
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.
Virginia. Because of Northern Virginia, with its proximity to Washington, DC,
and Hampton Roads, which has the nation's largest concentration of military in-
stallations, the Federal government has a greater impact on Virginia relative
to its size than any states other than Alaska and Hawaii. Virginia's economy
has continued to grow over the last decade, and while per capita income has
grown both faster and slower than the U.S. average from year to year, per cap-
ita income continues to be above the national average. Virginia's unreserved
general fund balances have continued to grow in recent years from a low in
1991. The Virginia Constitution requires a balanced budget and, since 1993, the
funding of a Revenue Stabilization Fund. Current debt levels are well below
limits established by the Constitution.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though 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 instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases 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.
25
<PAGE>
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
given at least 30 days' notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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 repur-
chase 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 ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(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 the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax or in instruments which are subject to AMT, ex-
cept during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal 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 Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities 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.
26
<PAGE>
Government securities and related repurchase agreements) 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 invest-
ments in Eligible Securities that are not in the highest rating category as de-
termined 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 as-
sets, 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 se-
curities 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 de-
scribed 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.
27
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund are managed under the di-
rection of the Fund's Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT The Adviser to Compass Capital Funds is PNC Asset Management
ADVISER AND Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform
SUB-ADVISER advisory services for investment companies, and has its prin-
cipal offices at 1835 Market Street, Philadelphia, Pennsylva-
nia 19103. PAMG is an indirect wholly-owned subsidiary of PNC
Bank Corp., a multi-bank holding company. 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.
As adviser, PAMG is responsible for the overall investment
management of the Portfolios. As sub-adviser, PIMC is respon-
sible 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 analy-
sis. 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, 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.
28
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR EACH PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
(other than the New Jersey Municipal Money Market Portfolio)
paid investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after vol-
untary fee waivers: Money Market Portfolio, .06%; U.S. Treasury
Money Market Portfolio, .06%; Municipal Money Market Portfolio,
.06%; Ohio Municipal Money Market Portfolio, .06%; Pennsylvania
Municipal Money Market Portfolio, .06%; North Carolina Municipal
Money Market Portfolio, .06%; and Virginia Municipal Money Mar-
ket Portfolio, .05%. For the period from February 1, 1996 to
September 30, 1996, the New Jersey Municipal Money Market Port-
folio paid investment advisory fees, after voluntary fee waiv-
ers, at the annual rate of .06% of its average daily net assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the Fund's co-administrators. CCG and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned
subsidiary of Provident Distributors, Inc. ("PDI"). 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 these services, CCG 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
CDI 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 as-
sets, .11% of
29
<PAGE>
the next $1 billion of each Portfolio's average daily net as-
sets 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 Portfo-
lio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER
SERVICING The Fund intends to enter into service arrangements with in-
stitutional investors ("Institutions") (including PNC Bank,
National Association and its affiliates) which provide that
the Institutions will render support services to their custom-
ers 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 a
shareholder processing fee of up to .15% (on an annualized ba-
sis) of the average daily net asset value of Service Shares
owned beneficially by their customers, Institutions may pro-
vide one or more of the following services: processing pur-
chase and redemption requests from customers and placing or-
ders with the Fund's transfer agent or the distributor;
processing dividend payments from the Fund on behalf of cus-
tomers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information nec-
essary for sub-accounting; and providing other similar servic-
es. In consideration for payment of a separate shareholder
servicing fee of up to .15% (on an annualized basis) of the
average daily net asset value of Service Shares owned benefi-
cially by their customers, Institutions may provide one or
more of these additional services to such customers: respond-
ing to customer inquiries relating to the services performed
by the Institution and to customer inquiries concerning their
investments in Service Shares; assisting customers in desig-
nating and changing dividend options, account designations and
addresses; and providing 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 invest-
ment of fiduciary funds in Portfolio shares. Institutions, in-
cluding banks regulated by the
30
<PAGE>
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 under-
writing securities. It is intended that the services provided by
Institutions under their service agreements will not be prohib-
ited under these laws. Under state securities laws, banks and
financial institutions that receive payments from the Fund may
be required to register as dealers.
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 Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing 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 dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, 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 gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
31
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI 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 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu-
tions acting on behalf of their customers, as well as to certain persons who
were shareholders of Compass Capital Group of Funds at the time of its combina-
tion with The PNC Fund during the first quarter of 1996. Service Shares will
normally be held of record by Institutions or in the names of nominees of In-
stitutions. Share purchases are normally effected through a customer's account
at an Institution through procedures established in connection with the re-
quirements 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 Port-
folio may be placed by telephoning PFPC at (800) 441-7450 no later than 12:00
noon (Eastern Time) on a Business Day. Orders received before 12:00 noon (East-
ern 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) 441-7450 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 or-
ders received after 12:00 noon (Eastern Time).
32
<PAGE>
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 $5,000;
however, Institutions may set a higher minimum for their customers. There is no
minimum subsequent investment requirement.
Compass Capital 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 Institu-
tions. These procedures will vary according to the type of account and the In-
stitution 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 the redemption proceeds on a
timely basis. In the case of shareholders holding share certificates, the cer-
tificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
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 employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. 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 accordance with such
procedures. 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 redemp-
tion 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 or-
ders 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 wir-
ing 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 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.
33
<PAGE>
The Fund may redeem Service Shares in any Portfolio account if the account bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
34
<PAGE>
What Special Purchase And Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC Fund(R)
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 de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. 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 with respect to
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, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders for
shares of the Portfolios that are in proper form are executed at their net as-
set value per share next determined after receipt by the Fund; however, orders
will not be executed until payments not made in Federal funds are converted to
Federal funds (which normally occurs within two Business Days of receipt) un-
less a creditworthy financial institution undertakes to pay for an order in
Federal funds by 4:00 p.m. (Eastern Time) the same Business Day an order is
placed. Under certain circumstances, the Fund may reject large individual pur-
chase orders received after 12:00 noon. The Fund may in its discretion reject
any order for shares.
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, Dela-
ware 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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee 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 cor-
poration, partnership, trust, fiduciary, executor or administrator.
35
<PAGE>
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. Compass Capital 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, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed 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.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, 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 in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") 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 pay-
ments 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 which may
be obtained from PFPC.
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. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
36
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
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 Portfo-
lio that are allocated to its Service Shares, less the liabilities charged to
its Service Shares, by the number of Service Shares outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
37
<PAGE>
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 divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion 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.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing 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 sub-
ject 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.
38
<PAGE>
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 the 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 re-
ceipt 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 mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum and environmen-
tal 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 divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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 on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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
39
<PAGE>
on obligations which, if realized directly, would be exempt from such income
taxes. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative 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 are properly attributable to 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 subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Municipal Money Market Portfo-
lio 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 for Federal income tax purposes or are properly at-
tributable to interest on Ohio Municipal Obligations or U.S. Obligations. How-
ever, 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 properly attributable to gain on the sale, ex-
change 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 Per-
sonal Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt 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 Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position 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 im-
posed by the Commonwealth of Pennsylvania on
40
<PAGE>
banks and other financial institutions or with respect to any privilege, ex-
cise, franchise or other tax imposed on business entities not discussed above
(including the Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania state-specific obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
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 obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments 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. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment 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 share-
holders by the Portfolio and derived from interest on debt obligations of cer-
tain 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 ob-
ligations 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 Fed-
eral 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 por-
tion of the dividends are derived from taxable interest for Virginia purposes
or from net short-term capital gains, such portion will be
41
<PAGE>
taxable to the shareholders as ordinary income. The character of long-term cap-
ital 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 is-
sued pursuant to special Virginia enabling legislation which provides a spe-
cific exemption for such gains will be exempt from Virginia income tax. Gener-
ally, interest on indebtedness incurred by shareholders to purchase or carry
shares of the Portfolio will not be deductible for Virginia income tax purpos-
es.
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 to-
tal assets consists of obligations the interest on which is exempt from taxa-
tion under Federal law. If the Portfolio fails to qualify, no part of its divi-
dends 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 sharehold-
ers unless the portion of income that is exempt from Virginia income tax can be
determined with reasonable certainty and substantiated. Generally, this deter-
mination 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 distribu-
tions 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 ex-
clude 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 Jer-
sey 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. Gov-
ernment obligations. Distributions by a qualified investment fund that are at-
tributable to most other sources will be subject to the New Jersey personal in-
come 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 obli-
gations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
42
<PAGE>
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 Corpora-
tion Business Tax.
43
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Service Shares of the eight money market portfolios de-
scribed 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 generally offered in connection with its Institu-
tional and Service Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Institutional or Investor Share classes, contact PFPC at (800) 441-7764 (Insti-
tutional Shares) or (800) 441-7762 (Investor Shares).
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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, and may be deemed a controlling person of the Fund under the 1940 Act. PNC
Bank is a subsidiary of PNC Bank Corp.
44
<PAGE>
How is Performance Calculated?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield" and "effective yield" for Service
Shares. Both yield figures are based on historical earnings and are not in-
tended 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 in-
vestment 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 ef-
fect 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 perfor-
mance of mutual funds with similar investment objectives and to relevant indi-
ces, 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 Technolo-
gies, Inc. and Weisenberger Investment Company Service. Performance information
may also include evaluations of the Portfolios published in nationally recog-
nized 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.
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 necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
45
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
46
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS 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 REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DIS-
TRIBUTOR. 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.
-----------------
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
THE MONEY
MARKET
PORTFOLIOS
SERVICE SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR A, INVESTOR B AND INVESTOR C 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
FORM N-1A ITEM LOCATION
- -------------- ----------
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
<PAGE>
The Money Market Portfolios Investor Shares
January , 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes 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 in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January , 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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.
The New Jersey, North Carolina, Ohio, Pennsylvania and Vir-
ginia Municipal Money Market Portfolios may invest a signifi-
cant percentage of their assets in a single issuer and, there-
fore, investments in these Portfolios may be riskier than an
investment in other types of money market funds.
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 AC-
CURACY 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.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 18.
COMPASS
CAPITAL
PORTFOLIO LIPPER PEER GROUP
Money Market Money Market Instrument Funds
U.S. Treasury
Money Market U.S. Treasury Money Market Funds
Municipal
Money Market Tax-Exempt Money Market Funds
NJ Municipal
Money Market NJ Tax-Exempt Money Market Funds
NC Municipal
Money Market Other States Tax-Exempt Money Market Funds
OH Municipal
Money Market Ohio Tax-Exempt Money Market Funds
PA Municipal
Money Market PA Tax-Exempt Money Market Funds
VA Municipal
Money Market Other States Tax-Exempt Money Market Funds
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 de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 5 of to find descriptions of
PORTFOLIOS the Portfolios, including the investment objectives, portfolio
management styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective, or that any Portfolio will be able
MONEY MARKET to maintain a stable net asset value of $1.00 per share. Cer-
INVESTING tain Portfolios may invest in U.S. dollar-denominated instru-
ments of foreign issuers or municipal securities backed by the
credit of foreign banks, which may be subject to risks in ad-
dition to those inherent in U.S. investments. Each state-spe-
cific municipal Portfolio will concentrate in the securities
of issuers located in a particular state, and is non-diversi-
fied, 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 And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are Shares
CAPITAL FUNDS Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 7
What Are The Portfolios' Financial Highlights?............... 10
What Are The Portfolios?..................................... 18
What Additional Investment Policies And Risks Apply?......... 22
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 28
Who Manages The Fund?........................................ 30
How Are Shares Purchased?.................................... 34
How Are Shares Redeemed?..................................... 36
What Are The Shareholder Features Of The Fund?............... 38
How Is Net Asset Value Calculated?........................... 41
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 42
How Are Fund Distributions Taxed?............................ 43
How Is The Fund Organized?................................... 48
How Is Performance Calculated?............................... 49
How Can I Get More Information?.............................. 50
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor
Shares of the Portfolios after fee waivers for the twelve month period ended
September 30, 1996 as a percentage of average daily net assets. The figures
shown for the New Jersey Municipal Money Market Portfolio have been restated
to reflect current expenses and fee waivers. An example based on the summary
is also shown.
<TABLE>
<CAPTION>
MONEY U.S. TREASURY MUNICIPAL
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> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/1/) .06% .06% .06% .06% .06% .06% .06% .06% .06%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75 .10 .75 .75
Other operating
expenses (after
fee
waivers)(/1/) .70 .55 .55 .70 .55 .55 .70 .55 .55
--- --- --- --- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00 .15 .00 .00
Other expenses .30 .30 .30 .30 .30 .30 .30 .30 .30
----- ---- ---- ----- ---- ---- ----- ---- ----
Total Portfolio
operating
expense (after
fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% for each class of each
Portfolio (.44% for the Investor A Shares of the Money Market Portfolio)
and administration fees would be .17% for each class of the Money Market
Portfolio and .18% for each class of the U.S. Treasury Money Market and
Municipal Money Market Portfolios. 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 remainder of the cur-
rent fiscal year at the levels set forth in the table. Without waivers,
"Other operating expenses" would be: (i) .73%, .75% and .76%, respective-
ly, for Investor A Shares; (ii) .58% .60% and .61%, respectively, for In-
vestor B Shares; and (iii) .58%, .60% and .61%, respectively, for Investor
C Shares; and "Total Portfolio Operating Expenses" would be: (iv) 1.27%,
1.29% and 1.30%, respectively, for Investor A Shares; (v) 1.77%, 1.79% and
1.80%, respectively, for Investor B Shares; and (vi) 1.77%, 1.79% and
1.80%, 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 As-
sociation of Securities Dealers, Inc. ("NASD").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<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> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory Fees
(after fee
waivers)(/1/) .05% .05% .05% .06% .06% .06% .06% .06% .06%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75 .10 .75 .75
Other operating
expenses (after
fee
waivers)(/1/) .71 .56 .56 .70 .55 .55 .70 .55 .55
----- ----- ----- ----- ----- ----- ----- ----- -----
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00 .15 .00 .00
Other expenses .31 .31 .31 .30 .30 .30 .30 .30 .30
----- ---- ---- ----- ---- ---- ----- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. 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 neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .86%, .82% and
.77%, respectively, for Investor A Shares; (ii) .71%, .67% and .62%, re-
spectively, for Investor B Shares; and (iii) .71%, .67% and .62%, respec-
tively, for Investor C Shares; and "Total Portfolio operating expenses"
would be: (iv) 1.41%, 1.37%, and 1.32%, respectively, for Investor A
Shares; (v) 1.91%, 1.87%, and 1.82%, respectively, for Investor B Shares;
and (vi) 1.91%, 1.87% and 1.82%, 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 NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA VIRGINIA
MUNICIPAL MUNICIPAL
MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
--------------------------------------------------------------------
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)(/1/) .06% .06% .06% .05% .05% .05%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75
Other operating expenses
(after fee
waivers)(/1/) .70 .55 .55 .71 .56 .56
----- ------ ------ ----- ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .00 .00 .15 .00 .00
Other expenses .30 .30 .30 .31 .31 .31
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ====== ====== ===== ====== ======
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. 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 neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .75% and .86%,
respectively, for Investor A Shares; (ii) .60% and .71%, respectively, for
Investor B Shares; and (iii) .60% and .71%, respectively, for Investor C
Shares; and "Total Portfolio operating expenses" would be: (iv) 1.30% and
1.41%, respectively, for Investor A Shares; (v) 1.80% and 1.91%, respec-
tively, for Investor B Shares; and (vi) 1.80% and 1.91%, 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 NASD.
8
<PAGE>
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment 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 $48 $106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
U.S. Treasury Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
New Jersey Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
North Carolina Municipal Money
Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Ohio Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Pennsylvania Municipal Money
Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Virginia Municipal Money
Portfolio
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
</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 of 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 Investor B Shares to Investor A Shares after
eight years (applies to shares received in an exchange transaction for In-
vestor B Shares of an equity portfolio of the Fund).
*** Based on the conversion of Investor B Shares to Investor A Shares after
seven years (applies to shares received in an exchange transaction for In-
vestor B Shares of a fixed income portfolio of the Fund).
The foregoing Tables and Example are intended to assist investors in under-
standing the expenses the Portfolios pay. Investors bear these expenses 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 EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
9
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information, and has been audited by the
Portfolios' independent accountants. This financial informa-
tion should be read together with those financial statements.
For the period shown there were no outstanding Investor Shares
of the Virginia Municipal Money Market Portfolio. Further in-
formation about the performance of the Portfolios is available
in the annual shareholder reports. Both the Statement of Addi-
tional Information and the annual shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-
7762.
10
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
-------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 1/13/93/1/ YEAR 9/15/95/1/
ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95
-------------------------------------------------------------
<S> <C> <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 0.0511 0.0308 0.0188 0.0020
Net realized gain (loss)
on investments - - - - - - - -
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.0511 0.0308 0.0188 0.0020
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0511) (0.0308) (0.0188) (0.0020)
Distributions from net
realized capital gains - - - - - - - -
-------- -------- -------- -------- -------- --------
Total distributions (0.0511) (0.0308) (0.0188) (0.0020)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total return 5.23% 3.12% 1.89% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 10,185 $ 4,342 $ 49 $ 27
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.81% 0.75% 0.67%/2/ 1.34%/2/
Before
advisory/administration
fee waivers 1.19% 1.16% 0.78%/2/ 1.72%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.15% 3.39% 2.62%/2/ 4.58%/2/
Before
advisory/administration
fee waivers 4.78% 2.98% 2.51%/2/ 4.20%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
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 YEAR 11/2/92/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
--------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0311 0.0193 0.0181
Net realized gain (loss) on
investments - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0311 0.0193 0.0181
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0311) (0.0193) (0.0181)
Distributions from net realized
capital gains - - - - - -
-------- -------- -------- --------
Total distributions (0.0311) (0.0193) (0.0181)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 3.15% 1.95% 1.83%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 20 $ 41 $ 15
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.79% 0.75% 0.72%/2/
Before advisory/administration fee
waivers 1.23% 1.23% 0.83%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.08% 2.05% 2.23%/2/
Before advisory/administration fee
waivers 2.64% 1.58% 2.12%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
--------------------------------------
FOR THE
PERIOD
YEAR YEAR YEAR 1/14/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
--------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0501 0.0309 0.0183
Net realized gain (loss) on
investments - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0501 0.0309 0.0183
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0501) (0.0309) (0.0183)
Distributions from net realized
capital gains - - - - - -
-------- -------- -------- --------
Total distributions (0.0501) (0.0309) (0.0183)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 5.13% 3.11% 1.85%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 1,285 $ 1,656 $ 50
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.80% 0.75% 0.65%/2/
Before advisory/administration fee
waivers 1.21% 1.20% 0.78%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.03% 3.60% 2.57%/2/
Before advisory/administration fee
waivers 4.62% 3.14% 2.44%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
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 YEAR 10/5/93/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
----------------------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0310 0.0199
Net realized gain (loss) on investments - - - -
-------- -------- --------
Total from investment operations 0.0310 0.0199
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0310) (0.0199)
Distributions from net realized capital gains - - - -
-------- -------- --------
Total distributions (0.0310) (0.0199)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00
======== ======== ========
Total return 3.15% 2.01%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 75 $ 28
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.80% 0.62%/2/
Before advisory/administration fee waivers 1.26% 1.26%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.02% 1.94%/2/
Before advisory/administration fee waivers 2.56% 1.30%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
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 YEAR 12/28/93/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
-----------------------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0302 0.0153
Net realized gain (loss) on investments - - - -
-------- -------- --------
Total from investment operations 0.0302 0.0153
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0302) (0.0153)
Distributions from net realized capital
gains - - - -
-------- -------- --------
Total distributions (0.0302) (0.0153)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00
======== ======== ========
Total return 3.06% 1.58%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 750 $ 139
Ratios of expenses to average net assets
After advisory/administration fee
waivers .82% 0.65%/2/
Before advisory/administration fee
waivers 1.24% 1.22%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.03% 2.11%/2/
Before advisory/administration fee
waivers 2.61% 1.54%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
------------------
FOR THE
PERIOD
YEAR 2/14/95/1/
ENDED THROUGH
9/30/96 9/30/95
------------------
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00
-------- --------
Income from investment operations
Net investment income 0.0194
Net realized gain (loss) on investments - -
-------- --------
Total from investment operations 0.0194
-------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0194)
Distributions from net realized capital gains - -
-------- --------
Total distributions (0.0194)
-------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00
======== ========
Total return 1.95%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 53
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.83%/2/
Before advisory/administration fee waivers 1.36%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 3.05%/2/
Before advisory/administration fee waivers 2.52%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
-----------------------------
2/1/96 1/16/96/1/
THROUGH THROUGH
9/30/96 1/31/96
-----------------------------
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00
------- -------
Income from investment operations
Net investment income 0.00
Net realized gain (loss) on investments - -
------- -------
Total from investment operations 0.00
------- -------
LESS DISTRIBUTIONS
Distributions from net investment income 0.00
Distributions from net realized capital gains - -
------- -------
Total distributions 0.00
------- -------
NET ASSET VALUE AT END OF PERIOD $ 1.00
======= =======
Total return 2.66%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $21,662
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.71%/2/
Before advisory/administration fee waivers 1.20%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 2.66%/2/
Before advisory/administration fee waivers 2.17%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor New Jersey Municipal Money Market Portfolio") of Compass Capital
Group, which was organized as a Massachusetts business trust. On January 13,
1996, the assets and liabilities of the Predecessor New Jersey Municipal
Money Market Portfolio were transferred to this Portfolio, and were combined
with the assets of a pre-existing portfolio of investments maintained by the
Fund.
/1/Commencement of operations of share class.
/2/Annualized.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent 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 govern-
ment, bank, commercial and other obligations, that are avail-
able 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 institu-
tions 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. ("D&P"), 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 inter-
est by the U.S. Government or by its agencies or instru-
mentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign 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 govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
18
<PAGE>
U.S. The investment objective of the U.S. Treasury Money Market Port-
TREASURY folio is to provide as high a level of current interest income
MONEY as is consistent with maintaining liquidity and stability of
MARKET principal. It pursues this objective by investing exclusively in
PORTFOLIO short-term bills, notes and other obligations issued or guaran-
teed by the U.S. Treasury and repurchase agreements relating to
such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfolio
PORTFOLIOS is to provide as high a level of current interest income exempt
from Federal income taxes as is consistent with maintaining li-
quidity and stability of principal. It pursues this objective by
investing substantially all of its assets in short-term obliga-
tions issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authori-
ties ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market Port-
folio (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
specific state in which a Portfolio concentrates, as is consis-
tent with maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal 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 compa-
rable quality as determined by the Portfolios' sub-adviser
under guidelines established by the Fund's Board of Trust-
ees; and
(E) municipal bonds and notes which are guaranteed as to princi-
pal and interest by the U.S. Government or an agency or in-
strumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
19
<PAGE>
During normal market conditions, at least 80% of each Munici-
pal Portfolio's net assets will be invested in securities
which are Municipal Obligations. In addition, under normal
conditions 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"). The Municipal Money Mar-
ket Portfolio intends, on the other hand, to invest less than
25% of its total assets in Municipal Obligations of issuers
located in the same state. During temporary defensive periods,
each Municipal Portfolio may invest without limitation in ob-
ligations 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 Paper that is received by taxpayers subject to the Fed-
eral alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its 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 activ-
ity 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, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, under
DIVERSIFICATION 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 organi-
zations ("NRSROs") (or one NRSRO if the security is rated by
only one NRSRO), or (ii) are comparable in priority and secu-
rity with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including secu-
rities of issuers that have long-term but not short-term rat-
ings) but are of comparable quality as determined in accor-
dance with guidelines approved by the Board of Trustees.
20
<PAGE>
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not ex-
ceed 90 days. In no event will a Portfolio purchase securities
which mature more than 397 days from the date of purchase (ex-
cept for certain variable and floating rate instruments and se-
curities collateralizing repurchase agreements). Securities in
which the Portfolios invest may not earn as high a level of in-
come 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 port-
folio typically are dependent upon the performance of a smaller
number of securities relative to the number held in a diversi-
fied portfolio. Consequently, the change in value of any one se-
curity may affect the overall value of a non-diversified portfo-
lio more than it would a diversified portfolio. In addition, be-
cause the State-Specific Municipal Portfolios concentrate their
investments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than an
investment in other money market funds.
21
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign 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 obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the 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. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration 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. Sec-
tion 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 investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain 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 Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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.
22
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position 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 Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
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
service providers 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. Although under normal market conditions they do
not expect to do so, 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 mort-
gage 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. In periods of falling inter-
est rates, the rate of mortgage prepayments tends to increase. During these pe-
riods, the reinvestment of
23
<PAGE>
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 matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand 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 in-
terest 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 expose the Portfo-
lio 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 con-
tributions 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 Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing 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 pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained 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 securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable 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
24
<PAGE>
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 repur-
chase 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 po-
sitions, the Portfolios 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 ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory 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 nor-
mal 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 repur-
chase 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% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines 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 re-
stricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Municipal Portfolios in State-Spe-
cific Obligations raises special investment considerations. Changes in the eco-
nomic condition and governmental policies of a state and its political subdivi-
sions 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 Considerations Re-
garding State-Specific Obligations" in the Statement of Additional Information.
25
<PAGE>
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing 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 cycli-
cal 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 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 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 relat-
ing to) those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases resulted in surpluses the following
three years; as of June 30, 1994, the General Fund has a surplus of $892.9
million. The deficit in the Commonwealth's unreserved/undesignated funds also
has been eliminated, and there was a surplus of $79.2 million as of June 30,
1994. Rising unemployment, a relatively high proportion of persons 65 and
older in the Commonwealth and court ordered increases in healthcare reimburse-
ment 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 posi-
tions. A new governor took office in January 1995, but the Commonwealth is
likely to continue to show fiscal restraint.
North Carolina. Growth of North Carolina tax revenues slowed considerably dur-
ing 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, 1994 and 1995, however, ended with a posi-
tive General Fund balance each year. 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 bal-
ance at the end of each such year available for future appropriations.
Virginia. Because of Northern Virginia, with its proximity to Washington, DC
and Hampton Roads, which has the nation's largest concentration of military
installations, the Federal govern-
26
<PAGE>
ment has a greater impact on Virginia relative to its size than any states
other than Alaska and Hawaii. Virginia's economy has continued to grow over the
last decade, and while per capita income has grown both faster and slower than
the U.S. average from year to year, per capita income continues to be above the
national average. Virginia's unreserved general fund balances have continued to
grow in recent years from a low in 1991. The Virginia Constitution requires a
balanced budget and, since 1993, the funding of a Revenue Stabilization Fund.
Current debt levels are well below limits established by the Constitution.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though 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 instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases 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.
27
<PAGE>
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
given at least 30 days' notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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 repur-
chase 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 ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(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 the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax or in instruments which are subject to AMT, ex-
cept during defensive periods or during periods of unusual market condi-
tions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal 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 Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities 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.
28
<PAGE>
Government securities and related repurchase agreements) 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 invest-
ments in Eligible Securities that are not in the highest rating category as de-
termined 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 as-
sets, 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 se-
curities 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 de-
scribed 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.
29
<PAGE>
Who Manages The Fund?
- -------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of the Fund's Board of Trustees. The following per-
sons currently serve on the Board:
William O. Albertini--Executive Vice President and Chief
Financial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Of-
ficer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT The Adviser to Compass Capital Funds is PNC Asset Management
ADVISER AND Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform
SUB-ADVISER advisory services for investment companies, and has its prin-
cipal offices at 1835 Market Street, Philadelphia, Pennsylva-
nia 19103. PAMG is an indirect wholly-owned subsidiary of PNC
Bank Corp., a multi-bank holding company. PNC Institutional
Management Corporation ("PIMC"), a wholly-owned subsidiary of
PAMG, serves as each Portfolio's sub-adviser. PIMC's princi-
pal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809.
As adviser, PAMG is responsible for the overall investment
management of the Portfolios. As sub-adviser, PIMC is respon-
sible 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 di-
rected through broker/dealers who sell Fund shares, subject
to the requirements of best execution.
For their investment advisory and sub-advisory services, 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.
30
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL
FEE RATE FOR EACH PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
SUB-
AVERAGE DAILY NET INVESTMENT ADVISORY
ASSETS ADVISORY FEE FEE
----------------- ------------ --------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
(other than the New Jersey Municipal Money Market Portfolio)
paid investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after vol-
untary fee waivers: Money Market Portfolio, .06%; U.S. Treasury
Money Market Portfolio, .06%; Municipal Money Market Portfolio,
.06%; Ohio Municipal Money Market Portfolio, .06%; Pennsylvania
Municipal Money Market Portfolio, .06%; North Carolina Municipal
Money Market Portfolio, .06%; and Virginia Municipal Money Mar-
ket Portfolio, .05%. For the period from February 1, 1996 to
September 30, 1996, the New Jersey Municipal Money Market Port-
folio paid investment advisory fees, after voluntary fee waiv-
ers, at the annual rate of .06% of its average daily net assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the Fund's co-administrators. CCG and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned
subsidiary of Provident Distributors, Inc. ("PDI"). 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 these services, CCG 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
CDI 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 as-
sets, .11% of
31
<PAGE>
the next $1 billion of each Portfolio's average daily net as-
sets 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
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER AGENT, PNC Bank serves as the Portfolios' custodian and PFPC serves
DIVIDEND as their transfer agent and dividend disbursing agent.
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION Under the Fund's Distribution and Service Plan (the "Plan"),
AND SERVICE Investor Shares of the Portfolios bear the expense of pay-
PLAN ments ("distribution fees") made to CDI, as the Fund's dis-
tributor (the "Distributor"), or affiliates of PNC Bank, Na-
tional Association ("PNC Bank") for distribution and sales
support services. The distribution fees may be used to com-
pensate the Distributor for distribution services and to com-
pensate 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, fi-
nancial institutions and industry professionals ("Service Or-
ganizations") for sales support services and related ex-
penses. Distribution fees payable under the Plan will not ex-
ceed .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. Payments under the Plan are not tied directly to out-
of-pocket expenses and therefore may be used by the recipi-
ents as they choose (for example, to defray their overhead
expenses). The Plan also permits the Distributor, PAMG, the
Administrators and other companies that receive fees from the
Fund to make payments relating to distribution and sales sup-
port activities out of their past profits or other sources
available to them.
Under the Plan, the Fund intends to enter into service ar-
rangements 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 may provide one or more of the follow-
ing services:
32
<PAGE>
responding to customer inquiries relating to the services per-
formed by the Service Organization and to customer inquiries
concerning their investments in Investor Shares; assisting cus-
tomers in designating and changing dividend options, account
designations and addresses; and providing other similar share-
holder liaison services. In consideration for a separate share-
holder processing fee of up to .15% (annualized) of the average
daily net asset value of Investor Shares owned by their custom-
ers, Service Organizations may provide one or more of these ad-
ditional services to such customers: processing purchase and re-
demption 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-ac-
counting with respect to Investor Shares beneficially owned by
customers or the information necessary for sub-accounting; and
providing other similar services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of In-
vestor Shares should read this Prospectus in light of the terms
and fees governing their accounts with Service Organizations.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. Under state securities laws, banks
and financial institutions that receive payments from the Fund
may be required to register as dealers.
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 Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, distribution 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 addi-
tional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solicita-
tions, 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 equita-
ble.
33
<PAGE>
How Are Shares Purchased?
- -------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties 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 In-
vestment 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 em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
PURCHASES THROUGH BROKERS. Shares may be purchased through brokers which have
entered into dealer agreements with the Distributor.
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 below,
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 sharehold-
ers. 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 Compass Capital Funds. An Account Application Form
may be obtained by calling (800) 441-7762. The name of the Portfolio with re-
spect to 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 Portfo-
lio, the name of the account registration and the shareholder account number.
Before wiring any funds, an investor must call PFPC at (800) 441-7762 in order
to confirm the wire instructions.
OTHER PURCHASE INFORMATION. Purchase orders for Investor Shares of the Portfo-
lios that are in proper form are executed at their net asset value per share
next determined after receipt by the Fund; however, orders will not be exe-
cuted until payments not made in Federal funds are converted to Federal funds
(which normally occurs within two Business Days of receipt) unless a credit-
worthy financial institution undertakes to pay for an order in Federal funds
by 4:00 p.m. (Eastern Time) the same Business Day an order is placed.
Under certain circumstances, the Fund may reject large individual purchase or-
ders received after 12:00 noon. The Fund may in its discretion reject any or-
der for shares.
34
<PAGE>
Investor B Shares and Investor C Shares of the Portfolios are available only to
the holders of Investor B Shares or Investor C Shares, respectively, 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. Investor B
Shares of a Portfolio will automatically convert to Investor A Shares at the
time the Investor B Shares of the non-money market portfolio that were previ-
ously purchased would have converted. The purpose of the conversion is to re-
lieve 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. After such conversion, an investor would hold Investor
A Shares subject to the operating expenses for Investor A Shares. 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 CDI as the Distribu-
tor. CDI 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. No certificates will be issued for shares.
Payments for shares of a Portfolio may, in the discretion of the Fund's invest-
ment adviser, be made in the form of securities that are permissible invest-
ments for that Portfolio. Compass Capital reserves the right to reject any pur-
chase order or to waive the minimum initial investment requirement.
35
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to 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 Portfo-
lios, 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 Portfo-
lio, the Investor A Shares will be redeemed first unless the shareholder indi-
cates otherwise. Except as noted below, a request for redemption must be signed
by all persons in whose names the shares are registered. Signatures must con-
form 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 secu-
rities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee 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 documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
REDEMPTION BY CHECK. Upon request, the Fund will provide the holders of In-
vestor 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 inter-
ested in obtaining the checkwriting option on existing accounts may contact
PFPC 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 In-
vestor 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 share-
holder must sign each check, unless 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. PNC 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 num-
ber 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 pre-
sented for cash payments at the offices of PNC 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
36
<PAGE>
Federal wire transfer to a single previously designated bank account. Once au-
thorization 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 peri-
ods of substantial economic or market change, telephone redemptions may be dif-
ficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box
8907, Wilmington, Delaware 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 share-
holder's bank. To change the name of the single designated bank account to re-
ceive 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 em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er'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 noti-
fied 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 their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, 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 appli-
cable 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 trans-
fer 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
37
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
Compass Capital Funds offers 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 from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor A Shares, B Shares and C Shares of each Portfolio
may be exchanged for shares of the same class of other portfolios of the Fund
which offer that class of shares, based on their respective net asset values,
subject to any applicable sales charge.
Unless an exemption applies, a front-end sales charge will be charged in con-
nection with exchanges for Investor A Shares of the Fund's non-money market in-
vestment portfolios. Similarly, exchanges of Investor A Shares of a Portfolio
for Investor B or Investor C Shares of a non-money market portfolio of the Fund
will also be subject to a CDSC, unless an exemption applies. Investor B Shares
of the Portfolios are only exchangeable for Investor B Shares of the Fund's
other investment portfolios, and Investor C Shares of the Portfolios are only
exchangeable for Investor C Shares of the Fund's other 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 determin-
ing 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 ex-
change. No exchange fee is imposed by the Fund.
Investor A Shares of 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 pur-
chase 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 non-money
market portfolio based on their respective net asset values. Such exchanges of
Investor A Shares may be subject to the difference between the sales charge
previously paid and the higher sales charge (if any) payable with respect to
the shares acquired in the exchange.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide 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.
38
<PAGE>
During periods of substantial economic or market change, telephone exchanges
may be difficult to complete and shareholders may have to submit exchange re-
quests 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 speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic 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 ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. 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 mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling 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. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
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 which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual 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 Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts.
39
<PAGE>
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 pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed 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 which may be obtained
from PFPC.
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 PFPC. No contingent deferred sales charge will be as-
sessed on redemptions of Investor B and Investor C Shares made through the SWP
that do not exceed 12% of an account's net asset value on an annualized basis.
For example, monthly, quarterly and semi-annual SWP redemptions of Investor B
and Investor C Shares will not be subject to the CDSC if they do not exceed 1%,
3% and 6%, respectively, of an account's net asset value on the redemption
date. SWP redemptions of Investor B and Investor C Shares in excess of this
limit are still subject to the applicable CDSC.
40
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio 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 pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
41
<PAGE>
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 divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing 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 re-
alize 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.
42
<PAGE>
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 the 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 re-
ceipt 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 mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum and environmen-
tal 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 divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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 on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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 addi-
43
<PAGE>
tion, shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to differ-
ent 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 are properly attributable to 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 subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Municipal Money Market Portfo-
lio 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 for Federal income tax purposes or are properly at-
tributable to interest on Ohio Municipal Obligations or U.S. Obligations. How-
ever, 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 properly attributable to gain on the sale, ex-
change 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 Per-
sonal Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt 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 Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position 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 im-
posed by the Commonwealth of Pennsylvania on banks and other financial institu-
tions or with respect to any privilege, excise, franchise or other
44
<PAGE>
tax imposed on business entities not discussed above (including the Corporate
Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania state-specific obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
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 obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments 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. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment 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 share-
holders by the Portfolio and derived from interest on debt obligations of cer-
tain 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 ob-
ligations 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 Fed-
eral 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 por-
tion 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
45
<PAGE>
gains realized and distributed by the Portfolio will flow through to its share-
holders regardless of how long the shareholders have held their shares. Capital
gains distributed to shareholders derived from Virginia obligations issued pur-
suant to special Virginia enabling legislation which provides a specific exemp-
tion for such gains will be exempt from Virginia income tax. Generally, inter-
est 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 to-
tal assets consists of obligations the interest on which is exempt from taxa-
tion under Federal law. If the Portfolio fails to qualify, no part of its divi-
dends 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 sharehold-
ers unless the portion of income that is exempt from Virginia income tax can be
determined with reasonable certainty and substantiated. Generally, this deter-
mination 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 distribu-
tions 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 ex-
clude 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 Jer-
sey 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. Gov-
ernment obligations. Distributions by a qualified investment fund that are at-
tributable to most other sources will be subject to the New Jersey personal in-
come 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 obli-
gations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
46
<PAGE>
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 Corpora-
tion Business Tax.
47
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Investor Shares of the eight money market portfolios
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 generally offered in connection with its Institu-
tional and Service Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Service and Institutional share classes, contact PFPC at (800) 441-7762.
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 December , 1996, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
48
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
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 gen-
erated 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 gener-
ated each week over a 52-week period and is shown as a percentage of the in-
vestment. "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 rein-
vestment. A Municipal Portfolio's "tax equivalent yield" may also be quoted,
which shows the level of taxable yield needed to produce an after-tax equiva-
lent 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 indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance 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 in nationally recognized ranking services, and information
as reported by financial publications such as Business Week, Fortune, Institu-
tional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature.
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 necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
49
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions, dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
50
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS 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 REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DIS-
TRIBUTOR. 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.
-----------------
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
THE MONEY
MARKET
PORTFOLIOS
INVESTOR SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF THE LOW DURATION BOND
PORTFOLIO, INTERMEDIATE GOVERNMENT BOND 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
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Bond Portfolios Institutional Shares
January 1, 1997
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes the Institutional Shares of ten of those portfolios
(the "Portfolios"):
. Low Duration Bond Portfolio
. Intermediate Government Bond Portfolio
. Intermediate Bond Portfolio
. Core Bond 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 in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, 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, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE 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 SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest in taxable bonds, and four of these
Portfolios invest in tax-exempt bonds. A detailed description of
each Portfolio begins on page 20.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasury Short U.S. Government
(previously called the Short Index
Government Bond Lehman Brothers
Portfolio) Intermediate Government Intermediate U.S.
Government
Intermediate Government Lehman Brothers Intermediate
Bond Intermediate Government/Corporate
Government/Corporate
Intermediate Bond Lehman Aggregate Intermediate Investment
Grade Debt
Salomon BIG Corporate Debt A-Rated
Core Bond Salomon Non-U.S. Hedged General World Income
World Government Bond
Managed Income Index
International Bond Lehman Municipal Bond General Municipal Debt
Index
Lehman Local GO Index PA Municipal Debt
Tax-Free Income Lehman Local GO Index NJ Municipal Debt
Lehman Local GO Index OH Municipal Debt
PA Tax-Free Income
NJ Tax-Free Income
OH Tax Free Income
</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 This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
BOND We intend this document to be an effective tool as you explore
PORTFOLIOS different directions in fixed income investing. You may wish to
use the table of contents on page 5 to find descriptions of the
Portfolios, including their investment objectives, portfolio
management styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?"
CAPITAL FUNDS
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 9
What Are The Portfolios?..................................... 20
What Are The Differences Among The Portfolios?............... 21
What Types Of Securities Are In The Portfolios?.............. 22
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 23
What Additional Investment Policies and Risks Apply?......... 24
Who Manages The Fund?........................................ 37
How Are Shares Purchased And Redeemed?....................... 42
How Is Net Asset Value Calculated?........................... 44
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 45
How Are Fund Distributions Taxed?............................ 46
How Is The Fund Organized?................................... 50
How Is Performance Calculated?............................... 51
How Can I Get More Information?.............................. 52
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a
percentage of average daily net assets. The figures shown for the Low Duration
Bond, Core Bond, International Bond and New Jersey Tax-Free Income Portfolios
have been restated to reflect current expenses and fee waivers. An example
based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION GOVERNMENT INTERMEDIATE
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .30% .30%
Other operating expenses .25 .25 .25
----- ------ ------
Administration fees
(after fee waivers)(/1/) .15 .15 .13
Other expenses .10 .10 .12
---- ----- -----
Total Portfolio operating expenses (after
fee waivers)(/1/) .55% .55% .55%
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CORE BOND MANAGED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees
(after fee waivers)(/1/) .30% .35%
Other operating expenses .25 .23
----- -------
Administration fees (after fee waivers)(/1/) .15 .12
Other expenses .10 .11
---- ------
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .58%
===== =======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. 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
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .33%, .33%, .35%, .33%
and .34%, respectively, and "Total Portfolio operating expenses" would be
.83%, .83%, .85%, .83% and .84%, respectively.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .55% .30% .30%
Other operating expenses .43 .25 .25
--------- -------- ---------
Administration fees
(after fee
waivers)(/1/) .15 .13 .13
Other expenses .28 .12 .12
-------- ------- --------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .98% .55% .55%
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX- TAX-
FREE INCOME FREE INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)(/1/) .30% .30%
Other operating expenses .25 .25
------ ------
Administration fees (after fee waivers)(/1/) .10 .10
Other expenses .15 .15
----- -----
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .55%
====== ======
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50%, .50%, .50% and .50%,
respectively, and administration fees would be .23% for each Portfolio. 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 in-
formed the Fund that they expect to waive fees and reimburse expenses dur-
ing the remainder of the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .51%, .51%, .35%, .38%
and .38%, respectively, and "Total Portfolio operating expenses" would be
1.06%, .85%, .85%, .88% and .88% respectively.
7
<PAGE>
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>
Low Duration Bond Portfolio $ 6 $18 $31 $ 69
Intermediate Government Bond
Portfolio 6 18 31 69
Core Bond Portfolio 6 18 31 69
Intermediate Bond Portfolio 6 18 31 69
Managed Income Portfolio 6 19 32 73
International Bond Portfolio 10 31 54 120
Tax-Free Income Portfolio 6 18 31 69
Pennsylvania Tax-Free Income
Portfolio 6 18 31 69
New Jersey Tax-Free Income Portfolio 6 18 31 69
Ohio Tax-Free Income Portfolio 6 18 31 69
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed 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 OPERAT-
ING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
8
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' 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 shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-7764.
9
<PAGE>
Financial Highlights
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
APRIL 1, 1996 JULY 1, 1995 YEAR YEAR JULY 17, 1992(*)
THROUGH THROUGH ENDED ENDED THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ $ 9.83 $ 9.71 $ 9.96 $ 10.00
------- ------- ------- ------- -------
Net investment income
(net of $.014, $.011
and $.005
respectively, of
interest expense)(**) 0.42 0.58 0.48 0.51
Net realized and
unrealized loss on
investments -- 0.13 (0.25) (0.06)
------- ------- ------- ------- -------
Net increase from
investment operations 0.42 0.71 0.23 0.45
------- ------- ------- ------- -------
Dividends from net
investment income (0.41) (0.58) (0.48) (0.49)
Distributions from net
realized capital gains (0.01) (0.01) - - - -
------- ------- ------- ------- -------
Total dividends and
distributions (0.46) (0.59) (0.48) (0.49)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ $ 9.79 $ 9.83 $ 9.71 $ 9.96
======= ======= ======= ======= =======
Total investment
return(***) % 4.25% 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET
ASSETS:
Expenses(**) % 0.63% 0.57% 0.57% 0.56%(****)
Net investment
income(**) % 5.25% 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $ $ $34,236 $36,686 $67,540
Portfolio turnover % 185% 586% 455% 513%
Net assets, end of
period (in thousands) % $52,843 $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 Low
Duration Bond Portfolio") of The BFM Institutional Trust Inc., which was
organized as a Maryland business corporation. On January 13, 1996, the
assets and li-abilities of the Predecessor Low Duration 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 of share class.
(**) 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 ex-
pense 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 in-
vestment income ratios would have been 5.60%, 4.25% and 5.22% for the pe-
riods 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.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 9.64 $ 10.60 $ 10.46 $ 10.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.58 0.55 0.54 0.24
Net gain (loss) on
investments (both
realized and
unrealized) 0.38 (0.86) 0.16 0.46
-------- -------- -------- -------- --------
Total from investment
operations 0.96 (0.31) 0.70 0.70
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.58) (0.55) (0.54) (0.24)
Distributions from net
realized capital gains - - (0.10) (0.02) - -
-------- -------- -------- -------- --------
Total distributions (0.58) (0.65) (0.56) (0.24)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ $ 10.02 $ 9.64 $ 10.60 $ 10.46
======== ======== ======== ======== ========
Total return % 10.28% (3.08)% 6.88% 7.14%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $134,835 $128,974 $137,065 $105,620
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.42% 0.40% 0.73% 0.80%/2/
Before
advisory/administration
fee waivers % 0.79% 0.80% 0.81% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 5.94% 5.48% 5.23% 5.28%/2/
Before
advisory/administration
fee waivers % 5.57% 5.08% 5.15% 5.28%/2/
PORTFOLIO TURNOVER RATE % 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/17/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.05 $ 10.01 $ 10.00
---- -------- ------- -------
Income from investment operations
Net investment income 0.56 0.54 0.02
Net gain (loss) on investments (both
realized and unrealized) 0.38 (0.88) (0.01)
---- -------- ------- -------
Total from investment operations 0.94 (0.34) 0.01
---- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.56) (0.56) - -
Distributions from net realized
capital gains - - (0.06) - -
---- -------- ------- -------
Total distributions (0.56) (0.62) - -
---- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 9.43 $ 9.05 $ 10.01
==== ======== ======= =======
Total return % 10.76% (3.52)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $124,979 $71,896 $56,713
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.55% 0.45% 0.45%/2/
Before advisory/administration fee
waivers % 0.89% 0.88% 0.84%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 6.18% 5.54% 4.72%/2/
Before advisory/administration fee
waivers % 5.84% 5.11% 4.33%/2/
PORTFOLIO TURNOVER RATE % 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
APRIL 1, 1996 JULY 1, 1995 YEAR YEAR DECEMBER 9, 1992(*)
THROUGH THROUGH ENDED ENDED THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ $ 9.85 $ 9.36 $ 10.37 $10.00
---- ------- ------- ------- ------
Net investment income
(net of $.004, $.003 and
$.001, respectively, of
interest expense)(**) 0.47 0.62 0.55 0.32
Net realized and
unrealized gains on
investments (0.07) 0.50 (0.60) 0.37
---- ------- ------- ------- ------
Net (decrease) increase
from investment
operations 5.45 1.12 (0.05) 0.69
---- ------- ------- ------- ------
Dividends from net
investment income (0.47) (0.62) (0.55) (0.32)
Distributions from net
realized capital gains (0.17) (0.01) (0.41)
---- ------- ------- -------
Total dividends and
distributions (0.64) (0.63) (0.96) (0.32)
---- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD $ $ 7.61 $ 9.85 $ 9.36 $10.37
==== ======= ======= ======= ======
Total investment
return(***) % 3.93% 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET
ASSETS:
Expenses(*) % 0.66%(****) 0.55% 0.55% 0.55%(****)
Net investment
income(**) % 5.89%(****) 6.62% 5.61% 5.57%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $ $ $16,247 $ 9,702 $6,622
Portfolio turnover % 723% 435% 722% 354%
Net assets, end of
period (in thousands) $ $64,707 $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 13, 1996, the assets and
liabil-ities of the Predecessor Core Bond Portfolio were transferred to
this Port-folio, which had no prior operating history.
(*) Commencement of investment operations of share class.
(**) The investment adviser of the Predecessor Core Bond Portfolio waived fees
amounting to $56,894, $34,010 and $24,761 and reimbursed expenses amount-
ing 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
Prede-cessor 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 Prede-cessor Core Bond Portfolio waived fees
amounting to $24,272 and $17,283, respectively. If the Predecessor Core
Bond Portfolio had borne all ex-penses for the periods ended June 30,
1995, 1994 and 1993, the expense ra-tios would have been 1.75%, 2.65% and
2.44%, respectively; the net invest-ment 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 as-
sumed, for purposes of this calculation, to be reinvested at the net as-
set value per share on the payment date.
(****) Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
-------- -------- -------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.65 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on
investments (both
realized and
unrealized) 0.60 (1.21) 0.56 0.48 0.63 (0.29)
-------- -------- -------- -------- -------- ------- -------
Total from investment
operations 1.25 (0.57) 1.23 1.17 1.37 0.37
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.65) (0.64) (0.67) (0.69) (0.73) (0.66)
Distribution in excess
of net investment
income (0.01) (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 (0.66) (0.81) (0.80) (0.69) (0.81) (0.67)
-------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ . $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
======== ======== ======== ======== ======== ======= =======
Total return % 13.27% (5.27)% 12.13% 11.80% 14.74% 3.80%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $443,148 $395,060 $341,791 $314,075 $52,802 $38,328
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.57% 0.55% 0.74% 0.80% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers % 0.77% 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 % 6.44% 6.11% 6.25% 6.28% 7.36% 7.31%/2/
Before
advisory/administration
fee waivers % 6.24% 5.89% 6.21% 6.28% 7.32% 7.29%/2/
PORTFOLIO TURNOVER RATE % 203% 61% 72% 56% 38% 18%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD
*
THROUGH
9/30/96*
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $
---
Income from investment operations
Net investment income
Net (loss) gain on investments (both realized and unrealized)
---
Total from investment operations
---
LESS DISTRIBUTIONS
Distributions from net investment income
Distributions from net realized capital gains
---
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 %
Excluding waivers %
Ratios of net investment income to average net assets %
Excluding waivers %
PORTFOLIO TURNOVER RATE %
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996.
* Commencement of operations of share class.
** Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 1/21/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $10.04 $11.31 $10.61
-------- ------ ------ ------
Income from investment operations
Net investment income 0.53 0.53 0.42
Net gain (loss) on investments (both
realized and unrealized) 0.59 (0.93) 0.70
-------- ------ ------ ------
Total from investment operations 1.12 (0.40) 1.12
-------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.53) (0.53) (0.42)
Distributions from net realized
capital gains (0.02) (0.34) - -
-------- ------ ------ ------
Total distributions (0.55) (0.87) (0.42)
-------- ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ $10.61 $10.04 $11.31
======== ====== ====== ======
Total return % 11.54% (3.77)% 10.72%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $ 271 $ 132 $ 675
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.52% 0.50% 0.50%/2/
Before advisory/administration fee
waivers % 1.30% 1.73% 1.28%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.19% 4.97% 5.14%/2/
Before advisory/administration fee
waivers % 4.41% 3.74% 4.36%/2/
PORTFOLIO TURNOVER RATE % 92% 40% 71%
</TABLE>
/1/Commencement of operations of Share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 12/1/92/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $ 9.82 $10.70 $10.00
----- ------ ------ ------
Income from investment operations
Net investment income 0.52 0.53 0.39
Net gain (loss) on investments (both
realized and unrealized) 0.51 (0.85) 0.73
----- ------ ------ ------
Total from investment operations 1.03 (0.32) 1.12
----- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.52) (0.53) (0.39)
Distributions from net realized
capital gains - - (0.03) (0.03)
----- ------ ------ ------
Total distributions (0.52) (0.56) (0.42)
----- ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ $10.33 $ 9.82 $10.70
===== ====== ====== ======
Total return % 10.81% (2.96)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $2,092 $ 639 $ 256
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.52% 0.39% 0.09%/2/
Before advisory/administration fee
waivers % 0.84% 0.99% 0.97%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.23% 5.27% 5.19%/2/
Before advisory/administration fee
waivers % 4.91% 4.67% 4.31%/2/
PORTFOLIO TURNOVER RATE % 66% 30% 40%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
17
<PAGE>
Financial Highlights (continued)
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD
*
THROUGH
9/30/96
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $
---
Income from investment operations
Net investment income
Net (loss) gain on investments (both realized and unrealized)
---
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 $
===
Total return %
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) %
Ratios of expenses to average net assets %
Excluding waivers %
Ratios of net investment income to average net assets %
Excluding waivers %
PORTFOLIO TURNOVER RATE %
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munic-
ipal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 13, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were trans-
ferred to this Portfolio, which had no prior operating history.
* Commencement of operations of share class.
** Annualized.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 12/1/92/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $ 9.60 $10.53 $10.00
---- ------ ------ ------
Income from investment operations
Net investment income 0.55 0.53 0.36
Net gain (loss) on investments (both
realized and unrealized) 0.45 (0.91) 0.53
---- ------ ------ ------
Total from investment operations 1.00 (0.38) 0.89
---- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.55) (0.53) (0.36)
Distributions from net realized
capital gains - - (0.02) - -
---- ------ ------ ------
Total distributions (0.55) (0.55) (0.36)
---- ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ $10.05 $ 9.60 $10.53
==== ====== ====== ======
Total return % 10.75% (3.75)% 9.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $ 200 $ 127 $1,676
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.12% 0.10% 0.08%/2/
Before advisory/administration fee
waivers % 1.19% 1.49% 2.59%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.61% 5.16% 4.99%/2/
Before advisory/administration fee
waivers % 4.54% 3.77% 2.48%/2/
PORTFOLIO TURNOVER RATE % 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
19
<PAGE>
What Are The Portfolios?
- -------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 30 portfolios and
has 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 COMPASS CAPITAL FUNDS consist of ten
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Six 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 peri-
ods, a fund that invests in any one of these styles may per-
form above or below the market. An investment program that
combines these multiple disciplines allows investors to se-
lect from among these various product options in the way that
most closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond 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
Bond, Intermediate Bond, the preservation of capital.
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.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
20
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Managed Salomon BIG 5-10 Years Investment Grade BBB
Income Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
OH Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
21
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio,
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
22
<PAGE>
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
given at least 30 days' notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept 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 Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), 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 in-
vested 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).
The investment limitations stated above are applied at the time investment se-
curities 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 de-
scribed 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.
23
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio and
Intermediate Government Bond Portfolio will be rated in the highest rating cat-
egory at the time of purchase or, if unrated, of comparable quality as deter-
mined by the Portfolios' sub-adviser. Securities acquired by the other Portfo-
lios will be rated investment grade at the time of purchase (within the four
highest voting categories by Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor
Services, Inc.) or, if unrated, of comparable quality as determined by a Port-
folio's sub-adviser. Securities rated "Baa" on "BBB" are generally considered
to be investment grade although they have speculative characteristics. If a
security's rating 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 Intermediate Government
Bond Portfolio will invest at least 65% of its total 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 total 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 (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific 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 no more 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 with-
out 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 investment or conversion
into U.S. dollars. Investing in securities of foreign issuers involves consid-
erations not typically associated with investing in securities of companies or-
ganized 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.
24
<PAGE>
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, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, 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 Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more that 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments 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 com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility 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.
25
<PAGE>
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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 partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position 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 ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest 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 particular 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 portfo-
lios, 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-di-
versified portfolio more than it would a diversified portfolio.
26
<PAGE>
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. 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 Portfo-
lio 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 issu-
ance. The Fund and its service providers 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.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in Mortgage-related and other
asset-backed securities (i.e., securities backed by home equity loans, install-
ment sale contracts, credit card receivables or other assets) issued by govern-
mental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding 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. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no
27
<PAGE>
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 ac-
crual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include planned
amortization classes ("PACs") which generally require, within certain limits,
that specified amounts of principal be applied on each payment date, and gener-
ally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion 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 pur-
chaser 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. There-
fore, there is a possibility that recoveries on repossessed collateral may not,
in some cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
mortgage-related and other asset-backed securities will be based on estimates
of average life which take prepayments into account. The average life of a
mortgage-related 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. In gener-
al, the collateral supporting non-mortgage asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience substan-
tial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a 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 and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage)
28
<PAGE>
or mortgage-related securities containing loans or mortgages originated by PNC
Bank or its affiliates. It is possible that under some circumstances, PNC Mort-
gage Securities Corp. or its affiliates could have interests that are in con-
flict with the holders of these mortgage-backed securities, and such holders
could have rights against PNC Mortgage Securities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment 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 obliga-
tions. 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, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities 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 mort-
gage-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. How-
ever, 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 SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives 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.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial 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 obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
29
<PAGE>
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their inter-
est rates, maturities and times of issuance. Obligations of certain agencies
and instrumentalities of the U.S. Government such as the GNMA are supported by
the United States' full faith and credit; others such as those of the FNMA and
the Student Loan Marketing Association are supported by the right of the is-
suer to borrow from the Treasury; others such as those of the Federal Farm
Credit Banks or the FHLMC are supported only by the credit of the instrumen-
tality. No assurance can be given that the U.S. Government will provide finan-
cial 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 inter-
est rate swaps and may purchase or sell interest rate caps and floors. The
Portfolios expect to enter into these transactions primarily to preserve a re-
turn 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 Portfo-
lios intend to use these transactions as a hedge and not as a speculative in-
vestment.
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 speci-
fied 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 may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (po-
sition 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 set-
tlement of transactions in portfolio securities denominated in that foreign
currency, and may also enter into contracts to purchase or sell foreign cur-
rencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts (futures contracts). The Portfolio may also pur-
chase 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 cur-
rency 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.
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 earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, securities indices or the yield differential between
30
<PAGE>
two securities, or, in the case of the International Bond Portfolio, foreign
currencies, 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 when the aggregate premiums on outstanding op-
tions 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 mem-
bers 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 pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its 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 entered in to for other than bona fide hedging
purposes 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 quan-
tity 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
31
<PAGE>
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing 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. insur-
ance companies. Under these contracts, a Portfolio makes cash contributions to
a deposit fund of the insurance company's general account. The insurance com-
pany 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 securi-
ties on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, 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. Se-
curities 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 Portfolios 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 in-
terest 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 ex-
ceeds 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 Port-
folio. The absence of an active secondary market with respect to particular
variable and floating rate instruments, however, could make it difficult for a
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 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.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de
32
<PAGE>
cline 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 in-
stitutions 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 re-
purchase 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 (except the Tax-Free Portfo-
lios) may use reverse repurchase agreements when it is anticipated that the in-
terest income to be earned from the investment of the proceeds of the transac-
tion is greater than the interest expense of the transaction. This use of re-
verse repurchase agreements may be regarded as leveraging and, therefore, spec-
ulative. Reverse repurchase agreements involve the risks that the interest in-
come 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 de-
cline below the price of the securities the Portfolio is obligated to repur-
chase 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 securities having a value at least equal to the re-
purchase 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 share-
holder 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 each 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 re-
purchase 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 un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified 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
a Portfolio's sub-adviser that an adequate trading market exists for that secu-
rity. This investment practice could have the effect of increasing the level of
illiquidity in a Portfolio during any period that qualified institutional buy-
ers become uninterested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing 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 that it owns or intends to
33
<PAGE>
purchase, regardless of future changes in interest rates or market action.
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 trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, 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 per-
formance would have been without the use of dollar rolls. At the time a Port-
folio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate,
33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or re-
purchase securities may be restricted. 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 may make short sales both as a form of hedging to off-
set 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.
34
<PAGE>
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not, however, be a factor pre-
venting a sale or purchase when the sub-adviser believes investment considera-
tions 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. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing 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 mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though 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
35
<PAGE>
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 diver-
sified over time and thus its economy appears to be less vulnerable during re-
cessionary periods, a recurrence of high levels of unemployment could ad-
versely affect New Jersey's overall economy and the ability of New Jersey and
its political subdivisions and instrumentalities to meet their financial obli-
gations. In addition, New Jersey maintains a balanced budget which restricts
total appropriation increases to only 5% annually with respect to any munici-
pality or county, the balanced budget plan may actually adversely affect a
particular municipality's or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing 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 cycli-
cal 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 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 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 relat-
ing to) those obligations.
36
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund are managed under the di-
rection of its Board of Trustees. The following persons cur-
rently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Management
SUB- Group ("PAMG"). Each of the Portfolios within the Compass Capi-
ADVISERS tal Fund family, except the International Bond Portfolio, is
managed by a specialized portfolio manager who is a member of
PAMG's fixed income portfolio management subsidiary, BlackRock
Financial Management, Inc. ("BlackRock"). The sub-adviser of the
International Bond Portfolio is Morgan Grenfell Investment Serv-
ices Limited ("Morgan Grenfell").
The ten portfolios and their investment sub-advisers and portfo-
lio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Low Duration Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond 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 its
inception.
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 1991.
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);
Income Portfolio manager since 1995.
New Jersey Tax-Free In- BlackRock(/1/) Kevin Klingert (see above);
come Portfolio manager since 1995.
Ohio Tax-Free Income BlackRock(/1/) Kevin Klingert (see above);
Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
38
<PAGE>
PAMG was organized in 1994 to perform advisory services for in-
vestment 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 conglomer-
ate.
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 maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
paid investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after vol-
untary fee waivers: Intermediate Government Bond Portfolio,
.30%; Intermediate Bond Portfolio, .30%; Managed Income Portfo-
lio, .35%; Tax-Free Income Portfolio, .30%; Pennsylvania Tax-
Free Income Portfolio, .30%; and Ohio Tax-Free Income Portfolio,
.30%. For the period from April 1, 1996 through September 30,
1996, the Low Duration Bond and Core Bond Portfolios paid in-
vestment advisory fees, after voluntary fee waivers, at the an-
nual rates of % and % of their respective average daily net
assets. For the periods from February 1, 1996 and February 13,
1996, respectively, through September 30, 1996, the New Jersey
Tax-Free Income and International Bond Portfolios paid invest-
ment advisory fees, after voluntary fee waivers, at the annual
rates of % and % of their respective average daily net as-
sets.
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios
39
<PAGE>
may be directed through registered broker/dealers who have
entered into dealer agreements with Compass Capital's dis-
tributor, subject to the requirements of best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). 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 relat-
ing to the maintenance of financial records and fund account-
ing. As compensation for these services, CCG is entitled to
receive a fee, computed daily and payable monthly, at an an-
nual rate of .03% of each Portfolio's average daily net as-
sets, and PFPC and CDI 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 Port-
folio'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
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses in-
clude, but are not limited to, fees paid to PAMG and the Ad-
ministrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servic-
ing and processing fees, fees and expenses in registering and
qualifying the Portfolios and their shares for distribution
under Federal and state securities laws, expenses of prepar-
ing prospectuses and statements of additional information and
of printing and distributing
40
<PAGE>
prospectuses and statements of additional information to exist-
ing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, insurance premi-
ums, the expense of independent pricing services, and other ex-
penses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
41
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI 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 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Institutional Shares.
PURCHASE OF SHARES. Institutional Shares are offered to institutional invest-
ors, 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 computed
after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East-
ern 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) 441-7450. Orders re-
ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi-
ness 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 permis-
sible investments for the respective Portfolios. For further information, see
the Statement of Additional Information. The minimum initial investment for in-
stitutions is $5,000. There is no minimum subsequent investment requirement.
Compass Capital 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) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. 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 accordance with such procedures.
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 redeem-
42
<PAGE>
ing 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 at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
43
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio 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 its Institutional Shares, by the number
of its Institutional Shares 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 normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 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 a Portfolio's sub-adviser under
the supervision of the Board of Trustees determines such method does not repre-
sent fair value.
44
<PAGE>
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 Institutional 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. Each Portfolio declares a dividend each day on "settled"
shares (i.e. shares for which the particular Portfolio has received payment in
Federal funds) on the first Business day after a purchase order is placed with
the Fund. Payments by check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year, substantially all of the
Portfolios' net investment income will be declared as dividends. the amount of
the daily dividend for each Portfolio will be based on periodic projections of
its net investment income. All dividends are paid within ten days after the end
of each month. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by each Portfolio at least annually.
45
<PAGE>
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 dis-
tributed 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 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 re-
ceipt 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 ad-
justments 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 de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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.
Compass Capital 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.
46
<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer. 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 Inter-
national 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 a 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 gen-
erally 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 pro-
portionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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 addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania 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 (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 ex-
empt for Federal Income Tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come Portfolio for more than six months, the School District Tax.
47
<PAGE>
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, ex-
cept 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 inter-
est 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 above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax 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).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends 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. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions 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 Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to 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. Obliga-
48
<PAGE>
tions"), 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 Obli-
gations or similar obligations of other states or their subdivisions. Corpora-
tions 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 in-
come base for purposes of calculating their Ohio corporation franchise tax lia-
bility to the extent that such distributions either constitute exempt-interest
dividends for Federal income tax purposes or are properly attributable to in-
terest 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. Dis-
tributions properly attributable to gain on the sale, exchange or other dispo-
sition 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. Dis-
tributions attributable to other sources will be subject to the Ohio personal
income tax and the Ohio corporation franchise tax.
49
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, except the Intermediate Bond, Managed Income and Ohio Tax-Free In-
come Portfolios, offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. The
Intermediate Bond, Managed Income and Ohio Tax-Free Income Portfolios offer In-
stitutional Shares, Service Shares and Investor A Shares and, in addition, the
Ohio Tax-Free Income Portfolio offers Investor B Shares. This prospectus re-
lates only to Investor Shares of the ten Portfolios 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, 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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's classes
of Investor Shares. In addition, the performance of each class of Investor
Shares may be different. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan and an automatic withdrawal plan. For further information regarding
the Fund's Service and Investor Share classes, contact PFPC at (800) 441-7764
(Service Shares) or (800) 441-7762 (Investor Shares).
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 that 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 , 1996, PNC Bank held of record approximately % of the Fund's outstand-
ing shares, as trustee on behalf of individual and institutional investors, 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.
50
<PAGE>
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. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the measur-
ing 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 its
Institutional Shares are reinvested in Institutional Shares.
The yield of Institutional Shares is computed by dividing the Portfolio's net
income per share allocated to its Institutional Shares during a 30-day (or one
month) period by the net asset value 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 Portfolio's Institutional Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a Portfolio's Institu-
tional 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 T-Bill Index,
the "stocks, bonds and inflation index" published annually by Ibbotson Associ-
ates and the Lehman Government Corporate Bond Index, as well as the benchmarks
attached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their Institutional Shares published by nationally
recognized ranking services, and information as reported in financial publica-
tions such as Business Week, Fortune, Institutional Investor, Money Magazine,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in publi-
cations of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional 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 com-
pounding effects of dividends 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 re-
turn 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 Institutional Shares of a Portfolio cannot necessarily be used to compare
an
51
<PAGE>
investment in such shares with bank deposits, savings accounts and similar in-
vestment 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, operat-
ing expenses and market conditions. Any fees charged by brokers or other insti-
tutions directly to their customer accounts in connection with investments in
Institutional Shares will not be included in the Portfolio performance calcula-
tions.
52
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
53
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
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 Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency 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:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
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 (Baa-
3/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,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Index is:
53% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. 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 Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
54
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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.
----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND 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
THE BOND
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(SERVICE SHARES OF THE LOW DURATION BOND
PORTFOLIO, INTERMEDIATE GOVERNMENT BOND 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
FORM N-1A ITEM LOCATION
- -------------- ----------
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
<PAGE>
The Bond Portfolios Service Shares January 1, 1997
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes the Service Shares of ten of those portfolios (the
"Portfolios"):
Low Duration Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond 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 in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, 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, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE 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 SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest in taxable bonds, and four of these
Portfolios invest in tax-exempt bonds. A detailed description of
each Portfolio begins on page 22.
COMPASS PERFORMANCE LIPPER PEER GROUP
CAPITAL BENCHMARK
PORTFOLIO
Low Duration Bond Merrill 1-3 Year Treasury Short U.S.
(previously Index Government
called the Short Lehman Brothers Intermediate
Government Bond Intermdiate Government U.S. Government
Portfolio)
Lehman Brothers Intermediate
Intermediate Intermediate Governent/Corp.
Government
Bond Government/Corp.
Intermediate Bond Lehman Aggregate Intermediate
Investment
Grade Debt
Salomon BIG Corporate Debt-A
Rated
Core Bond Salomon Non-U.S. Hedged General World
World Government Bond Income
Managed Income Index
International Bond Lehman Municipal Bond General Municipal
Index Debt
Lehman Local GO Index PA Municipal Debt
Tax-Free Income Lehman Local GO Index NJ Municipal Debt
Lehman Local GO Index OH MUnicipal Debt
Pa Tax-Free Income
NJ Tax-Free Income
OH Tax-Free Income
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 This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
BOND different directions in fixed income investing. You may wish to
PORTFOLIOS use the table of contents on page 5 to find descriptions of the
Portfolios, including their investment objectives, portfolio
management styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?" and
CAPITAL FUNDS "What Special Purchase And Redemption Procedures May Apply?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 11
What Are The Portfolios?..................................... 22
What Are The Differences Among The Portfolios?............... 23
What Types of Securities Are In The Portfolios?.............. 24
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 25
What Additional Investment Policies And Risks Apply?......... 26
Who Manages The Fund?........................................ 39
How Are Shares Purchased And Redeemed?....................... 44
What Special Purchase And Redemption Procedures May Apply?... 46
How Is Net Asset Value Calculated?........................... 48
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 49
How Are Fund Distributions Taxed?............................ 50
How Is The Fund Organized?................................... 54
How Is Performance Calculated?............................... 55
How Can I Get More Information?.............................. 57
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios after fee waivers for the fiscal year ended September 30,
1996 as a percentage of average daily net assets. The figures shown for the
Low Duration Bond, Core Bond, International Bond and New Jersey Tax-Free In-
come Portfolios have been restated to reflect current expenses and fee waiv-
ers. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE INTERMEDIATE
DURATION BOND GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .30% .30% .30%
Other operating expenses .55 .55 .55
------- -------- ------
Administration fees (after fee
waivers)(/1/) .15 .15 .13
Shareholder servicing fees .15 .15 .15
Other expenses .25 .25 .27
------ ------- -----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .85% .85% .85%
======= ======== ======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. 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
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .63%, .63% and .65%, re-
spectively, and "Total Portfolio operating expenses" would be 1.13%, 1.13%
and 1.15%, respectively.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED INCOME
CORE PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .35%
Other operating expenses .55 .53
------- -------
Administration fees (after fee waivers)(/1/) .15 .12
Shareholder servicing fees .15 .15
Other expenses .25 .26
------ ------
Total Portfolio operating expenses (after fee
waivers)(/1/) .85% .88%
======= =======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .63% and .64%, respective-
ly, and "Total Portfolio operating expenses" would be 1.13% and 1.14%, re-
spectively.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .55% .30% .30%
Other operating expenses .73 .55 .55
---------- -------- --------
Administration fees
(after fee
waivers)(/1/) .15 .13 .13
Shareholder servicing
fee .15 .15 .15
Other expenses .43 .27 .27
-------- ------- -------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) 1.28% .85% .85%
========== ======== ========
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50% and .50%, respectively,
and administration fees would be .23% for each Portfolio. In addition, the
Expense Summary reflects reimbursements made to the Tax-Free Income Port-
folio 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 remainder
of the current fiscal year as necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the table. Without waivers,
"Other operating expenses" would be .81%, .65% and .65%, respectively, and
"Total Portfolio operating expenses" would be 1.36%, 1.15% and 1.15%, re-
spectively.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE TAX-FREE
INCOME INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)(/1/) .30% .30%
Other operating expenses .55 .55
----- -----
Administration fees (after fee waivers)(/1/) .10 .10
Shareholder servicing fees .15 .15
Other expenses .30 .30
---- ----
Total Portfolio operating expenses (after fee
waivers)(/1/) .85% .85%
===== =====
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .68% and .68%, respective-
ly, and "Total Portfolio operating expenses" would be 1.18% and 1.18%, re-
spectively.
9
<PAGE>
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment 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>
Low Duration Bond Portfolio $ 9 $27 $47 $105
Intermediate Government Bond
Portfolio 9 27 47 105
Intermediate Bond Portfolio 9 27 47 105
Core Bond Portfolio 9 27 47 105
Managed Income Portfolio 9 28 49 108
International Bond Portfolio 13 41 70 155
Tax-Free Income Portfolio 9 27 47 105
Pennsylvania Tax-Free Income
Portfolio 9 27 47 105
New Jersey Tax-Free Income Portfolio 9 27 47 105
Ohio Tax-Free Income Portfolio 9 27 47 105
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' independent accountant.This financial information should
be read together with those financial statements. Further infor-
mation about the performance of the Portfolios is available in
the Fund's annual shareholder reports. Both the Statement of Ad-
ditional Information and the annual shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-7764.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT-GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
APRIL 1, 1996 JANUARY 13, 1996(*)
THROUGH THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ $ 9.91
---- --------
Net investment income (net of $.014,
$.011 and $.005 respectively, of
interest expense) 0.11
Net realized and unrealized loss on
investments (0.12)
---- --------
Net increase from investment operations (0.01)
---- --------
Dividends from net investment income (0.11)
Distributions from net realized capital
gains - -
---- --------
Total dividends and distributions (0.11)
---- --------
NET ASSET VALUE, END OF PERIOD $ $ 9.79
==== ========
Total investment return % (0.11)%
RATIOS TO AVERAGE NET ASSETS:
Expenses % 1.01 %(**)
Net investment income % 4.94 %(**)
SUPPLEMENTAL DATA:
Average net assets (in thousands) $ $
Portfolio turnover % 185 %
Net assets, end of period (in
thousands) $ $181,670
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Low Duration Bond Portfolio were transferred to
this Portfolio, and were combined with the assets of a pre-existing portfo-
lio of investment maintained by the Fund.
(*) Commencement of investment operations of share class.
(**) Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29//93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.64 $ 10.60 $ 10.45
--- ------- ------- -------
Income from investment operations
Net investment income 0.56 0.53 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.37 (0.86) 0.15
--- ------- ------- -------
Total from investment operations 0.93 (0.33) 0.24
--- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.55) (0.53) (0.09)
Distributions from net realized
capital gains - - (0.10) - -
--- ------- ------- -------
Total distributions (0.55) (0.63) (0.09)
--- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 10.02 $ 9.64 $ 10.60
=== ======= ======= =======
Total return % 9.99% (3.31)% 2.30%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $49,762 $60,812 $15,035
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.69% 0.65% 0.67%/2/
Before advisory/administration fee
waivers % 1.06% 1.05% 0.75%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.67% 5.30% 5.14%/2/
Before advisory/administration fee
waivers % 5.30% 4.90% 5.06%/2/
PORTFOLIO TURNOVER RATE % 247% 9% 80%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/29//93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.05 $ 10.01 $ 9.99
--- ------- ------- ------
Income from investment operations
Net investment income 0.54 0.54 - -
Net gain (loss) on investments (both
realized and unrealized) 0.38 (0.91) 0.02
--- ------- ------- ------
Total from investment operations 0.92 (0.37) 0.02
--- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.54) (0.53) - -
Distributions from net realized
capital gains - - (0.06) - -
--- ------- ------- ------
Total distributions (0.54) (0.59) - -
--- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ $ 9.43 $ 9.05 $10.01
=== ======= ======= ======
Total return % 10.46% (3.80)% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $36,718 $35,764 $ 91
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.74% 0.70% 0.70%/2/
Before advisory/administration fee
waivers % 1.09% 1.13% 1.09%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.90% 5.33% 4.35%/2/
Before advisory/administration fee
waivers % 5.55% 4.90% 3.96%/2/
PORTFOLIO TURNOVER RATE % 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
4/1/96 1/13/96(*)
THROUGH THROUGH
9/30/96 3/31/96
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ $ 9.91
---- --------
Net investment income (net of $.004, $.003 and
$.001, respectively, of interest expense)(**) 0.11
Net realized and unrealized gains on
investments 0.30
---- --------
Net (decrease) increase from investment
operations 0.19
---- --------
Dividends from net investment income (0.11)
Distributions from net realized capital gains
Total dividends and distributions (0.11)
---- --------
NET ASSET VALUE, END OF PERIOD $ $ 9.61
==== ========
Total investment return(***) % (1.90)%
RATIOS TO AVERAGE NET ASSETS:
Expenses(*) % 0.85%(**)
Net investment income(**) % 5.46%(**)
SUPPLEMENTAL DATA:
Average net assets (in thousands) $ $
Portfolio turnover % 723%
Net assets, end of period (in thousands) $ $232,040
</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 13, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations of share class.
(**) Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.79 $ 11.17 $ 10.96
--- -------- ------- -------
Income from investment operations
Net investment income 0.63 0.59 0.11
Net gain (loss) on investments (both
realized and unrealized) 0.60 (1.18) 0.21
--- -------- ------- -------
Total from investment operations 1.23 (0.59) 0.32
--- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.63) (0.62) (0.11)
Distribution in excess of net
investment income (0.01) (0.02) - -
Distributions from net realized
capital gains - - (0.14) - -
Distributions in excess of net
realized gains - - (0.01) - -
--- -------- ------- -------
Total distributions (0.64) (0.79) (0.11)
--- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 10.38 $ 9.79 $ 11.17
=== ======== ======= =======
Total return % 12.97% (5.49)% 2.93%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $116,846 $67,655 $15,322
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.85% 0.80% 0.80%/2/
Before advisory/administration fee
waivers % 1.05% 1.02% 0.84%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 6.14% 5.95% 5.83%/2/
Before advisory/administration fee
waivers % 5.94% 5.73% 5.79%/2/
PORTFOLIO TURNOVER RATE % 203% 61% 72%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
2/1/96 3/1/95 YEAR YEAR YEAR PERIOD
THROUGH THROUGH ENDED ENDED ENDED ENDED
9/30/96 1/31/96 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
---- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.62 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both
realized and
unrealized) 1.13 (0.48) 0.46 0.47 0.26
---- ------- ------- ------- ------- -------
Total from investment
operations 1.75 (0.14) 1.11 0.99 0.57
---- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.88) (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 (0.88) (0.37) 1.12 (0.44) (0.36)
---- ------- ------- ------- ------- -------
NET ASSET VALUE AT END
OF PERIOD $ $ 11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21
==== ======= ======= ======= ======= =======
Total return % 16.79%* 1.50% 10.24% 9.55% 8.92%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $37,627 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets % 1.23%* 1.24% 1.38% 1.30% 1.33%*
Excluding waivers % 1.23%* 1.24% 1.38% 1.30% 1.37%*
Ratios of net
investment income to
average net assets % 5.62%* 5.96% 6.00% 6.31% 6.79%*
Excluding waivers % 5.62%* 5.96% 6.00% 6.31% 6.75%*
PORTFOLIO TURNOVER RATE % 159% 131% 128% 115% 110%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996.
* Annualized.
** Share class commenced operations on July 1, 1991.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $10.04 $11.31 $10.97
---- ------ ------ ------
Income from investment operations
Net investment income 0.50 0.51 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.59 (0.93) 0.34
---- ------ ------ ------
Total from investment operations 1.09 (0.42) 0.43
---- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.50) (0.51) (0.09)
Distributions from net realized
capital gains (0.02) (0.34) - -
---- ------ ------ ------
Total distributions (0.52) (0.85) (0.09)
---- ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.61 $10.04 $11.31
==== ====== ====== ======
Total return $ 11.24% (4.02)% 3.92%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) % $4,713 $2,109 $ 634
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.80% 0.75% 0.71%/2/
Before advisory/administration fee
waivers % 1.57% 1.98% 1.49%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 4.92% 4.75% 4.99%/2/
Before advisory/administration fee
waivers % 4.15% 3.52% 4.21%/2/
PORTFOLIO TURNOVER RATE % 92% 40% 71%
</TABLE>
/1/Commencement of operations of shares class.
/2/Annualized.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.82 $ 10.70 $ 10.43
---- ------- ------- -------
Income from investment operations
Net investment income 0.50 0.51 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.51 (0.85) 0.28
---- ------- ------- -------
Total from investment operations 1.01 (0.34) 0.37
---- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.50) (0.51) (0.09)
Distributions from net realized
capital gains - - (0.03) (0.01)
---- ------- ------- -------
Total distributions (0.50) (0.54) (0.10)
---- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 10.33 $ 9.82 $ 10.70
==== ======= ======= =======
Total return % 10.51% (3.20)% 3.54%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $13,815 $11,518 $ 3,894
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.79% 0.55% 0.34%/2/
Before advisory/administration fee
waivers % 1.11% 1.15% 1.22%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.04% 4.97% 4.90%/2/
Before advisory/administration fee
waivers % 4.72% 4.37% 4.02%/2/
PORTFOLIO TURNOVER RATE % 66% 30% 40%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
2/1/96 3/1/95 YEAR YEAR YEAR PERIOD
THROUGH THROUGH ENDED ENDED ENDED ENDED
9/30/96 1/31/96 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <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 0.46 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and
unrealized) 0.65 (0.36) 0.04 0.85 0.45
------ ------- ------- -------- ------- -------
Total from investment
operations 1.11 0.15 0.58 1.37 0.79
------ ------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.44) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - (0.01) (0.03) - - - -
------ ------- ------- -------- ------- -------
Total distributions (0.44) (0.52) (0.57) (0.53) (0.33)
------ ------- ------- -------- ------- -------
NET ASSET VALUE AT END
OF PERIOD $ $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46
====== ======= ======= ======== ======= =======
Total return 10.35% 1.49% 5.18% 13.48% 12.33%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $97,976 $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 % 0.90%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net
investment income to
average net assets % 4.43%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers % 4.41%* 4.63% 4.27% 4.48% 4.58%*
PORTFOLIO TURNOVER RATE % 18.26% 28.43% 12.05% 16.09% 0.00%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 13, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
* Annualized.
** Share class commenced operations on July 1, 1991.
20
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.60 $10.53 $10.24
------ ------ ------ ------
Income from investment operations
Net investment income 0.52 0.49 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.45 (0.91) 0.29
------ ------ ------ ------
Total from investment operations 0.97 (0.42) 0.38
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.52) (0.49) (0.09)
Distributions from net realized
capital gains - - (0.02) - -
------ ------ ------ ------
Total distributions (0.52) (0.51) (0.09)
------ ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ $10.05 $ 9.60 $10.53
====== ====== ====== ======
Total return % 10.45% (4.00)% 3.68%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $5,150 $4,428 $ 907
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.39% 0.35% 0.32%/2/
Before advisory/administration fee
waivers % 1.46% 1.74% 2.83%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 5.39% 5.06% 4.71%/2/
Before advisory/administration fee
waivers % 4.31% 3.67% 2.20%/2/
PORTFOLIO TURNOVER RATE % 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
21
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has 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 COMPASS CAPITAL FUNDS consist of ten
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Six 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 investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond 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
Bond, Intermediate Bond, the preservation of capital.
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.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
22
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Managed Salomon BIG 5-10 Years Investment Grade BBB
Income Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free Investment Grade BBB
Income Lehman Local GO Index 10-15 Years Spectrum
NJ Tax-Free Investment Grade BBB
Income Lehman Local GO Index 10-15 Years Spectrum
OH Tax-Free Investment Grade BBB
Income Lehman Local GO Index 10-15 Years Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
23
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
24
<PAGE>
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
given at least 30 days' notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept 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 Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), 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 in-
vested 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).
The investment limitations stated above are applied at the time investment se-
curities 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 de-
scribed 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.
25
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio and
Intermediate Government Bond Portfolio will be rated in the highest rating cat-
egory at the time of purchase or, if unrated, of comparable quality as deter-
mined by the Portfolios' sub-adviser. Securities acquired by the other Portfo-
lios will be rated investment grade at the time of purchase (within the four
highest voting categories by Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor
Services, Inc.) or, if unrated, of comparable quality as determined by a Port-
folio's sub-adviser. Securities rated "Baa" on "BBB" are generally considered
to be investment grade although they have speculative characteristics. If a
security's rating 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 Intermediate Government
Bond Portfolio will invest at least 65% of its total assets in obligations is-
sued 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 total 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 (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific 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 no more 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 with-
out 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 investment or conversion
into U.S. dollars. Investing in securities of foreign issuers involves consid-
erations not typically associated with investing in securities of companies or-
ganized 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.
26
<PAGE>
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, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, 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 Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments 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 com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility 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.
27
<PAGE>
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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 partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments 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 ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest 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 particular 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 portfo-
lios, 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-di-
versified portfolio more than it would a diversified portfolio.
28
<PAGE>
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. 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 Portfo-
lio 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 issu-
ance. The Fund and its service providers 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.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in mortgage-related and other
asset-backed securities (i.e., securities backed by home equity loans, install-
ment sale contracts, credit card receivables or other assets) issued by govern-
mental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding 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. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no
29
<PAGE>
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 ac-
crual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include planned
amortization classes ("PACs") which generally require, within certain limits,
that specified amounts of principal be applied on each payment date, and gener-
ally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured and the debtors are entitled to the protec-
tion 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 pur-
chaser 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. There-
fore, there is a possibility that recoveries on repossessed collateral may not,
in some cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
mortgage-related and other asset-backed securities will be based on estimates
of average life which take prepayments into account. The average life of a
mortgage-related 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. In gener-
al, the collateral supporting non-mortgage asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience substan-
tial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a 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 and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears
30
<PAGE>
Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of
Sears Mortgage) or mortgage-related securities containing loans or mortgages
originated by PNC Bank or its affiliates. It is possible that under some cir-
cumstances, PNC Mortgage Securities Corp. or its affiliates could have inter-
ests that are in conflict with the holders of these mortgage-backed securities,
and such holders could have rights against PNC Mortgage Securities Corp. or its
affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment 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 obliga-
tions. 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, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities 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 mort-
gage-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. How-
ever, 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 SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives 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.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial 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 obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
31
<PAGE>
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 GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA 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 FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government will 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 Portfo-
lios 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 securi-
ties 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 inter-
est 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 ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion 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 ex-
change-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 fluctua-
tions, 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.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, securities indices, or the yield differential between
32
<PAGE>
two securities or, in the case of the International Bond Portfolio, foreign
currencies, 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 when the aggregate premiums on outstanding op-
tions 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 mem-
bers 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 pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its 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 entered into for other than bona fide hedging
purposes 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 quan-
tity 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
33
<PAGE>
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing 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 de-
posit 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 securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable 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 recover-
ing 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 Portfolios 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 inter-
est 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 ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility 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 a 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 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.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline in value suffered by the Portfolio's securities.
34
<PAGE>
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 (except the Tax-Free Portfolios) may use reverse re-
purchase 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 agree-
ments may be regarded as leveraging and, therefore, speculative. Reverse repur-
chase agreements involve the risks that the interest income earned in the in-
vestment of the proceeds will be less than the interest expense, that the mar-
ket value of the securities sold by a Portfolio may decline below the price of
the securities the Portfolio 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 liq-
uid 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 ad-
ditional 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 share-
holder 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 each 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 re-
purchase 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 un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified 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
a Portfolio's sub-adviser that an adequate trading market exists for that secu-
rity. This investment practice could have the effect of increasing the level of
illiquidity in a Portfolio during any period that qualified institutional buy-
ers become uninterested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing 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 that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and for
35
<PAGE>
ward commitment transactions involve the risk, however, that the price or yield
obtained in a transaction may be less favorable than the price or yield avail-
able 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 trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, 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 per-
formance would have been without the use of dollar rolls. At the time a Port-
folio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. 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 em-
ployed.
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 de-
cline. The Portfolios may 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 ac-
quire 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. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not, however, be a factor pre-
venting a sale or purchase when the sub-adviser
36
<PAGE>
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. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing 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 mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though 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 instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New
37
<PAGE>
Jersey maintains a balanced budget which restricts total appropriation in-
creases 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.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing 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 im-
portant 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 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 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 govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal 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.
38
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund are managed under the di-
rection of its Board of Trustees. The following persons cur-
rently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Management
SUB- Group ("PAMG"). Each of the Portfolios within the Compass Capi-
ADVISERS tal Fund family, except the International Bond Portfolio, is
managed by a specialized portfolio manager who is a member of
PAMG's fixed income portfolio management subsidiary, BlackRock
Financial Management, Inc. ("BlackRock"). The sub-adviser of the
International Bond Portfolio is Morgan Grenfell Investment Serv-
ices Limited ("Morgan Grenfell").
The ten portfolios and their investment sub-advisers and portfo-
lio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Low Duration Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond 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 its
inception.
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 1991.
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);
Income Portfolio manager since 1995.
New Jersey Tax-Free In- BlackRock(/1/) Kevin Klingert (see above);
come Portfolio manager since 1995.
Ohio Tax-Free Income BlackRock(/1/) Kevin Klingert (see above);
Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
40
<PAGE>
PAMG was organized in 1994 to perform advisory services for in-
vestment 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 conglomer-
ate.
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 maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
paid investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after vol-
untary fee waivers: Intermediate Government Bond Portfolio,
.30%; Intermediate Bond Portfolio, .30%; Managed Income Portfo-
lio, .35%; Tax-Free Income Portfolio, 30%; Pennsylvania Tax-Free
Income Portfolio, .30%; and Ohio Tax-Free Income Portfolio, 30%.
For the period from April 1, 1996 through September 30, 1996,
the Low Duration Bond and Core Bond Portfolios paid investment
advisory fees, after voluntary fee waivers, at the annual rates
of % and % of their respective average daily net assets. For
the periods from February 1, 1996 and February 13, 1996, respec-
tively, through September 30, 1996, the New Jersey Tax-Free In-
come and International Bond Portfolios paid investment advisory
fees, after voluntary fee waivers, at the annual rates of %
and % of their respective average daily net assets.
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with Com-
pass Capital's distributor, subject to the requirements of best
execution.
41
<PAGE>
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). 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 these services, CCG 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 CDI 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 Portfo-
lio'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 admin-
istration fees from a Portfolio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are the Ex-
penses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service arrangements with in-
SERVICING stitutional investors ("Institutions") (including PNC Bank,
National Association and its affiliates) which provide that
the Institutions will render support services to their custom-
ers 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 a
shareholder processing fee of up to .15% (on an annualized ba-
sis) of the average daily net asset value of Service Shares
owned beneficially by their customers, Institutions may pro-
vide one or more of the following services: processing pur-
chase and redemption requests from customers and placing or-
ders with the Fund's transfer agent or the distributor;
processing dividend payments from the Fund on behalf of cus-
tomers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information nec-
essary for sub-accounting; and provid
42
<PAGE>
ing other similar services. In consideration for payment of a
separate shareholder servicing fee of up to .15% (on an
annualized basis) of the average daily net asset value of Serv-
ice 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; assisting cus-
tomers in designating and arranging dividend options, account
designations and addresses; and providing other similar share-
holder 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 Re-
serve Board and state banking commissions, and investment advis-
ers 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 under-
writing securities. It is intended that the services provided by
Institutions under their service agreements will not be prohib-
ited under these laws. Under state securities laws, banks and
financial institutions that receive payments from the Fund may
be required to register as dealers.
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 Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing 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 dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, 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 gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
43
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI 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 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu-
tions acting on behalf of their customers, as well as certain persons who were
shareholders of Compass Capital Group of Funds at the time of its combination
with the PNC(R) Fund during the first quarter of 1996. Service Shares will nor-
mally be held of record by Institutions or in the names of nominees of Institu-
tions. 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 redemp-
tions 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 week-
day 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) 441-7450. 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.
Compass Capital may in its discretion 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 Institu-
tions. These procedures will vary according to the type of account and the In-
stitution 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
44
<PAGE>
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) 441-7450.
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 employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. 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 accordance with such
procedures.
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 or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed 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 bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
45
<PAGE>
What Special Purchase and Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC(R) Fund
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 de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. 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 with respect to
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, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders which
are received by PFPC, together with payment, before the close of regular trad-
ing 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.
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 which may be obtained from PFPC. The minimum pre-au-
thorized 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, Dela-
ware 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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee 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 cor-
poration, 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
46
<PAGE>
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.
Compass Capital 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, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed 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.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, 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 in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") 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 pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed 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 which may be obtained
from PFPC.
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. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
47
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern 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 its Service Shares, by the number of its Serv-
ice Shares 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 normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 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 a Portfolio's sub-adviser under
the supervision of the Board of Trustees determines such method does not repre-
sent fair value.
48
<PAGE>
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
Service 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.
Each Portfolio declares a dividend each day on "settled" shares (i.e. shares
for which the particular Portfolio has received payment in Federal funds) on
the first Business Day after a purchase order is placed with the Fund. Payments
by check are normally converted to Federal funds within two Business Days of
receipt. Over the course of a year, substantially all of the Portfolios' net
investment income will be declared as dividends. The amount of the daily divi-
dend for each Portfolio will be based on periodic projections of its net in-
vestment income. All dividends are paid within ten days after the end of each
month. Net realized capital gains (including net short-term capital gains), if
any, will be distributed by each Portfolio at least annually.
49
<PAGE>
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 dis-
tributed 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 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 re-
ceipt 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 ad-
justments 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 de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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.
Compass Capital 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 shares depending upon their tax basis and their price
at the time of redemption,
50
<PAGE>
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 Inter-
national 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 a 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 gen-
erally 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 pro-
portionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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 addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania 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 (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 ex-
empt for Federal Income Tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come Portfolio for more than six months, the School District Tax.
51
<PAGE>
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, ex-
cept 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 inter-
est 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 above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax).
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax 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).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends 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. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions 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 Corpora-
tion Business Tax.
52
<PAGE>
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to 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 subdivi-
sions. 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 fran-
chise tax liability to the extent that such distributions either constitute ex-
empt-interest dividends for Federal income tax purposes or are properly attrib-
utable to interest on Ohio Municipal Obligations or U.S. Obligations. However,
Shares of the Ohio Tax-Free Income Portfolio will be included in a corpora-
tion's net worth base for purposes of calculating the Ohio corporation fran-
chise tax. Distributions properly attributable to 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.
53
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, except the Intermediate Bond, Managed Income and Ohio Tax-Free In-
come Portfolios, offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. The
Intermediate Bond, Managed Income and Ohio Tax-Free Income Portfolios each of-
fer Institutional Shares, Service Shares and Investor A Shares and, in addi-
tion, the Ohio Tax-Free Income Portfolio offers Investor B Shares. This pro-
spectus relates only to Service Shares of the ten Portfolios 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, 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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's classes
of Investor Shares. In addition, the performance of each class of Investor
Shares may be different. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan and an automatic withdrawal plan. For further information regarding
the Fund's Institutional or Investor Share classes, contact PFPC at (800) 441-
7764 (Institutional Shares) or (800) 441-7762 (Investor Shares).
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 that 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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, 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.
54
<PAGE>
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 calcu-
lated on an average annual total return basis for various periods. Average an-
nual 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 to-
tal return reflects the total percentage change in value over the measuring pe-
riod. Both methods of calculating total return assume that dividend and capital
gain distributions made by a Portfolio with respect to its Service Shares are
reinvested in Service Shares.
The yield of Service Shares is computed by dividing the Portfolio's net income
per share allocated to its Service Shares during a 30-day (or one month) period
by the net asset value 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 Portfolio's Service Shares may be compared to the perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, 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 com-
pared 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 T-Bill Index, the "stocks, bonds and
inflation index" published annually by Ibbotson Associates and the Lehman Gov-
ernment Corporate Bond Index, as well as the benchmarks attached to this Pro-
spectus. Performance information may also include evaluations of the Portfolios
and their Service Shares published by nationally recognized ranking services,
and information as reported in financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or re-
gional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service 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 dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn 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 invest-
ment in
55
<PAGE>
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 institu-
tions directly to their customer accounts in connection with investments in
Service Shares will not be included in the Portfolio performance calculations.
56
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
57
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
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 Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency 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:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
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 (Baa-
3/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,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Index is:
53% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. 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 Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
58
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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 PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND 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
THE BOND
PORTFOLIOS
SERVICE SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR A AND INVESTOR B SHARES OF THE
LOW DURATION BOND PORTFOLIO, INTERMEDIATE GOVERNMENT BOND
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
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Bond Portfolios Investor Shares
January 1, 1997
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus
describes the Investor Shares of eleven of those portfolios
(the "Portfolios"):
Low Duration Bond Portfolio
Intermediate Government Bond 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 in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, 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, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE 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 SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eleven
investment portfolios that provide investors with a broad spec-
trum 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 descrip-
tion of each Portfolio begins on page 23.
COMPASS PERFORMANCE LIPPER PEER GROUP
CAPITAL BENCHMARK
PORTFOLIO
Short U.S. Government
Merrill 1-3
Year
Low Duration Treasury
Bond Index
(previously
called the
Short
Government
Bond
Portfolio)
Intermediate U.S. Government
Intermediate Government/Corporate
Intermediate Investment Grade
Lehman Debt
Brothers General U.S. Government
Intermediate
Government
Corporate Debt A-Rated
Lehman
Brothers
Intermediate
Government/Corporate
General World Income
Intermediate
Government
Bond Lehman
Aggregate
General Municipal Debt
Intermediate PA Municipal Debt
Bond
NJ Municipal Debt
Lehman OH Municipal Debt
Mortgage/10
Year
Treasury
Core Bond
Government Salomon BIG
Income Salomon Non-
U.S. Hedged
World
Government
Bond Index
Managed
Income
International
Bond Lehman
Municipal
Bond Index
Tax-Free Lehman Local
Income GO Index
PA Tax-Free Lehman Local
Income GO Index
NJ Tax-Free Lehman Local
Income GO Index
OH Tax Free
Income
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 This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
BOND different directions in fixed income investing. You may wish to
PORTFOLIOS use the table of contents on page 5 to find descriptions of the
Portfolios, including their investment objectives, portfolio
management styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are
CAPITAL FUNDS Shares Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 11
What Are The Portfolios?..................................... 23
What Are The Differences Among The Portfolios?............... 24
What Types Of Securities Are In The Portfolios?.............. 25
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 26
What Additional Investment Policies And Risks Apply?......... 27
Who Manages The Fund?........................................ 40
What Pricing Options Are Available To Investors?............. 46
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 48
How Are Shares Purchased?.................................... 49
How Are Shares Redeemed?..................................... 51
What Are The Shareholder Features Of The Fund?............... 53
What Is The Schedule Of Sales Charges And Exemptions?........ 56
How Is Net Asset Value Calculated?........................... 62
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 63
How Are Fund Distributions Taxed?............................ 64
How Is The Fund Organized?................................... 68
How Is Performance Calculated?............................... 69
How Can I Get More Information?.............................. 71
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a
percentage of average daily net assets. The figures shown for the Low Duration
Bond, Core Bond, International Bond and New Jersey Tax-Free Income Portfolios
have been restated to reflect current expenses and fee waivers. An example
based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE INTERMEDIATE
DURATION BOND GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO+
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 3.0% None 4.0% None 4.0%
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% None 4.5% None
Sales Charge on
Reinvested Dividends None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .30% .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00
Other operating expenses
(after fee
waivers)(/3/) .72 .72 .72 .72 .72
------ ------ ------ ------ -------
Shareholder servicing
fee .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32
---- ---- ---- ---- -----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.02% 1.77% 1.02% 1.77% 1.02%
====== ====== ====== ====== =======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse ex-
penses, but have informed the Fund that they expect to waive fees and re-
imburse expenses during the remainder of the current fiscal year as neces-
sary to maintain the Portfolios' total operating expenses at the levels
set forth in the table. Without waivers, "Other operating expenses" would
be: (i) .80%, .80% and .82%, respectively, for Investor A Shares; and (ii)
.80% and .80%, respectively, for Investor B shares; and "Total Portfolio
operating expenses" would be: (iii) 1.30%, 1.30% and 1.32%, respectively,
for Investor A Shares; and (iv) 2.06% and 2.05%, respectively, for In-
vestor B 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) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are The Key Considerations In Selecting A Pricing
Option?" on page 48. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor B Shares (as well as investors in Investor
A Shares if 12b-1 fees are charged in the future) 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").
+ The Intermediate Bond Portfolio does not currently offer Investor B Shares.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT MANAGED
CORE BOND INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO+
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 4.0% None 4.5% None 4.5%
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% None 4.5% None
Sales Charge on
Reinvested Dividends None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .30% .30% .30% .30% .35%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00
Other operating expenses
(after fee
waivers)(/3/) .72 .72 .72 .72 .70
------ ------ ------ ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .30
---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.02% 1.77% 1.02% 1.77% 1.05%
====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. 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 ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.80%, .80% and .81%, respectively, for Investor A Shares; and (ii) .80% and
.80%, respectively, for Investor B Shares; and "Total Portfolio operating
expenses" would be: (iii) 1.30%, 1.30% and 1.31%, respectively, for In-
vestor A Shares; and (iv) 2.05% and 2.05%, respectively, for Investor B
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) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" on page 48. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor B Shares (as well as investors in Investor A
Shares if 12b-1 fees are charged in the future) may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
+ The Managed Income Portfolio does not currently offer Investor B Shares.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 5.0% None 4.0% None 4.0% None
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% None 4.5% None 4.5%
Sales Charge on
Reinvested Dividends None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .55% .55% .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00 .75
Other operating expenses
(after fee waivers and
expense
reimbursements)(/3/) .90 .90 .72 .72 .67 .72
------ ------ ------ ------ ----- ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .50 .50 .32 .32 .27 .32
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee waivers and
expense
reimbursements)(/3/) 1.45% 2.20% 1.02% 1.77% .97% 1.77%
====== ====== ====== ====== ===== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .50% and .50%, respec-
tively, and administration fees would be .23% for each class of each Port-
folio. In addition, the Expense Summary reflects reimbursements made to
the Tax-Free Income Portfolio by the adviser. PAMG and the Portfolios' ad-
ministrators 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 remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.98%, .82% and .77%, respectively, for Investor A Shares; and (ii) .98%,
.82% and .82%, respectively, for Investor B Shares; and "Total Portfolio
operating expenses" would be: (iii) 1.52%, 1.32% and 1.32%, respectively,
for Investor A Shares; and (iv) 2.27%, 2.07% and 2.07%, respectively, for
Investor B 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) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are the Key Considerations in Selecting a Pricing
Option?" on page 48. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor B Shares (as well as investors in Investor
A Shares if 12b-1 fees are charged in the future) may pay more than the
economic equivalent of the maximum front-end sales charges permitted by
the rules of the NASD.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 4.0% None 4.0% None
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% None 4.5%
Sales Charge on Reinvested
Dividends None None None None
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory Fees (after fee
waivers)(/3/) .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75
Other operating expenses
(after fee waivers)(/3/) .72 .72 .72 .72
------ ------ ------ ------
Shareholder servicing fee .25 .25 .25 .25
Shareholder processing fee .15 .15 .15 .15
Other expenses .32 .32 .32 .32
---- ---- ---- ----
Total Portfolio operating
expenses (after fee
waivers)(/3/) 1.02% 1.77% 1.02% 1.77%
====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. 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 ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.85% and .85%, respectively, for Investor A Shares; and (ii) .85% and .85%,
respectively, for Investor B Shares; and "Total Portfolio operating ex-
penses" would be: (iii) 1.32% and 1.35% for Investor A Shares; and (iv)
2.07% and 2.10% for Investor B Shares. The Portfolios do not expect to in-
cur 12b-1 fees with respect to Investor A Shares (otherwise payable at the
maximum rate of .10%) during the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" on page 48. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor B Shares (as well as investors in Investor A
Shares if 12b-1 fees are charged in the future) may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
9
<PAGE>
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>
Low Duration Bond Portfolio
A Shares* $40 $61 $ 85 $151
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Intermediate Government Bond
Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Intermediate Bond Portfolio
A Shares* 50 71 94 160
Core Bond Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Government Income Portfolio
A Shares* 55 76 99 164
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Managed Income Portfolio
A Shares* 55 77 100 167
International Bond Portfolio
A Shares* 64 94 125 215
B Shares (Redemption)** 67 106 140 234
B Shares (No Redemption) 22 69 118 234
Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Pennsylvania Tax-Free Income
Portfolio
A Shares* 50 70 91 154
B Shares (Redemption)** 63 93 119 177***
B Shares (No Redemption) 18 56 96 177***
New Jersey Tax-Free Income
Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Ohio Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares af-
ter seven years.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed 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 OPERAT-
ING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' 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 shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-7762.
During the periods shown, no Investor B Shares of the Low Dura-
tion Bond, Intermediate Government Bond, Intermediate Bond, Core
Bond, Managed Income, International Bond, Tax-Free Income and
New-Jersey Tax-Free Income Portfolios were outstanding. The In-
termediate Bond and Managed Income Portfolios do not currently
offer Investor B Shares.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
APRIL 1, 1996 JANUARY 13, 1996(*)
THROUGH THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period
--- ---
Net investment income
Net realized and unrealized loss on
investments
--- ---
Net increase from investment operations
--- ---
Dividends from net investment income
Distributions from net realized capital
gains
--- ---
Total dividends and distributions
--- ---
NET ASSET VALUE, END OF PERIOD
=== ===
Total investment return(***)
RATIOS TO AVERAGE NET ASSETS:
Expenses
Net investment income
SUPPLEMENTAL DATA:
Average net assets (in thousands)
Portfolio turnover
Net assets, end of period (in thousands)
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Low Duration Bond Portfolio were transferred to
this Portfolio, and were combined with the assets of a pre-existing portfo-
lio of investments maintained by the Fund.
(*) Commencement of investment operations of share class.
(**) Annualized.
(***) Sales load not reflected in total return.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/11/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 9.64 $10.60 $10.46 $10.05
--- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.55 0.53 0.54 0.24
Net gain (loss) on
investments (both
realized and
unrealized) 0.39 (0.87) 0.16 0.41
--- ------ ------ ------ ------
Total from investment
operations 0.94 (0.34) 0.70 0.65
--- ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.52) (0.54) (0.24)
Distributions from net
realized capital gains - - (0.10) (0.02) - -
--- ------ ------ ------ ------
Total distributions (0.55) (0.62) (0.56) (0.24)
--- ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ $10.03 $ 9.64 $10.60 $10.46
=== ====== ====== ====== ======
Total return % 9.98%/3/ (3.36)%/3/ 6.84%/3/ 6.64%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $9,802 $8,508 $7,666 $1,484
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.70% 0.65% 0.76% 0.80%/2/
Before
advisory/administration
fee waivers % 1.07% 1.05% 0.84% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 5.67% 5.24% 5.19% 5.28%/2/
Before
advisory/administration
fee waivers % 5.30% 4.84% 5.11% 5.28%/2/
PORTFOLIO TURNOVER RATE % 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 5/20/94/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $ 9.05 $ 9.23
--- ------ ------
Income from investment operations
Net investment income 0.54 0.20
Net gain (loss) on investments (both realized
and unrealized) 0.38 (0.17)
--- ------ ------
Total from investment operations 0.92 0.03
--- ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.54) (0.21)
Distributions from net realized capital gains - - - -
--- ------ ------
Total distributions (0.54) (0.21)
--- ------ ------
NET ASSET VALUE AT END OF PERIOD $ $ 9.43 $ 9.05
=== ====== ======
Total return 10.35%/3/ 0.31%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ $ 647 $ 87
Ratios of expenses to average net assets
After advisory/administration fee waivers % 0.84% 0.85%/2/
Before advisory/administration fee waivers % 1.19% 1.28%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers % 5.89% 5.35%/2/
Before advisory/administration fee waivers % 5.55% 4.92%/2/
PORTFOLIO TURNOVER RATE % 262% 92%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
4/1/96 1/31/96(*) 4/1/96 3/18/96*
THROUGH THROUGH THROUGH THROUGH
9/30/96 3/31/96 9/30/96 3/31/96
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ $ 9.99 $ $ 9.58
--- ------ ------- ----------
Net investment income 0.08 0.01
Net realized and unrealized
gains on investments (0.38) 0.03
--- ------ ------- ----------
Net (decrease) increase from
investment operations (0.30) 0.04
--- ------ ------- ----------
Dividends from net investment
income (0.08) (0.01)
Distributions from net realized
capital gains - -
Total dividends and
distributions (0.08) - -
--- ------ ------- ----------
NET ASSET VALUE, END OF PERIOD $ $ 9.61 $ $9.61
=== ====== ======= ==========
Total investment return (***) % (2.96)% % 0.33%
RATIOS TO AVERAGE NET ASSETS:
Expenses (*) % 1.02% % 1.77%(**)
Net investment income % 5.43% % 4.71%(**)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $ $ $ $
Portfolio turnover % 723% % 723%
Net assets, end of period (in
thousands) $ $ 80 $ $ 77
</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 13, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations of share class.
(**) Annualized.
(***) Sales load not reflected in total return.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR 10/03/94/1/ YEAR 10/03/94
ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/96 9/30/95
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $10.00 $ $ 10.00
--- ------ ------ ----------
Income from investment
operations
Net investment income 0.55 0.50
Net gain (loss) on investments
(both realized and
unrealized) 0.68 0.68
--- ------ ------ ----------
Total from investment
operations 1.23 1.18
--- ------ ------ ----------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.50)
Distribution in excess of net
investment income
Distributions from net
realized capital gains - - - -
Distributions in excess of net
realized gains - - - -
--- ------ ------ ----------
Total distributions (0.55) (0.50)
--- ------ ------ ----------
NET ASSET VALUE AT END OF
PERIOD $ $10.68 $ $ 10.68
=== ====== ====== ==========
Total return % 14.27%/3/ % 13.52%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $ $2,990 $ $ 10,188
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.37%/2/ % 1.05%/2/
Before advisory/administration
fee waivers % 1.81%/2/ % 2.50%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 6.89%/2/ % 6.17%/2/
Before advisory/administration
fee waivers % 5.44%/2/ % 4.72%/2/
PORTFOLIO TURNOVER RATE % 258% % 258%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 2/05/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 9.79 $ 11.18 $10.74 $10.40
--- ------- ------- ------ ------
Income from investment
operations
Net investment income 0.60 0.57 0.66 0.46
Net gain (loss) on
investments (both
realized and
unrealized) 0.60 (1.19) 0.57 0.34
--- ------- ------- ------ ------
Total from investment
operations 1.20 (0.62) 1.23 0.80
--- ------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.60) (0.66) (0.46)
Distribution in excess
of net investment
income (0.01) (0.02) - - - -
Distributions from net
realized capital gains - - (0.14) (0.13) - -
Distributions in excess
of net realized gains - - (0.01) - - - -
--- ------- ------- ------ ------
Total distributions (0.61) (0.77) (0.79) (0.46)
--- ------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ $ 10.38 $ 9.79 $11.18 $10.74
=== ======= ======= ====== ======
Total return % 12.74%/3/ (5.76)%/3/ 12.13%/3/ 7.86%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $11,977 $10,921 $7,252 $1,417
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 1.05% 1.00% 0.84% 0.80%/2/
Before
advisory/administration
fee waivers % 1.25% 1.22% 0.88% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 5.96% 5.66% 6.09% 6.28%/2/
Before
advisory/administration
fee waivers % 5.76% 5.44% 6.05% 6.28%/2/
PORTFOLIO TURNOVER RATE % 203% 61% 72% 56%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD
*
THROUGH
9/30/96
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $
---
Income from investment operations
Net investment income
Net (loss) gain on investments (both realized and unrealized)
---
Total from investment operations
---
LESS DISTRIBUTIONS
Distributions from net investment income
Distributions from net realized capital gains
---
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 %
Excluding waivers %
Ratios of net investment income to average net assets %
Excluding waivers %
PORTFOLIO TURNOVER RATE %
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996.
* Commencement of operations of share class.
** Annualized.
***Total return does not reflect sales load.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 5/14/90/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $10.04 $11.31 $10.60 $10.33 $ 9.91 $10.00
--- ------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.48 0.48 0.55 0.58 0.64 0.25
Net gain (loss) on
investments (both
realized and
unrealized) 0.59 (0.93) 0.83 0.49 0.46 (0.11)
--- ------ ------ ------ ------ ------ ------
Total from investment
operations 1.07 (0.45) 1.38 1.07 1.10 0.14
--- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.48) (0.55) (0.59) (0.66) (0.23)
Distributions from net
realized capital gains (0.02) (0.34) (0.12) (0.21) (0.02) - -
--- ------ ------ ------ ------ ------ ------
Total distributions (0.50) (0.82) (0.67) (0.80) (0.68) (0.23)
--- ------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91
=== ====== ====== ====== ====== ======
Total return % 10.99%/3/ (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) $ $6,591 $6,972 $7,831 $7,349 $3,510 $4,044
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 1.00% 0.95% 0.57% 0.53% 1.00% 1.00%/2/
Before
advisory/administration
fee waivers % 1.78% 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 % 4.74% 4.53% 5.06% 5.56% 6.23% 6.56%/2/
Before
advisory/administration
fee waivers % 3.96% 3.30% 4.27% 4.42% 5.34% 5.86%/2/
PORTFOLIO TURNOVER RATE % 92% 40% 71% 38% 95% 18%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 12/1/92/1/ YEAR 10/03/94/1/
ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 9.82 $ 10.70 $ 10.00 $ $ 9.82
--- ------- ------- ------- --- ------
Income from investment
operations
Net investment income 0.48 0.52 0.42 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.51 (0.85) 0.73 0.51
--- ------- ------- ------- --- ------
Total from investment
operations 0.99 (0.33) 1.15 0.93
--- ------- ------- ------- --- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.52) (0.42) (0.42)
Distributions from net
realized capital gains - - (0.03) (0.03) - -
--- ------- ------- ------- --- ------
Total distributions (0.48) (0.55) (0.45) (0.42)
--- ------- ------- ------- --- ------
NET ASSET VALUE AT END OF
PERIOD $ $ 10.33 $ 9.82 $ 10.70 $ $10.33
=== ======= ======= ======= === ======
Total return % 10.30%/3/ (3.06)%/3/ 11.69%/3/ % 9.69%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $42,775 $46,563 $35,934 $ $4,008
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.98% 0.41% 0.07%/2/ % 1.57%/2/
Before
advisory/administration
fee waivers % 1.30% 1.01% 0.95%/2/ % 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 4.88% 5.06% 5.19%/2/ % 4.07%/2/
Before
advisory/administration
fee waivers % 4.56% 4.46% 4.31%/2/ % 3.75%/2/
PORTFOLIO TURNOVER RATE % 66% 30% 40% % 66%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
20
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES
<S> <C>
FOR THE FOR THE
PERIOD PERIOD
2/1/96 1/26/96*
THROUGH THROUGH
9/30/96 1/31/96
</TABLE>
<TABLE>
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $11.54
--- ------
Income from investment
operations
Net investment income - -
Net (loss) gain on
investments (both
realized and
unrealized) 0.07
--- ------
Total from investment
operations 0.07
--- ------
LESS DISTRIBUTIONS
Distributions from net
investment income - -
Distributions from net
realized capital gains - -
--- ------
Total distributions - -
--- ------
NET ASSET VALUE AT END OF
PERIOD $ $11.61
=== ======
Total return*** % 0.63%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $ 14
Ratios of expenses to
average net assets % 1.02%*
Excluding waivers % 1.36%*
Ratios of net investment
income to average net
assets % 2.79%*
Excluding waivers % 2.45%*
PORTFOLIO TURNOVER RATE % 26%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 13, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
* Commencement of operations of share class.
** Annualized.
*** Sales load not reflected in total return.
21
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES* INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 12/1/92/1/ YEAR 10/13/94*
ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 9.60 $10.53 $10.00 $ $ 9.58
--- ------ ------ ------ --- ------
Income from investment
operations
Net investment income 0.52 0.53 0.36 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.45 (0.91) 0.53 0.47
--- ------ ------ ------ --- ------
Total from investment
operations 0.97 (0.38) 0.89 0.89
--- ------ ------ ------ --- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.52) (0.53) (0.36) (0.42)
Distributions from net
realized capital gains - - (0.02) - - - -
--- ------ ------ ------ --- ------
Total distributions (0.52) (0.55) (0.36) (0.42)
--- ------ ------ ------ --- ------
NET ASSET VALUE AT END OF
PERIOD $ $10.05 $ 9.60 $10.53 $ $10.05
=== ====== ====== ====== === ======
Total return*** % 10.46% (3.75)% 9.10% % 9.33%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $3,303 $3,825 $2,386 $ $ 106
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.38% 0.10% 0.07%** % 1.17%**
Before
advisory/administration
fee waivers % 1.45% 1.49% 2.58%** % 2.25%**
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 5.42% 5.18% 4.90%** % 4.48%**
Before
advisory/administration
fee waivers % 4.35% 3.79% 2.39%** % 3.41%**
PORTFOLIO TURNOVER RATE % 63% 61% 36% % 63%
</TABLE>
* Commencement of operations of share class.
** Annualized.
*** Sales load not reflected in total return.
22
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eleven
investment portfolios that provide investors with a broad spec-
trum 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>
Low Duration Bond 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
Bond, Intermediate Bond, the preservation of capital.
Government 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.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio Tax- State-Specific Tax-Free Portfolio,
Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
23
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Gov't Income Lehman Mortgage/10 10-15 Years Gov't/Agency AAA
Year Treasury
Managed Salomon BIG 5-10 Years Investment Grade BBB
Income Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
OH Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
24
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
25
<PAGE>
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
given at least 30 days' notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept 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 Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), 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 in-
vested 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).
The investment limitations stated above are applied at the time investment se-
curities 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 de-
scribed 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.
26
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Portfolio, Interme-
diate Government Bond Portfolio and Government Income Portfolio will be rated
in the highest rating category at the time of purchase or, if unrated, of com-
parable quality as determined by the Portfolios' sub-adviser. Securities ac-
quired by the other Portfolios will be rated investment grade at the time of
purchase (within the four highest voting categories by Standard & Poor's Rat-
ings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Co. or Fitch Investor Services, Inc.) 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 specu-
lative characteristics. If a security's rating is reduced below the minimum
rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con-
sider 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 Intermediate Government
Bond Portfolio and Government Income Portfolio (the "Government Portfolios")
will invest at least 65% of their total assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its total
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 (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific 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 no more 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 with-
out 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 investment or conversion
into U.S. dollars. Investing in securities of foreign issuers involves consid-
erations not typically associated with investing in securities of companies or-
ganized 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.
27
<PAGE>
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, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, 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 Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments 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 com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility 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.
28
<PAGE>
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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 partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position 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 ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest 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 particular 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 portfo-
lios, 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-di-
versified portfolio more than it would a diversified portfolio.
29
<PAGE>
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. 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 Portfo-
lio 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 issu-
ance. The Fund and its service providers 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.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in mortgage-related and other
asset-backed securities (i.e., securities backed by home equity loans, install-
ment sale contracts, credit card receivables or other assets) issued by govern-
mental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding 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. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no
30
<PAGE>
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 ac-
crual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted therafter to interest-paying securities. They may also include planned
amortization classes ("PACs") which generally require, within certain limits,
that specified amounts of principal be applied on each payment date, and gener-
ally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws 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 and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
mortgage-related and other asset-backed securities will be based on estimates
of average life which take prepayments into account. The average life of a
mortgage-related 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. In gener-
al, the collateral supporting non-mortgage asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience substan-
tial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a 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 and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
31
<PAGE>
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities contain-
ing loans or mortgages originated by PNC Bank or its affiliates. It is possible
that under some circumstances, PNC Mortgage Securities Corp. or its affiliates
could have interests that are in conflict with the holders of these mortgage-
backed securities, and such holders could have rights against PNC Mortgage Se-
curities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment 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 obliga-
tions. 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, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities 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 mort-
gage-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. How-
ever, 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 SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives 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.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial 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 obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may
32
<PAGE>
also make interest-bearing savings deposits in commercial and savings banks in
amounts not in excess of 5% of their respective total assets.
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 GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA 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 FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government will 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 Portfo-
lios 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 securi-
ties 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 inter-
est 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 ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion 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 ex-
change-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 fluctua-
tions, 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.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write
33
<PAGE>
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,
securities indices, or the yield differential between two securities or, in the
case of the International Bond Portfolio, foreign currencies, and may or may
not be listed on a securities exchange and may or may not be issued by the Op-
tions Clearing Corporation. A Portfolio will not purchase put and call options
when 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 in-
vestment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing 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 pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its 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 entered into for other than bona fide hedging
purposes 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 quan-
tity 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency
34
<PAGE>
exchange rates and other economic factors. For further discussion of risks in-
volved 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 Trad-
ing 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 de-
posit 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 securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable 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 recover-
ing 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 Portfolios 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 inter-
est 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 ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility 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 a 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 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.
35
<PAGE>
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline 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
(except the Tax-Free Portfolios) may use 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 securi-
ties sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase and that the securities may not be re-
turned 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 debt
securities having a value at least equal to the repurchase price. A Portfo-
lio'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 ad-
dition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an addi-
tional 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 share-
holder 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 each 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 un-
der 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. These securities will not be considered illiquid so long as it is deter-
mined by a Portfolio's sub-adviser 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 in-
stitutional buyers become uninterested in purchasing these restricted
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment"
36
<PAGE>
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 that it owns or intends to purchase, regardless of
future changes in interest rates or market action. When-issued and forward com-
mitment transactions involve the risk, however, that the price or yield ob-
tained 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 trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, 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 per-
formance would have been without the use of dollar rolls. At the time a Portfo-
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. 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 em-
ployed.
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 de-
cline. The Portfolios may 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 ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
37
<PAGE>
PORTFOLIO TURNOVER RATES. Under normal market conditions it is expected that
the annual portfolio turnover rate for the Government Income Portfolio will not
exceed 300%. The past portfolio turnover rates of the other Portfolios are set
forth above under "What Are the Portfolios' Financial Highlights?" A Portfo-
lio's annual portfolio turnover rate will not, however, be a factor preventing
a sale or purchase when the sub-adviser believes investment considerations war-
rant 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. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/ undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing 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 mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of
38
<PAGE>
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 obli-
gations. In addition, New Jersey maintains a balanced budget which restricts
total appropriation increases to only 5% annually with respect to any munici-
pality or county, the balanced budget plan may actually adversely affect a par-
ticular municipality's or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing 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 im-
portant 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 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 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 govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal 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.
39
<PAGE>
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 following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief
Financial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Of-
ficer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Manage-
SUB-ADVISERS ment Group ("PAMG"). Each of the Portfolios within the Com-
pass Capital Fund family, except the International Bond Port-
folio, is managed by a specialized portfolio manager who is a
member of PAMG's fixed income portfolio management subsidi-
ary, BlackRock Financial Management, Inc. ("BlackRock"). The
sub-adviser of the International Bond Portfolio is Morgan
Grenfell Investment Services Limited ("Morgan Grenfell").
The eleven portfolios and their investment sub-advisers and
portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Low Duration Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond 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 its
inception.
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 1991.
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);
Income Portfolio manager since 1995.
New Jersey Tax-Free In- BlackRock(/1/) Kevin Klingert (see above);
come Portfolio manager since 1995.
Ohio Tax-Free Income BlackRock(/1/) Kevin Klingert (see above);
Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
41
<PAGE>
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, com-
puted daily on a Portfolio-by-Portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are The Expenses Of The Portfolios?" PAMG
and the sub-advisers intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfo-
lios (other than the Low Duration Bond, Core Bond, Interna-
tional Bond and New Jersey Tax-Free Income Portfolios) paid
investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after
voluntary fee waivers: Intermediate Government Bond Portfo-
lio, .30%; Intermediate Bond Portfolio, .30%; Government In-
come Portfolio, .30%; Managed Income Portfolio, .35%; Tax-
Free Income Portfolio, .30%; Pennsylvania Tax-Free Income
Portfolio, .30%; and Ohio Tax-Free Income Portfolio, .30%.
For the period from April 1, 1996 through September 30, 1996,
the Low Duration Bond and Core Bond Portfolios paid invest-
ment advisory fees, after voluntary fee waivers, at the an-
nual rates of % and % of their respective average daily
net assets. For the periods from February 1, 1996 and Febru-
ary 13, 1996, respectively, through September 30, 1996, the
New Jersey Tax-Free Income and International Bond Portfolios
paid investment advisory fees, after voluntary fee waivers,
at the annual rates of % and % of their respective aver-
age daily net assets.
42
<PAGE>
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with Com-
pass Capital's distributor, subject to the requirements of best
execution.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). 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 these services, CCG 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
CDI 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 as-
sets, .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 Adminis-
trators may waive some or all of their administration fees from
a Portfolio.
For information about the operating expenses the Portfolios paid
for the most recent fiscal year, see "What Are the Expenses of
the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"), In-
PLAN vestor Shares of the Portfolios bear the expense of payments
("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank, National Associ-
ation ("PNC Bank") for distribution and sales support services.
The distribution fees may be used to compensate the Distributor
for distribution services and to compensate
43
<PAGE>
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 Organiza-
tions") for sales support services and related expenses. Dis-
tribution 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. 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). The Plan also
permits the Distributor, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments
relating to distribution and sales support activities out of
their past profits or other sources available to them.
Under the Plan, the Fund intends to enter into service ar-
rangements 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 may provide one or more of the follow-
ing services: responding to customer inquiries relating to
the services performed by the Service Organization and to
customer inquiries concerning their investments in Investor
Shares; assisting customers in designating and changing divi-
dend options, account designations and addresses; and provid-
ing other similar shareholder liaison services. In considera-
tion 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 may
provide one or more of these additional services to such cus-
tomers: 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 Investor Shares beneficially owned by customers or
the information necessary for sub-accounting; and providing
other similar services.
Service Organizations may charge their clients additional
fees for account services. Customers who are beneficial own-
ers of Investor Shares should read this Prospectus in light
of the terms and fees governing their accounts with Service
Organizations.
44
<PAGE>
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. Under state securities laws, banks
and financial institutions that receive payments from the Fund
may be required to register as dealers.
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 Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, distribution 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 addi-
tional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solicita-
tions, 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 equita-
ble.
45
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Bond Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of 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 ongoing expenses
Free exchanges with other A Shares in the Compass Capital
Funds family
A Shares may make sense for investors with a long-term in-
vestment horizon who prefer to pay a one-time front-end sales
charge and have reduced ongoing fees.
B SHARES (BACK-END LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) if shares are re-
deemed, declining over 6 years from a high of 4.50%
Automatically convert to A Shares seven 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.
+The Intermediate Bond and Managed Income Portfolios do not currently offer In-
vestor B Shares.
46
<PAGE>
THE PRICING OPTIONS FOR EACH PORTFOLIO ARE DESCRIBED IN THE TABLES BELOW:
Intermediate Government Bond, Intermediate Bond, Core Bond, Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-Free
Income Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 4.00% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
Government Income and Managed Income Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 4.50% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
Low Duration Bond Portfolio:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge.................. 3.00% 0.00%
12b-1 Fee....................................... 0.00%* 0.75%
CDSC (Redemption Charge)........................ 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
International Bond Portfolio:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge.................. 5.00% 0.00%
12b-1 Fee....................................... 0.00%* 0.75%
CDSC (Redemption Charge)........................ 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</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 shares of the Portfolios may do so either by
mailing the investment application attached to this Prospectus along with a
check or by wiring money as specified below under "How Are Shares Purchased?"
The Fund also offers a third pricing option for shares of the Portfolios--In-
vestor C Shares--which are described in a separate prospectus. See "How Is The
Fund Organized?"
47
<PAGE>
What Are The Key Considerations In Selecting A Pricing Option?
- -------------------------------------------------------------------------------
In deciding which class of Investor Shares to purchase, investors should con-
sider the following:
Intended Holding Period. Over time, the cumulative distribution fees on a
Portfolio's Investor B 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 Shares' aggregate distribution fees would be equal to
the Investor A Shares' initial maximum sales charge from four to seven years
after purchase (depending on the Portfolio). Thereafter, Investor B Shares
would bear higher aggregate expenses. Investor B shareholders, however, enjoy
the benefit of permitting all their dollars to work from the time the invest-
ments are made. Any positive investment return on the additional invested
amount would partially or wholly offset the higher annual expenses borne by
Investor B 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 reinvest-
ment 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 January 12, 1996
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 de-
ferred sales charge is reduced for shares held more than one year. Investor B
Shares of a Portfolio purchased on or before January 12, 1996 convert to In-
vestor A Shares of the Portfolio at the end of six years after purchase. For
more information about Investor B Shares purchased before January 12, 1996 and
the deferred sales charge payable on their redemption, call PFPC at (800) 441-
7762.
Investor B shareholders also pay a contingent deferred sales charge if they
redeem during the first six years after purchase, unless a sales charge waiver
applies. Investors expecting to redeem during this period should consider the
cost of the applicable contingent deferred sales charge in addition to the ag-
gregate annual Investor B distribution fees, as compared with the cost of the
applicable initial sales charges applicable to the Investor A 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 ad-
vantageous for investors purchasing large quantities of Investor Shares to
purchase Investor A Shares. In any event, the Fund will not accept any pur-
chase order for $1,000,000 or more of Investor B Shares.
Waiver of Sales Charges. The entire initial sales charge on Investor A Shares
of a Portfolio may be waived for certain eligible purchasers allowing their
entire purchase price to be immediately invested in a Portfolio. The contin-
gent deferred sales charge may be waived upon redemption of certain Investor B
Shares.
48
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties 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 In-
vestment 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 em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
When placing purchase orders, investors should specify whether the order is for
Investor A or Investor B 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. Pur-
chase 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 sales charge. Payment for an order may
be made by the broker in Federal funds or other funds immediately available to
the Portfolios' 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 pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to 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, specify
the class of Investor Shares, and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East-
ern time) on any Business Day (as defined below) are priced at the applicable
net asset value next determined on that day, plus any applicable sales charge.
49
<PAGE>
OTHER PURCHASE INFORMATION. Shares of each Portfolio are sold on a continuous
basis by CDI as the Distributor. CDI 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 in-
quiry. The issuance of shares is recorded on the books of the Fund. No certifi-
cates will be issued for 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. Compass Capital reserves
the right to reject any purchase order or to waive the minimum initial invest-
ment requirement.
50
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. 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 OR INVESTOR B SHARES. If a redeem-
ing shareholder owns both Investor A Shares and Investor B 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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee 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 documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
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 desig-
nated 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 de-
scribed 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, Delaware 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 share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written re-
51
<PAGE>
quest (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 em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. 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 in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account
in such Portfolio falls below the required minimum initial investment 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 in-
vestments before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of Investor B
Shares will be reduced by the amount of any applicable contingent deferred
sales charge. Unless another payment option is used as described above, pay-
ment 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 pay-
ment 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 responsi-
bilities under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
52
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
Compass Capital Funds offers 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 from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor A and Investor B Shares of each Portfolio may be
exchanged for shares of the same class of other portfolios of the Fund which
offer that class of shares, based on their respective net asset values. Ex-
changes of Investor A Shares may be subject to the difference between the sales
charge previously paid on the exchanged shares and the higher sales charge (if
any) payable with respect to the shares acquired in the exchange.
Investor A Shares of 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 pur-
chase 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 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 re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide 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 Del-
aware 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 writ-
ing.
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 speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic 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 ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For
53
<PAGE>
Federal income tax purposes, a share exchange is a taxable event and, accord-
ingly, a capital gain or loss may be realized. Before making an exchange re-
quest, 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 handling 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. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
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 which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual 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 Fund offers 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 cur-
rent 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 withdraw-
als 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 which may be obtained from PFPC.
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 PFPC. Purchases of additional Investor A Shares of the
Fund concurrently with withdrawals may be disadvantageous to invest-
54
<PAGE>
ors because of the sales charges involved and, therefore, are discouraged. No
contingent deferred sales charge will be assessed on redemptions of Investor B
Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor B Shares will not be subject to the CDSC if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. SWP redemptions of Investor B Shares in excess of this limit
are still subject to the applicable CDSC.
55
<PAGE>
What Is The Schedule Of Sales Charges And Exemptions?
- --------------------------------------------------------------------------------
INVESTOR A Investor A Shares are subject to a front-end sales charge de-
SHARES termined in accordance with the following schedules:
Low Duration Bond Portfolio:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 3.00% 3.09% 2.50%
$25,000 but less than $50,000 2.75 2.83 2.25
$50,000 but less than $100,000 2.50 2.56 2.00
$100,000 but less than $250,000 2.00 2.04 1.75
$250,000 but less than $500,000 1.50 1.52 1.25
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
Intermediate Government Bond, Intermediate Bond, Core Bond, Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-Free
Income Portfolios:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 but less than $50,000 3.75 3.90 3.25
$50,000 but less than $100,000 3.50 3.63 3.00
$100,000 but less than $250,000 3.00 3.09 2.50
$250,000 but less than $500,000 2.00 2.04 1.50
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 0.75% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
56
<PAGE>
Government Income and Managed Income Portfolios:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (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% 4.71% 4.00%
$25,000 but less than $50,000 4.25 4.70 3.75
$50,000 but less than $100,000 4.00 4.17 3.50
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
International Bond Portfolio:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (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% 5.26% 4.50%
$25,000 but less than $50,000 4.75 4.99 4.25
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 4.00 4.17 3.50
$250,000 but less than $500,000 3.00 3.09 2.50
$500,000 but less than $1,000,000 2.00 2.04 1.50
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 1.00% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
57
<PAGE>
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 Dis-
tributor. Dealers who receive 90% or more of the sales charge may be deemed to
be "underwriters" under the 1933 Act. The amount of the sales charge not
reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp.
who provide sales support services.
SALES CHARGE WAIVERS--INVESTOR A 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 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 representa-
tives of 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
(c). The following persons may also buy Investor A Shares without paying a
sales charge: (a) persons investing through an authorized payroll deduction
plan; (b) persons investing through an authorized investment plan for organiza-
tions which operate under Section 501(c)(3) of the Internal Revenue Code; (c)
registered investment advisers, trust companies and bank trust departments ex-
ercising discretionary investment authority with respect to amounts to be in-
vested in a Portfolio, provided that the aggregate amount invested pursuant to
this exemption equals at least $250,000; and (d) persons participating in a
"wrap account" or similar program under which they pay advisory fees to a bro-
ker-dealer or other financial institution. 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) pay-
able by qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate in 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 in purchases of Investor A Shares of
the Portfolios aggregating less than $500,000 will be 2.50% (1.50% with respect
to shares of the Low Duration Bond Portfolio.) The above schedules will apply
to purchases by such Qualified Plans of Investor A Shares aggregating $500,000
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, pur-
chases 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 com-
pany, 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 ex-
pense. An organized group does not include a group of
58
<PAGE>
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 fidu-
ciary 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 RE-
CEIVE THE CUMULATIVE QUANTITY REDUCTION, PREVIOUS PURCHASES OF INVESTOR A
SHARES MUST BE CALLED TO THE ATTENTION OF PFPC 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 another non-money market portfolio of the Fund), a share-
holder has a one-time right, to be exercised within 45 days, to reinvest the
redemption proceeds without any sales charges. PFPC must be notified of the re-
investment in writing by the purchaser, or by his or her broker, at the time
the purchase is made in order to eliminate a sales charge. An investor should
consult a tax adviser concerning the tax consequences of use of the reinvest-
ment 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 de-
ferred 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 or her financial institution, at the time the purchase of Investor A
Shares is made.
LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a 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 In-
tent 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 PFPC UPON MAKING SUBSEQUENT PURCHASES
THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF INTENT. All dividends and capi-
tal 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 In-
vestor 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
59
<PAGE>
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 ex-
piration 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 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 six years of purchase. The deferred sales charge on Investor B Shares is
based on the lesser of the offering price or the net asset value of the In-
vestor B Shares on the redemption date. Brokers will receive commissions equal
to 4.0% of the Index B Shares sold by them plus ongoing fees under the Fund's
Distribution and Service Plan and described under "Who Manages The Fund?" These
commissions may be different than the reallowances or placement fees paid to
dealers in connection with sales of Investor A Shares.
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<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 4.50%
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 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
</TABLE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor B Shares is not charged in connection with: (1) ex-
changes described in "What Are the Shareholder Features of the Fund?--Exchange
Privilege"; (2) redemptions made
60
<PAGE>
in connection with minimum required distributions from IRA, 403(b)(7) and Qual-
ified 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 In-
ternal Revenue Code) subsequent to the purchase of Investor B Shares; (4) in-
voluntary redemptions of Investor B Shares in accounts with low balances as de-
scribed in "How Are Shares Redeemed?"; and (5) redemptions made pursuant to the
Systematic Withdrawal Plan, subject to the limitations set forth above under
"What Are the Shareholder Features of the Fund?--Systematic Withdrawal Plan."
In addition, no contingent deferred sales charge is charged on Investor B
Shares acquired through the reinvestment of dividends or distributions.
When an investor redeems Investor B Shares, the redemption order is processed
to minimize the amount of the contingent deferred sales charge that will be
charged. Investor B Shares are redeemed first from those shares that are not
subject to the deferred sales load (i.e., shares that were acquired through re-
investment of dividends or distributions) and after that from the shares that
have been held the longest.
61
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio 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 secu-
rities 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 normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 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 a Portfolio's sub-adviser under
the supervision of the Board of Trustees determines such method does not repre-
sent fair value.
62
<PAGE>
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 share-
holder 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. Each Portfolio declares a dividend each day on "set-
tled" shares (i.e., shares for which the particular Portfolio has received pay-
ment in Federal funds) on the first Business Day after a purchase order is
placed with the Fund. Payments by check are normally converted to Federal funds
within two Business Days of receipt. Over the course of a year, substantially
all of the Portfolio's net investment income will be declared as dividends. The
amount of the daily dividend for each Portfolio will be based on periodic pro-
jections of its net investment income. All dividends are paid within ten days
after the end of each month. Net realized capital gains (including net short-
term capital gains), if any, will be distributed by each Portfolio at least an-
nually.
63
<PAGE>
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 dis-
tributed 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 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 re-
ceipt 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 ad-
justments 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 de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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 speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing 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 or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer.
64
<PAGE>
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 re-
demption, transfer or exchange of such shares. However, if a shareholder ex-
changes 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 for the pur-
pose of determining gain or loss but may be included (subject to the same limi-
tation) 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 in-
terest 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 divi-
dends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national 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 a 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 gen-
erally 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 pro-
portionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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 addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania 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 (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 ex-
empt for Federal Income Tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
65
<PAGE>
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come 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, ex-
cept 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 inter-
est 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 above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax).
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax 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).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends 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. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions 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.
66
<PAGE>
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 Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to 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 subdivi-
sions. 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 fran-
chise tax liability to the extent that such distributions either constitute ex-
empt-interest dividends for Federal income tax purposes or are properly attrib-
utable to interest on Ohio Municipal Obligations or U.S. Obligations. However,
Shares of the Ohio Tax-Free Income Portfolio will be included in a corpora-
tion's net worth base for purposes of calculating the Ohio corporation fran-
chise tax. Distributions properly attributable to 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.
67
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, other than the Government Income, Intermediate Bond, Managed Income
and Ohio Tax-Free Income Portfolios, offers five separate classes of shares--
Institutional Shares, Service Shares, Investor A Shares, Investor B Shares. The
Government Income Portfolio offers Investor A Shares, Investor B Shares and In-
vestor C Shares; the Intermediate Bond, Managed Income and Ohio Tax-Free Income
Portfolios each offer Investor A Shares, Institutional Shares and Service
Shares and, in addition, the Ohio Tax-Free Income Portfolio offers Investor B
Shares. This prospectus relates only to Investor A Shares and Investor B Shares
of the eleven Portfolios 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, 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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. In addition, the performance of each class of In-
vestor Shares may be different. The Fund offers various services and privileges
in connection with its Investor Shares that are not generally offered in con-
nection with its Institutional and Service Shares, including an automatic in-
vestment plan and an automatic withdrawal plan. For further information regard-
ing the Fund's Institutional, Service and Investor C Share classes, contact
PFPC at (800) 441-7764.
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 that 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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, 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.
68
<PAGE>
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 Investor Shares of a Portfolio over the measuring pe-
riod. 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 re-
flecting the sales load.
The yield of a class of shares is computed by dividing the Portfolio's net in-
come 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 class of a Portfolio's Investor Shares may be compared to
the performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a class of a Portfolio's
Investor 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 T-Bill Index,
the "stocks, bonds and inflation index" published annually by Ibbotson Associ-
ates and the Lehman Government Corporate Bond Index, as well as the benchmarks
attached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their share classes published by nationally recog-
nized ranking services, and information as reported in financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal 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 dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
69
<PAGE>
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Investor Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for In-
vestor Shares of a Portfolio cannot necessarily be used to compare an invest-
ment 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 institu-
tions directly to their customer accounts in connection with investments in In-
vestor Shares will not be included in the Portfolio performance calculations.
70
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
71
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
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 Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency 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:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
Government Income Lehman Mortgage/10 Year 50% allocation to the mortgage component of
Treasury the Lehman Aggregate Index and a 50%
allocation to the Merrill Lynch 10 Year
Index
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 (Baa-
3/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,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Index is:
53% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. 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 Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
72
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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 PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND 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
THE BOND
PORTFOLIOS
INVESTOR SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR C SHARES OF THE
LOW DURATION BOND PORTFOLIO, INTERMEDIATE GOVERNMENT BOND
PORTFOLIO, GOVERNMENT INCOME PORTFOLIO,
CORE BOND PORTFOLIO, INTERNATIONAL BOND PORTFOLIO,
TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA TAX-FREE INCOME PORTFOLIO,
AND NEW JERSEY TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- -------------- ----------
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
<PAGE>
The Bond Portfolios Investor C Shares January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes the Investor C Shares of eight of those portfolios
(the "Portfolios"):
[[_]] Low Duration Bond Portfolio
[_] Intermediate Government Bond Portfolio
[_] Core Bond Portfolio
[_] Government Income Portfolio
[_] International Bond Portfolio
[_] Tax-Free Income Portfolio
[_] Pennsylvania Tax-Free Income Portfolio
[[_]] New Jersey Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, 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, obli-
gations 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 AC-
CURACY 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.
<PAGE>
The Bond Portfolios of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eight
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Five of these Portfolios invest in taxable bonds, and three of
these Portfolios invest in tax-exempt bonds. A detailed descrip-
tion of each Portfolio begins on page 11.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Short U.S. Government
(previously called Treasury Index
the Short Government
Bond Portfolio)
Intermediate Govern- Lehman Brothers Intermediate
ment Bond Intermediate U.S. Government
Government
Core Bond Lehman Aggregate Intermediate
Investment Grade Debt
Government Income Lehman Mortgage/10 General U.S. Government
Year Treasury
International Bond Salomon Non-U.S. General World Income
Hedged World
Government Bond
Index
Tax-Free Income Lehman Municipal Bond General Municipal Debt
Index
PA Tax-Free Income Lehman Local GO Index PA Municipal Debt
NJ Tax-Free Income Lehman Local GO Index NJ 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").
3
<PAGE>
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfo-
CAPITAL BOND lios. We intend this document to be an effective tool as you
PORTFOLIOS explore different directions in fixed income investing. You
may wish to use the table of contents on page 5 to find de-
scriptions of the Portfolios, including their investment ob-
jectives, portfolio management styles, risks and charges and
expenses.
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND purchase mortgage- related, asset-backed, foreign and illiquid
INVESTING 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 of the Pennsylvania and New Jersey Tax-Free
Income Portfolios (the "State-Specific Tax-Free Portfolios")
concentrates in the securities of issuers located in a partic-
ular state, and is non-diversified, which means that its per-
formance may be dependent upon the performance of a smaller
number of securities than the other Portfolios, which are con-
sidered diversified. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased?" and "How Are
CAPITAL FUNDS Shares Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?...............
What Are The Portfolios?..................................... 11
What Are The Differences Among The Portfolios?............... 12
What Types Of Securities Are In The Portfolios?.............. 13
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 14
What Additional Investment Policies And Risks Apply?......... 15
Who Manages The Fund?........................................ 28
What Pricing Options Are Available To Investors?............. 34
How Are Shares Purchased?.................................... 35
How Are Shares Redeemed?..................................... 37
What Are The Shareholder Features Of The Fund?............... 39
What Sales Charge And Exemptions Apply To Investor C
Shares?..................................................... 41
How Is Net Asset Value Calculated?........................... 42
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 43
How Are Fund Distributions Taxed?............................ 44
How Is The Fund Organized?................................... 47
How Is Performance Calculated?............................... 48
How Can I Get More Information?.............................. 50
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor C
Shares of the International Bond Portfolio for the fiscal year ended September
30, 1996, as restated to reflect current expenses and fee waivers. Because no
Investor C Shares of the other Portfolios were outstanding during the fiscal
year ended September 30, 1996, the table below summarizes the annual operating
expenses expected to be incurred by Investor C Shares of those Portfolios for
the current fiscal year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION BOND GOVERNMENT BOND
PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None None
Deferred Sales Charge/(1)/
(as a percentage of offering price) 1.0% 1.0%
Sales Charge on Reinvested Dividends None None
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)/(2)/ .30% .30%
12b-1 fees/(3)/ .75 .75
Other operating expenses (after fee
waivers)/(2)/ .72 .72
----- --------
Shareholder servicing fee .25 .25
Shareholder processing fee .15 .15
Other expenses .32 .32
--- ------
Total Portfolio operating expenses (after fee
waivers)/(2)/ 1.77% 1.77%
===== ========
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the
Portfolios. Without waivers, advisory fees would be .50% and administration
fees would be .23% for each Portfolio. 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 remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be .80% and
.80%, respectively, and "Total Portfolio operating expenses" would be 2.05%
and 2.05%, respectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares 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").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CORE BOND GOVERNMENT INCOME
PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None None
Deferred Sales Charge/(1)/
(as a percentage of offering price) 1.0% 1.0%
Sales Charge on Reinvested Dividends None None
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)/(2)/ .30% .30%
12b-1 fees/(3)/ .75 .75
Other operating expenses (after fee
waivers)/(2)/ .72 .72
----- ---------
Shareholder servicing fee .25 .25
Shareholder processing fee .15 .15
Other expenses .32 .32
--- -------
Total Portfolio operating expenses (after
fee waivers)/(2)/ 1.77% 1.77%
===== =========
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfolio.
Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .80% and .80%, respective-
ly, and "Total Portfolio operating expenses" would be 2.05% and 2.05%, re-
spectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL BOND TAX-FREE INCOME
PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge (as a
percentage of offering price) None None
Deferred Sales Charge(/1/)
(as a percentage of offering price) 1.0% 1.0%
Sales Charge on Reinvested Dividends None None
ANNUAL PORTOLIO OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/2/) .55% .30%
12b-1 fees(/3/) .75 .75
Other operating expenses (after fee
waivers and expense
reimbursements)(/2/) .90 .72
---------- -----
Shareholder servicing fee .25 .25
Shareholder processing fee .15 .15
Other expenses .50 .32
-------- ---
Total Portfolio operating expenses
(after fee waivers and expense
reimbursements)(/2/) 2.20% 1.77%
========== =====
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and .50%, respectively,
and administration fees would be .23% for each Portfolio. In addition, the
Expense Summary reflects reimbursements made to the Tax-Free Income Portfo-
lio 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 remainder
of the current fiscal year as necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the table. Without waivers,
"Other operating expenses" would be .98% and .82%, respectively, and "Total
Portfolio operating expenses" would be 2.28% and 2.07%, respectively, for
Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA NEW JERSEY
TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None None
Deferred Sales Charge/(1)/
(as a percentage of offering price) 1.0% 1.0%
Sales Charge on Reinvested Dividends None None
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)/(2)/ .30% .30%
12b-1 fees/(3)/ .75 .75
Other operating expenses (after fee
waivers)/(2)/ .72 .72
----- -----
Shareholder servicing fee .25 .25
Shareholder processing fee .15 .15
Other expenses .32 .32
--- ---
Total Portfolio operating expenses (after fee
waivers)/(2)/ 1.77% 1.77%
===== =====
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each Portfolio. PAMG and the Portfolios" administrators
are under no obligation to waive fees or reimburse expenses, but have in-
formed the Fund that they expect to waive fees and reimburse expenses dur-
ing the remainder of the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .82% and .85%, respec-
tively, and "Total Portfolio operating expenses" would be 2.07% and 2.10%,
respectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
9
<PAGE>
EXAMPLE
An investor in Investor C 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>
Low Duration Bond Portfolio $18 $56 $96 $208
Intermidiate Government Bond
Portfolio 18 56 96 208
Core Bond Portfolio 18 56 96 208
Government Income Portfolio 18 56 96 208
International Bond Portfolio 22 69 118 253
Tax-Free Income Portfolio 18 56 96 208
Pennsylvania Tax-Free Income
Portfolio 18 56 96 208
New Jersey Tax-Free Income Portfolio 18 56 96 208
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 28 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eight
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Five of these Portfolios invest solely in taxable bonds and
three 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>
Low Duration Bond 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
Bond, Government Income the preservation of capital.
and International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income and New Jersey and, to the extent possible for each
Tax-Free Income State-Specific Tax-Free Portfolio,
income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
11
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MINIMUM
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Bond Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Treasury Index
Intermediate Gov't Bond Lehman Brothers 5-10 Years Gov't/Agency AAA
Intermediate Gov't
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Gov't Income Lehman Mortgage/10 10-15 Years Gov't/Agency AAA
Year Treasury
International Bond Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Hedged World Gov't/Agency
Government Bond Index
Tax-Free Income Lehman Municipal Bond 10-15 Years Investment Grade BBB
Index Spectrum
PA Tax-Free Income Lehman Local GO Index 10-15 Years Investment Grade BBB
Spectrum
NJ Tax-Free Income 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.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
12
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities at
all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under normal
market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Bond Yes Yes Yes Elig. Elig. Elig. No Elig.
Intermediate Gov't Bond Yes Yes Yes Elig. Yes Elig. No Elig.
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
International Bond Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Tax-Free Income Temp. No No No No No No Yes
PA Tax-Free Income Temp. No No No No No No Yes
NJ Tax-Free Income Temp. No No No No No No Yes
</TABLE>
/1/ MBS = mortgage-backed securities
/2/ ABS = asset-backed securities
13
<PAGE>
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
given at least 30 days notice before any such change. No assurance can be pro-
vided 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). Sev-
eral 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 repur-
chase 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; and
(3) in the case of each Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), 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 in-
vested 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).
The investment limitations stated above are applied at the time investment se-
curities 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 de-
scribed 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.
14
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio, In-
termediate Government Bond Portfolio and Government Income Portfolio will be
rated in the highest rating category at the time of purchase or, if unrated, of
comparable quality as determined by the Portfolios' sub-adviser. Securities ac-
quired by the other Portfolios will be rated investment grade at the time of
purchase (within the four highest voting categories by Standard & Poor's Rat-
ings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Co. or Fitch Investor Services, Inc.) 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 specu-
lative characteristics. If a security's rating is reduced below the minimum
rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con-
sider 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 Intermediate Government
Bond Portfolio and Government Income Portfolio (the "Government Portfolios")
will invest at least 65% of their total assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its total
assets in the debt obligations of foreign issuers located in at least three
different foreign countries. The Pennsylvania Tax-Free Income Portfolio and New
Jersey Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and
the Tax-Free Income Portfolio (together with the "State-Specific Tax-Free Port-
folios," the "Tax-Free Portfolios") will invest, during normal market condi-
tions, 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 au-
thorities and related tax-exempt derivative securities the interest on which is
exempt from regular Federal income tax and is not an item of tax preference for
purposes of the Federal alternative minimum tax ("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 no
more 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. 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 secu-
rities generally are denominated and pay dividends or interest in foreign cur-
rencies, the value of a Portfolio that invests in foreign securities will be
affected favorably or unfavorably by changes in currency exchange rates.
15
<PAGE>
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, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, 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 Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments 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 com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility 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.
16
<PAGE>
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities 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 fi-
nanced. 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 in-
clude "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 partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal 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 obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position 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 (when added
together with any other taxable investments held by the Portfolio) in private
activity bonds the interest on which is an item of tax preference for purposes
of the Federal alternative minimum tax ("AMT Paper"). In addition, each Tax-
Free Portfolio may invest 25% or more of its 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 particular 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 portfo-
lios, 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-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfo-
17
<PAGE>
lio's option, specified Municipal Obligations at a specified price. The acqui-
sition of a stand-by commitment may increase the cost, and thereby reduce the
yield, of the Municipal Obligations to which the commitment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. In addition, Municipal Obligations pur-
chased by the Portfolios included obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. 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 Portfo-
lio 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 issu-
ance. The Fund and its service providers 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.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in mortgage-related and other
asset-backed securities (i.e., securities backed by home equity loans, install-
ment sale contracts, credit card receivables or other assets) issued by govern-
mental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding 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. 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 hav-
ing an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known
18
<PAGE>
as "Z-Bonds"), which only accrue interest at a specified rate until other spec-
ified classes have been retired and are converted thereafter to interest-paying
securities. They may also include planned amortization classes ("PAC's") 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.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws, 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 and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
mortgage-related and other asset-backed securities will be based on estimates
of average life which take prepayments into account. The average life of a
mortgage-related 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. In gener-
al, the collateral supporting non-mortgage asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience substan-
tial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment or prepayment proceeds by a 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 and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
Prepayments on mortgage-related and asset-backed securities generally increase
with falling interest rates and decrease with rising interest rates; further-
more, prepayment rates are influenced by a variety of economic and social fac-
tors. In general, the collateral supporting non-mortgage asset-backed securi-
ties is of shorter maturity than mortgage loans and is less likely to
19
<PAGE>
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.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities contain-
ing loans or mortgages originated by PNC Bank or its affiliates. It is possible
that under some circumstances, PNC Mortgage Securities Corp. or its affiliates
could have interests that are in conflict with the holders of these mortgage-
backed securities, and such holders could have rights against PNC Mortgage Se-
curities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment 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 obliga-
tions. 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, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities 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 mort-
gage-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. How-
ever, 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 SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives 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.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or
20
<PAGE>
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 for-
eign issuer. Bank obligations may include certificates of deposit, notes, bank-
ers' acceptances and fixed time deposits. These obligations may be general ob-
ligations of the parent bank or may be limited to the issuing branch or subsid-
iary by the terms of a 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 their respective total assets.
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 GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA 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 FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government will 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 Portfo-
lios 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 securi-
ties 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 inter-
est 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 ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion 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 ex-
change-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
21
<PAGE>
protect against currency fluctuations, the International Bond Portfolio may en-
ter into currency swaps. Currency swaps involve the exchange of the rights of
the Portfolio and another party to make or receive payments in specified cur-
rencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, securities indices or the yield differential between two
securities or, in the case of the International Bond Portfolio, foreign curren-
cies, 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 when 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 de-
fault.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its 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 entered into for other than bona fide hedging
purposes 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 quan-
tity 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
22
<PAGE>
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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing 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 de-
posit 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 securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable 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 recover-
ing 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 Portfolios 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 inter-
est 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 ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility 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 a 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.
23
<PAGE>
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 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.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline 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
(except the Tax-Free Portfolios) may use 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 trans-
action. 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 Portfolio is obli-
gated to repurchase and that the securities may not be returned to the Portfo-
lio. 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 debt securities having a value at
least equal to the repurchase price. A Portfolio's reverse repurchase agree-
ments, 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 share-
holder 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 each 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 re-
purchase 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 un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified 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
a Portfolio's sub-adviser that an adequate trading market exists
24
<PAGE>
for that security. This investment practice could have the effect of increasing
the level of illiquidity in a Portfolio during any period that qualified insti-
tutional buyers become uninterested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing 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 that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
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 trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, 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 per-
formance would have been without the use of dollar rolls. At the time a Portfo-
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. 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 em-
ployed.
25
<PAGE>
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 de-
cline. The Portfolios may 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 ac-
quire 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 rates for the Tax-Free Portfolios will not exceed
100%. The annual portfolio turnover rates for the other Portfolios may be high,
and may exceed 500%. A Portfolio's annual portfolio turnover rate will not 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
and greater realized capital gains which are taxable as ordinary income to
shareholders.
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. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/ undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing 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 mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with in-
26
<PAGE>
come and job growth at levels below national averages. Employment growth has
shifted to the trade and service sectors, with losses in more high-paid manu-
facturing positions. A new governor took office in January, 1995, but the Com-
monwealth is likely to continue to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though 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 instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, and the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
27
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the di-
rection of its Board of Trustees. The following persons cur-
rently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Manage-
SUB-ADVISERS ment Group ("PAMG"). Each of the Portfolios within the Compass
Capital Fund family, except the International Bond Portfolio,
is managed by a specialized portfolio manager who is a member
of PAMG's fixed income portfolio management subsidiary, Black-
Rock Financial Management, Inc. ("BlackRock"). The sub-adviser
of the International Bond Portfolio is Morgan Grenfell Invest-
ment Services Limited ("Morgan Grenfell").
The eight portfolios and their investment sub-advisers and
portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Low Duration Bond BlackRock/(1)/ Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock/(1)/ Robert S. Kapito, Michael P. Lustig
Bond 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 its
inception.
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.
International Bond Morgan Grenfell/(2)/ Martin A. Hall; Director of Morgan
Grenfell since 1991; Portfolio
manager since 1991.
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);
Income Portfolio manager since 1995.
New Jersey Tax-Free BlackRock/(1)/ Kevin Klingert (see above);
Income Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
PAMG was organized in 1994 to perform advisory services for in-
vestment 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 maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
29
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- -----------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
paid investment advisory fees at the following annual rates
(expressed as a percentage of average daily net assets) after
voluntary fee waivers: Intermediate Government Bond Portfolio,
.30%; Government Income Portfolio, .30%; Tax-Free Income Port-
folio, 0%; and Pennsylvania Tax-Free Income Portfolio, .30%.
For the period from April 1, 1996 through September 30, 1996,
the Low Duration Bond and Core Bond Portfolios paid investment
advisory fees, after voluntary fee waivers, at the annual
rates of % and % of their respective average daily net as-
sets. For the period from February 1, 1996 and February 13,
1996, respectively, through September 30, 1996, the New Jersey
Tax-Free Income and International Bond Portfolios paid invest-
ment advisory fees, after voluntary fee waivers, at the annual
rates of % and % of their respective average daily net as-
sets.
The sub-advisers to each Portfolio strive to achieve best exe-
cution on all transactions. Infrequently, brokerage transac-
tions for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements of
best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). 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 these services, CCG is entitled to receive
a fee, computed daily and payable
30
<PAGE>
monthly, at an annual rate of .03% of each Portfolio's average
daily net assets, and PFPC and CDI 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 aver-
age daily net assets, .18% of the next $500 million of each
Portfolio's average daily net assets, .16% of the next $1 bil-
lion of each Portfolio's average daily net assets and .15% of
each Portfolio's average daily net assets in excess of $2 bil-
lion. 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 paid
for the most recent fiscal year, see "What Are the Expenses of
the Portfolios?"
TRANSFER PNC Bank, National Association ("PNC Bank") serves as the Port-
AGENT, folios' custodian and PFPC serves as their transfer agent and
DIVIDEND dividend disbursing agent.
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION Under the Fund's Distribution and Service Plan (the "Plan"), In-
AND SERVICE vestor C Shares of the Portfolios bear the expense of payments
PLAN ("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank for distribution
and sales support services. The distribution fees may be used to
compensate the Distributor for distribution services and to com-
pensate the Distributor and PNC Bank affiliates for sales sup-
port services provided in connection with the offering and sale
of Investor C 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 in-
stitutions and industry professionals ("Service Organizations")
for sales support services and related expenses. Distribution
fees payable under the Plan will not exceed .75% (annualized) of
the average daily net asset value of each Portfolio's outstand-
ing Investor C Shares. Payments under the Plan are not tied di-
rectly to out-of-pocket expenses and therefore may be used by
the recipients as they choose (for example, to defray their
overhead expenses). The Plan also permits the Distributor, PAMG,
the Administrators and other companies that receive fees from
the Fund to make payments relating to distribution and sales
support activities out of their past profits or other sources
available to them.
Under the Plan, the Fund intends to enter into service arrange-
ments with Service Organizations (including PNC Bank and its af-
filiates) with respect to Investor C Shares pursuant to which
Service Organizations
31
<PAGE>
will render certain support services to their customers who
are the beneficial owners of Investor C Shares. In considera-
tion for a shareholder servicing fee of up to .25%
(annualized) of the average daily net asset value of Investor
C Shares owned by their customers, Service Organizations may
provide one or more of the following services: responding to
customer inquiries relating to the services performed by the
Service Organization and to customer inquiries concerning
their investments in Investor C Shares; assisting customers in
designating and changing dividend options, account designa-
tions and addresses; and providing other similar 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 C Shares owned by their customers,
Service Organizations may provide one or more of these addi-
tional services to such customers: processing purchase and re-
demption 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 Investor C Shares beneficially
owned by customers or the information necessary for
sub-accounting; and providing other similar services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of
Investor C Shares should read this Prospectus in light of the
terms and fees governing their accounts with Service Organiza-
tions.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided
by Service Organizations under their service agreements will
not be prohibited under these laws. Under state securities,
banks and financial institutions that receive payments from
the Fund may be required to register as dealers.
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 Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and
processing fees, distribution fees, fees and expenses in reg-
istering and qualifying the Portfolios and their shares for
distribution under Federal and state securities laws, expenses
of preparing prospectuses and statements of additional infor-
mation 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
32
<PAGE>
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 de-
termines to be fair and equitable.
33
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Bond Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes. The Investor C Share pricing option is described be-
low:
C SHARES (LEVEL LOAD)
[[_]] Contingent deferred sales charge (CDSC) of 1.00% if shares
are redeemed within 12 months of purchase
<TABLE>
<S> <C>
Investor C Shares of all Portfolios:
Maximum Front-End Sales Charge 0.00%
12b-1 Fee 0.75%
CDSC (Redemption Charge) 1.00%
(If redeemed within 12
months of purchase)
</TABLE>
The Fund also offers two additional pricing options for shares
of the Portfolios--Investor A Shares (which are sold with a
front-end load) and Investor B Shares (which are subject to a
back-end load if redeemed within six years of purchase). C
Shares may make sense for shorter term (relative to both B
Shares and A Shares) investors who prefer to pay for profes-
sional investment advice on an ongoing 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 years of purchase. Brokers will receive
commissions equal to 1% of Investor C Shares sold by them plus
ongoing fees under the Fund's Distribution and Service Plan as
described above under "Who Manages the Fund?" These commis-
sions and payments may be different than the reallowances or
placement fees paid to dealers in connection with sales of In-
vestor A Shares and Investor B Shares. For more information on
A Shares and B Shares of the Portfolios, call (800) 441-7762.
Investors wishing to purchase shares of the Portfolios may do
so either by mailing the investment application attached to
this Prospectus along with a check or by wiring money as spec-
ified below under "How Are Shares Purchased?"
34
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor C 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 In-
vestment 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 em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through
brokers which have entered into dealer agreements with the Distributor. Pur-
chase 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. Payment for an order may be made by the broker in Federal
funds or other funds immediately available to the Portfolios' 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 C
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 pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to 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, specify
the class of Investor Shares, and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East-
ern time) on any Business Day (as defined below) are priced at the applicable
net asset value next determined on that day.
35
<PAGE>
OTHER PURCHASE INFORMATION. Shares of each Portfolio are sold on a continuous
basis by CDI as the Distributor. CDI 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 in-
quiry. The issuance of shares is recorded on the books of the Fund. No certifi-
cates will be issued for 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. Compass Capital reserves
the right to reject any purchase order or to waive the minimum initial invest-
ment requirement.
36
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. Shareholders may also place redemption requests through a broker or
other institution, which may charge a fee for this service.
WHEN REDEEMING SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE THAT THEY
ARE REDEEMING 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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Additional documentary evidence of authority is re-
quired by PFPC in the event redemption is requested by a corporation, partner-
ship, 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 desig-
nated 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 de-
scribed above. During periods of substantial economic or market change, tele-
phone redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 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 share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written re-
37
<PAGE>
quest (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 em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the required minimum initial investment as the re-
sult 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 their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of 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 ac-
ceptance by PFPC of the request and any other necessary documents in proper or-
der. 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 re-
cently 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
38
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
COMPASS CAPITAL FUNDS offers 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 from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor C Shares of each Portfolio may be exchanged for
Investor C Shares of other portfolios of the Fund which offer that class of
shares, based on their respective net asset values.
The exchange of 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 re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. 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 col-
lect (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 speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic 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 ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. 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 mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
39
<PAGE>
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. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
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 which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs. 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 Fund offers 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 cur-
rent 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 withdraw-
als 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 which may be obtained from PFPC.
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. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC. No con-
tingent deferred sales charge will be assessed on redemptions of Investor C
Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor C Shares will not be subject to the CDSC if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. SWP redemptions of Investor C Shares in excess of this limit
are still subject to the applicable CDSC.
40
<PAGE>
What Sales Charge And Exemptions Apply To Investor C Shares?
- --------------------------------------------------------------------------------
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor C Shares is not charged in connection with: (1) ex-
changes described in "What Are The Shareholder Features Of The Fund?--Exchange
Privilege"; (2) redemptions made in connection with minimum required distribu-
tions from IRA, 403(b)(7) and qualified employee benefit 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 C Shares; (4) involuntary redemptions of
Investor C Shares in accounts with low balances as described in "How Are Shares
Redeemed?"; and (5) redemptions made pursuant to the Systematic Withdrawal
Plan, subject to the limitations set forth above under "What Are The Share-
holder Features Of The Fund?--Systematic Withdrawal Plan." In addition, no con-
tingent deferred sales charge is charged on Investor C Shares acquired through
the reinvestment of dividends or distributions.
When an investor redeems Investor C Shares, the redemption order is processed
to minimize the amount of the contingent deferred sales charge that will be
charged. 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 re-
investment of dividends or distributions) and after that from the shares that
have been held the longest.
41
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Investor C Shares of each Portfo-
lio 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 Investor C Shares,
less the liabilities charged to its Investor C Shares, by the number of its In-
vestor C Shares 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 normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 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 a Portfolio's sub-adviser under
the supervision of the Board of Trustees determines such method does not repre-
sent fair value.
42
<PAGE>
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 Investor C 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. Each Portfolio declares a dividend each day on "settled"
shares (i.e., shares for which the particular Portfolio has received payment in
Federal funds) on the first Business Day after a purchase order is placed with
the Fund. Payments by check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year, substantially all of the
Portfolios' net investment income will be declared as dividends. The amount of
the daily dividend for each Portfolio will be based on periodic projections of
its net investment income. All dividends are paid within ten days after the end
of each month. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by each Portfolio at least annually.
43
<PAGE>
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 dis-
tributed 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 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 re-
ceipt 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 ad-
justments 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 de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, 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.
Compass Capital 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.
44
<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer. 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.
It is expected that dividends and certain interest income earned by the Inter-
national 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 taxable year consists of stock or se-
curities of foreign corporations, the Portfolio may elect, for U.S. Federal in-
come tax purposes, to treat certain foreign taxes paid by it, including gener-
ally 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 pro-
portionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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 addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania 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 (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 ex-
empt for Federal Income Tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come 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
45
<PAGE>
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 re-
spect 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 inter-
est 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 above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax 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).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends 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. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions 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 Corpora-
tion Business Tax.
46
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, other than the Government Income Portfolio, offers five separate
classes of shares--Institutional Shares, Service Shares, Investor A Shares, In-
vestor B Shares and Investor C Shares. The Government Income Portfolio offers
Investor A Shares, Investor B Shares and Investor C Shares. This prospectus re-
lates only to Investor C Shares of the eight Portfolios described herein. Prior
to the date of this prospectus, no Investor C Shares had been sold to the pub-
lic.
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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. In addition, the performance of each class of In-
vestor Shares may be different. The Fund offers various services and privileges
in connection with its Investor Shares that are not generally offered in con-
nection with its Institutional and Service Shares, including an automatic in-
vestment plan and an automatic withdrawal plan. For further information regard-
ing the Fund's Institutional and Service Share classes and the other Investor
Share classes, contact PFPC at (800) 441-7764.
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 that 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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, 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.
47
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Investor C Shares of the Portfolios may be quoted
in advertisements and communications to shareholders. Total return will be cal-
culated 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 Investor C Shares of a Portfolio over the measuring period.
Total return may also be calculated on an aggregate total return basis. Aggre-
gate total return reflects the total percentage change in value over the mea-
suring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to Investor C
Shares are reinvested in Investor C Shares, and also reflect the deferred sales
load charged by the Portfolio with respect to Investor C Shares. When, however,
a Portfolio compares the total return of Investor C Shares to that of other
funds or relevant indices, total return may also be computed without reflecting
the sales load.
The yield of Investor C Shares is computed by dividing the Portfolio's net in-
come per share allocated to Investor C Shares during a 30-day (or one month)
period by the net asset value 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 Portfolio's Investor C Shares may be compared to the per-
formance of other mutual funds with similar investment objectives and to rele-
vant indices, as well as to ratings or rankings prepared by independent serv-
ices or other financial or industry publications that monitor the performance
of mutual funds. For example, the performance of a Portfolio's Investor C
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 T-Bill Index, and the
"stocks, bonds and inflation index" published annually by Ibbotson Associates
and the Lehman Government Corporate Bond Index, as well as the benchmarks at-
tached to this Prospectus. Performance information may also include evaluations
of the Portfolios and their Investor C Shares published by nationally recog-
nized ranking services, and information as reported in financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal 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 Investor C 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 dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an in-
48
<PAGE>
vestment in a Portfolio will fluctuate so that an investor's Investor C Shares,
when redeemed, may be worth more or less than their original cost. Since per-
formance will fluctuate, performance data for Investor C 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 pro-
vide an agreed or guaranteed fixed yield for a stated period of time. Perfor-
mance 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 Investor C Shares will not be in-
cluded in the Portfolio performance calculations.
49
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current
dividend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
50
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
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 Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency 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:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
Government Income Lehman Mortgage/10 Year 50% allocation to the mortgage component of
Treasury the Lehman Aggregate Index and a 50%
allocation to the Merrill Lynch 10 Year
Index
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. 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 Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
</TABLE>
51
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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.
----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
CORE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
THE BOND
PORTFOLIOS
INVESTOR C SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF THE VALUE EQUITY PORTFOLIO,
GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY PORTFOLIO,
MID-CAP GROWTH EQUITY PORTFOLIO, CORE EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL EMERGING
MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Equity Portfolios Institutional Shares January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Institutional Shares of eleven of those portfolios
(the "Portfolios"):
[-] Value Equity Portfolio
[_] Growth Equity Portfolio
[_] Small Cap Value Equity Portfolio
[_] Small Cap Growth Equity Portfolio
[[_]] Mid-Cap Value Equity Portfolio
[[_]] Mid-Cap Growth Equity Portfolio
[_] International Equity Portfolio
[_] International Emerging Markets Portfolio
[_] Select Equity Portfolio
[_] Index Equity Portfolio
[[_]] Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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 ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios 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 begins on page 18 and a summary of
each Performance Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Value Equity Russell 1000 Value Growth and Income
Index
Growth Equity Russell 1000 Growth Growth
Index
Small Cap Value Equity Russell 2000 Index Small Company Growth
Small Cap Growth Equity Russell 2000 Growth Small Company Growth
Index
Mid-Cap Equity Russell Midcap Value Midcap
Index
Mid-Cap Growth Equity Russell Midcap Growth Midcap
Index
International Equity EAFE Index International
International Emerging MSCI Emerging Markets
Markets Emerging Markets Free
Index
Select Equity S&P 500 Index Growth and Income
Index Equity S&P 500 Index S&P 500 Index
Balanced S&P 500 Index and Balanced
Salomon Broad
Investment Grade
Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visers 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 Portfo-
lio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
EQUITY different directions in equity investing. You may wish to use
PORTFOLIOS the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, 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 as-
sociated risks, deserve careful consideration. Certain risks
associated with international investments are heightened be-
cause of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies And Risks
Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?"
CAPITAL FUNDS
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 18
What Are The Differences Among The Portfolios?............... 19
What Additional Investment Policies And Risks Apply?......... 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 32
Who Manages The Fund?........................................ 33
How Are Shares Purchased And Redeemed?....................... 39
How Is Net Asset Value Calculated?........................... 41
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 42
How Are Fund Distributions Taxed?............................ 43
How Is The Fund Organized?................................... 45
How Is Performance Calculated?............................... 48
How Can I Get More Information?.............................. 50
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a per-
centage of average daily net assets. Because the Mid-Cap Value Equity Portfolio
and Mid-Cap Growth Equity Portfolio are new, the figures shown for these two
Portfolios are estimates for the current fiscal year. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
SMALL SMALL INTER-
CAP CAP MID-CAP MID-CAP INTER- NATIONAL
VALUE GROWTH VALUE GROWTH VALUE GROWTH NATIONAL EMERGING SELECT
EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY MARKETS EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)/(1)//(2)/ .50% .50% .53% .53% .50% .50% .70% 1.15% .50%
Operating
Expenses of the
Index Master
Portfolio N/A N/A N/A N/A N/A N/A N/A N/A N/A
Other operating
expenses .25 .25 .33 .33 .36 .36 .36 .63 .25
---- ---- ---- ---- ---- ---- ----- ----- ----
Administration
fees (after fee
waivers)/(1)/ .17 .15 .22 .22 .10 .10 .16 .18 .15
Other expenses .08 .10 .11 .11 .26 .20 .26 .45 .10
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)/(1)/ .75% .75% .86% .86% .86% .86% 1.06% 1.78% .75%
==== ==== ==== ==== ==== ==== ===== ===== ====
<CAPTION>
INDEX
EQUITY BALANCED
PORTFOLIO+ PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)/(1)//(2)/ .025% .50%
Operating
Expenses of the
Index Master
Portfolio .038 N/A
Other operating
expenses .117 .30
----- ------ ---- -----
Administration
fees (after fee
waivers)/(1)/ .045 .17
Other expenses .072 .13
Total Portfolio
operating
expenses (after
fee
waivers)/(1)/ .18% .80%
===== ====== ==== =====
</TABLE>
(1) Without waivers, advisory fees would be .75%, 1.25%, and .025%, respective-
ly, for the International Equity, International Emerging Markets and Index
Equity Portfolios and .55% for each of the other Portfolios and administra-
tion fees would be .23% for each Portfolio. PAMG and the Portfolios' admin-
istrators 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 remainder of
the current fiscal year at the levels set forth in the table. Without waiv-
ers, "Other operating expenses" would be .31%, .33%, .34%, .34%, .49%,
.49%, .43%, .68%, .33%, .30% and .36%, respectively, and "Total Portfolio
operating expenses" would be .86%, .85%, .89%, .89%, 1.04%, 1.04%, 1.18%,
1.93%, .88%, .37% and .91%, respectively.
(2) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
6
<PAGE>
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 Value Equity 9 27 48 106
Small Cap Growth Equity 9 27 48 106
Mid-Cap Value Equity 9 27 48 106
Mid-Cap Growth Equity 9 27 48 106
International Equity 11 34 58 129
International Emerging Markets 18 56 96 209
Select Equity 8 24 42 93
Index Equity 2 6 10 23
Balanced 8 26 44 99
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses (including the Index Equity Portfolio's 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 affiliates of the Portfolios' investment adviser
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 ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountant. This financial information
should be read together with those financial statements. Fur-
ther 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 shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7764. Information concerning the historical in-
vestment results of Institutional Shares of the Index Equity
Portfolio reflects the financial experience of that Portfolio
prior to its conversion on June 2, 1996 to a feeder portfolio
of the Index Master Portfolio. During the periods presented
the Mid-Cap Value Equity Portfolio and Mid-Cap Growth Equity
Portfolio did not conduct investment operations.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ $ 11.62 $ 11.68 $ 9.78 $ 10.00
------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.34 0.27 0.22 0.12
Net gain (loss) on
investments (both realized
and unrealized) 2.54 0.16 1.91 (0.24)
------- -------- -------- -------- --------
Total from investment
operations 2.88 0.43 2.13 (.12)
------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.33) (0.27) (0.23) (0.10)
Distributions from net
realized capital gains (0.25) (0.22) - - - -
------- -------- -------- -------- --------
Total distributions (0.58) (0.49) (0.23) (0.10)
------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ $ 13.92 $ 11.62 $ 11.68 $ 9.78
======= ======== ======== ======== ========
Total return % 25.73% 3.76% 21.92% 1.19%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $ $508,273 $577,996 $432,776 $322,806
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers % 0.67% 0.65% 0.80% 0.85%/2/
Before
advisory/administration fee
waivers % 0.81% 0.81% 0.83% 0.85%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers % 2.68% 2.44% 2.07% 2.62%/2/
Before
advisory/administration fee
waivers % 2.53% 2.28% 2.04% 2.62%/2/
PORTFOLIO TURNOVER RATE % 12% 11% 11% 13%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98 $ 10.00
--- -------- ------- -------- ------- ------- -------
Income from investment
operations
Net investment income 0.13 0.06 0.06 0.21 0.24 0.31
Net gain (loss) on
investments (both
realized and
unrealized) 2.88 (1.34) 2.07 0.30 1.51 (0.26)
--- -------- ------- -------- ------- ------- -------
Total from investment
operations 3.01 (1.28) 2.13 0.51 1.75 0.05
--- -------- ------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.17) (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 (0.17) (0.11) (0.47) (0.87) (1.45) (0.07)
--- -------- ------- -------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ $ 13.03 $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98
=== ======== ======= ======== ======= ======= =======
Total return % 29.88% (11.14)% 22.18% 4.98% 19.47% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $211,543 $97,834 $100,049 $58,372 $54,912 $39,790
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.67% 0.65% 0.81% 0.85% 0.85% 0.85%/2/
Before
advisory/administration
fee waivers % 0.85% 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 % 1.20% 0.62% 0.50% 2.07% 2.59% 2.75%/2/
Before
advisory/administration
fee waivers % 1.01% 0.38% 0.44% 2.06% 2.53% 2.72%/2/
PORTFOLIO TURNOVER RATE % 55% 212% 175% 162% 211% 149%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/13/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 13.62 $ 13.08 $ 10.14 $ 10.00
--- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.06 0.04 0.04 0.02
Net gain (loss) on
investments (both
realized and
unrealized) 2.17 0.77 3.02 0.13
--- -------- -------- -------- -------
Total from investment
operations 2.23 0.81 3.06 0.15
--- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.08) (0.02) (0.04) (0.01)
Distributions from net
realized capital gains (0.61) (0.25) (0.08) - -
--- -------- -------- -------- -------
Total distributions (0.69) (0.27) (0.12) (0.01)
--- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ $ 15.16 $ 13.62 $ 13.08 $ 10.14
=== ======== ======== ======== =======
Total return % 17.43% 6.28% 30.36% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $168,334 $168,360 $128,805 $75,045
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.75% 0.73% 0.83% 0.85%/2/
Before
advisory/administration
fee waivers % 0.84% 0.85% 0.87% 0.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 0.44% 0.28% 0.31% 0.51%/2/
Before
advisory/administration
fee waivers % 0.35% 0.16% 0.27% 0.47%/2/
PORTFOLIO TURNOVER RATE % 31% 18% 41% 17%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/14/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 10.16 $ 10.47 $ 10.00
--- -------- ------- -------
Income from investment operations
Net investment income 0.02 0.03 - -
Net gain (loss) on investments
(both realized and unrealized) 4.90 (0.33) 0.47
--- -------- ------- -------
Total from investment operations 4.92 (0.30) 0.47
--- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.02) (0.01) - -
Distributions from net realized
capital gains - - - - - -
--- -------- ------- -------
Total distributions (0.02) (0.01) - -
--- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 15.06 $ 10.16 $ 10.47
=== ======== ======= =======
Total return % 48.50% (2.89)% 4.70%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $145,915 $65,612 $11,310
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.75% 0.48% 0.73%/2/
Before advisory/administration fee
waivers % 0.88% 1.04% 1.42%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 0.22% 0.45% (0.11)%/2/
Before advisory/administration fee
waivers % 0.09% (0.10)% (0.80)%/2/
PORTFOLIO TURNOVER RATE % 74% 89% 9%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/27/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 13.44 $ 12.48 $ 9.87 $ 10.00
--- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.17 0.15 0.11 0.11
Net realized gain (loss)
on investments 0.13 1.17 2.61 (0.17)
--- -------- -------- -------- -------
Total from investment
operations 0.30 1.32 2.72 (0.06)
--- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.11) (0.11) (0.11) (0.07)
Distributions from net
realized capital gains (0.36) (0.25) - - - -
--- -------- -------- -------- -------
Total distributions (0.47) (0.36) (0.11) (0.07)
--- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ $ 13.27 $ 13.44 $ 12.48 $ 9.87
=== ======== ======== ======== =======
Total return % 2.46% 10.71% 27.72% (0.61)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $312,588 $284,905 $131,052 $60,357
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.97% 0.95% 1.10% 1.20%/2/
Before
advisory/administration
fee waivers % 1.14% 1.14% 1.16% 1.21%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 1.42% 1.27% 1.17% 2.59%/2/
Before
advisory/administration
fee waivers % 1.24% 1.08% 1.11% 2.58%/2/
PORTFOLIO TURNOVER RATE % 105% 37% 31% 15%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/17/94/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $ 10.56 $10.00
--- ------- ------
Income from investment operations
Net investment income 0.08 0.03
Net gain (loss) on investments (both realized
and unrealized) (2.15) 0.53
--- ------- ------
Total from investment operations 2.07 0.56
--- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.10) - -
Distributions from Capital (0.01) - -
Distributions from net realized capital gains (0.19) - -
--- ------- ------
Total distributions (0.30) - -
--- ------- ------
NET ASSET VALUE AT END OF PERIOD $ $ 8.19 $10.56
=== ======= ======
Total return % (19.72)% 5.60%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ $29,319 $2,511
Ratios of expenses to average net assets
After advisory/administration fee waivers % 1.78% 1.75%/2/
Before advisory/administration fee waivers % 2.02% 2.73%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers % 1.90% 1.19%/2/
Before advisory/administration fee waivers % 1.66% 0.21%/2/
PORTFOLIO TURNOVER RATE % 75% 4%
</TABLE>
/1/Commencement of operations of share classes.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
(FORMERLY, THE CORE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/13/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 9.92 $ 9.97 $ 10.00
---- -------- ------- -------
Income from investment operations
Net investment income 0.22 0.22 0.01
Net gain (loss) on investments (both
realized and unrealized) 2.08 (0.04) (0.04)
---- -------- ------- -------
Total from investment operations 2.30 0.18 (0.03)
---- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.22) (0.23) - -
Distributions from net realized
capital gains (0.12) - - - -
---- -------- ------- -------
Total distributions (0.34) (0.23) - -
---- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 11.88 $ 9.92 $ 9.97
==== ======== ======= =======
Total return % 23.76% 1.79% (.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $238,813 $48,123 $69,268
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.67% 0.65% 0.65%/2/
Before advisory/administration fee
waivers % 0.85% 0.93% 0.87%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 2.35% 2.11% 2.17%/2/
Before advisory/administration fee
waivers % 2.17% 1.82% 1.95%/2/
PORTFOLIO TURNOVER RATE % 51% 88% 2%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ $ 10.93 $ 11.02 $ 10.06 $ 10.00
---- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.38 0.31 0.27 0.13
Net realized gain (loss)
on investments 2.73 0.03 0.97 0.03
---- -------- -------- -------- --------
Total from investment
operations 3.11 0.34 1.24 0.16
---- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.34) (0.32) (0.28) (0.10)
Distributions from net
realized capital gains (0.12) (0.11) - - - -
---- -------- -------- -------- --------
Total distributions (0.46) (0.43) (0.28) (0.10)
---- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ $ 13.58 $ 10.93 $ 11.02 $ 10.06
==== ======== ======== ======== ========
Total return % 29.30% 3.07% 12.40% 1.62%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ $109,433 $147,746 $186,163 $175,888
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers % 0.17% 0.15% 0.40% 0.45%/2/
Before
advisory/administration
fee waivers % 0.50% 0.52% 0.52% 0.64%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers % 2.92% 2.72% 2.46% 2.85%/2/
Before
advisory/administration
fee waivers % 2.59% 2.35% 2.34% 2.66%/2/
PORTFOLIO TURNOVER RATE % 18% 17% 8% 23%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/1/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ $ 11.98 $ 12.42 $ 11.53 $11.01
---- ------- ------- ------- ------
Income from investment
operations
Net investment income 0.46 0.38 0.30 0.17
Net realized gain (loss) on
investments 1.90 (0.39) 1.15 0.51
---- ------- ------- ------- ------
Total from investment
operations 2.36 (0.01) 1.45 0.68
---- ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.47) (0.37) (0.30) (0.16)
Distributions from net
realized capital gains (0.14) (0.06) (0.26) - -
---- ------- ------- ------- ------
Total distributions (0.61) (0.43) (0.56) (0.16)
---- ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ $ 13.73 $ 11.98 $ 12.42 $11.53
==== ======= ======= ======= ======
Total return % 20.32% (0.11)% 12.86% 6.23%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $ $24,525 $17,610 $12,928 $2,501
Ratios of expenses to average
net assets
After advisory/administration
fee waivers % 0.67% 0.65% 0.80% 0.95%/2/
Before
advisory/administration fee
waivers % 0.88% 0.91% 0.98% 1.51%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers % 3.78% 3.16% 2.89% 3.28%/2/
Before
advisory/administration fee
waivers % 3.56% 2.89% 2.71% 2.72%/2/
PORTFOLIO TURNOVER RATE % 154% 54% 32% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment
styles so that investors may participate across multiple dis-
ciplines in order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of
eleven investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity
sector. Eight of these Portfolios invest primarily 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 in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the investor's goals
and sentiments.
INVESTMENT Each of the eleven Compass Capital Equity Portfolios seeks to
OBJECTIVES provide long-term Capital Appreciation.
The Select Equity, Value Equity, Mid-Cap Value Equity and Mid-
Cap Growth Equity Portfolios pursue a secondary objective of
Current Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described below. No assurance
can be made that a Portfolio will achieve its investment ob-
jective.
18
<PAGE>
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 Stocks with price/earnings Russell 1000
(defined as common stocks or and price/book ratios at Value Index
securities convertible into time of purchase below
common stocks) which the average for benchmark and
sub-adviser believes are capitalization in excess of
undervalued. A security's $1 billion.
earnings trend and its
dividend growth rate will
also be factors considered
in security selection.
Growth Equity Pursues stocks with earnings Stocks with growth rate Russell 1000
growth potential. Emphasizes estimates in excess of Growth Index
stocks which the sub-adviser average for benchmark and
considers to have favorable capitalization in excess of
and above-average earnings $1 billion.
growth prospects.
Small Cap Value Equity Pursues small cap stocks Stocks with price/earnings Russell 2000
which the sub-adviser and price/book ratios at Index
believes are undervalued. A time of purchase below
security's earnings trend average for benchmark and
and its dividend growth rate capitalization below $1
will also be factors billion.
considered in security
selection.
Small Cap Growth Equity Pursues small cap stocks Stocks with growth rate Russell 2000
with earnings growth estimates in excess of Growth Index
potential. Emphasizes small average for benchmark and
cap stocks which the sub- capitalization below $1
adviser considers to have billion.
favorable and above-average
earnings growth prospects.
Mid-Cap Pursues mid cap stocks and Stocks with low Russell
Value Equity sectors which the sub- price/earnings, price/book, Midcap
adviser believes are price/cash flow or Value Index
undervalued. [A security's price/sales ratios at the
earnings trend and its time of purchase relative to
dividend growth rate will their respective sectors or
also be factors considered the benchmark and
in security selection.] capitalization between $1
billion and $5 billion.
Mid-Cap Pursues mid cap stocks with Stocks with growth rate Russell
Growth Equity earnings growth potential. estimates in excess of Midcap
Emphasizes stocks which the average for benchmark and Growth Index
sub-adviser considers to capitalization between $1
have favorable and above- billion and $5 billion.
average earnings growth
prospects.
International Equity Pursues non-dollar Portfolio assets are EAFE Index
denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far East security's home market or
Index ("EAFE"). Within this stock exchange.
universe, a value style of
investing is employed to Diversification across
select stocks which the sub- countries, industry groups
adviser believes are and companies with
undervalued. A security's investment at all times in
earnings trend and its price at least three foreign
momentum will also be countries.
factors considered in
security selection. The sub-
adviser will also consider
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>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
International Emerging Pursues non-dollar Portfolio assets are MSCI
Markets denominated stocks of primarily invested in stocks International
issuers in emerging country of emerging market issuers. Emerging
markets (generally any Markets Free
country considered to be Stocks with price/earnings Index
emerging or developing by ratios below average for a
the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the United
Nations). Within this Ordinarily, stocks of
universe, a value style of issuers in at least three
investing is employed to emerging markets will be
select stocks which the sub- held.
adviser believes are
undervalued. The sub-adviser
will also consider
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.
Select Equity Combines value and growth Similar sector weightings as S&P 500 Index
style as sub-adviser benchmark, with over- or
identifies market under-weighting in
opportunity. particular securities within
those sectors.
Index Equity Invests all of its assets Holds substantially all the S&P 500 Index
indirectly through the U.S. stocks of the S&P 500 Index
Large Company Series (the in approximately the same
"Index Master Portfolio") of proportions as they are
The DFA Investment Trust represented in the Index.
Company in the stocks of the
S&P 500 Index using a
passive investment style
that pursues the replication
of the S&P 500 Index return.
Balanced Holds a blend of equity and Maintains a minimum 25% S&P 500 and
fixed income securities to investment in fixed income Salomon Broad
deliver total return through senior securities. Investment
capital appreciation and Grade Index
current income.
Equity Portion: Equity Portion:
Combines value and growth Similar sector weightings as
style as sub-adviser benchmark, with over- or
identifies market under- weighting in
opportunity. particular securities within
those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and Dollar-denominated
security selection across a investment grade bonds,
broad universe of fixed including U.S. Government,
income securities. mortgage-backed, asset-
backed and corporate debt
securities.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
20
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
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 se-
curities 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 convert-
ible 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.
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 De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying 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 con-
cerning 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. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, 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 when the aggregate premiums on outstanding op-
tions 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 mem-
bers if they default.
21
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes 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 con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest up to 5% of
22
<PAGE>
its net assets in certain short-term fixed income obligations in order to main-
tain liquidity or as invest temporarily uncommitted cash balances.
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase 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 securities.
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 transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities 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 se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. 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 securi-
ties 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 ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio (except the Index Master Portfolio) through reverse repur-
chase agreements under which the Portfolio sells portfolio securities to finan-
cial institutions such as banks and broker-dealers and agrees to repurchase
them at a particular date and price. A Portfolio may use the proceeds of re-
verse repurchase agreements to purchase other securities either maturing, or
under an agreement to resell, on a date simultaneous with or prior to the expi-
ration of the reverse repurchase agreement. The Balanced Portfolio 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 Portfolio is obligated to repurchase and that the securi-
ties 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 appropri
23
<PAGE>
ate liquid 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
(33% in the case of the Index Master Portfolio). In addition, the Balanced
Portfolio may borrow up to an additional 5% of its total assets for temporary
purposes. Whenever borrowings exceed 5% of a Portfolio's total assets, the
Portfolios (other than the Index Master Portfolio and the Balanced Portfolio)
will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) 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. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (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 addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained 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 re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly 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 secu-
rities 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 re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties 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. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser 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 pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
24
<PAGE>
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of smaller-capitalized organizations (less than $1 billion at
the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid-
Cap Growth Equity Portfolio will invest, under normal market conditions, at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of medium-capitalized organizations (between $1 billion and
$5 billion at the time of purchase). These organizations will normally have
more limited product lines, markets and financial resources and will be depen-
dent upon a more limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and, therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the 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 Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash.
- ------
* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
25
<PAGE>
S&P has no obligation or liability in connection with the administration, mar-
keting or trading of the Index Equity Portfolio or Index Master Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities 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 as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains 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 addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios 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 the
26
<PAGE>
higher cost of investment research, higher cost of custody of foreign securi-
ties, 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 Repub-
lic, Ecuador, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia,
Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam. Politi-
cal and economic structures in many of these countries may be undergoing sig-
nificant evolution and rapid development, and these countries may lack the so-
cial, political and economic stability characteristic of more developed coun-
tries. 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 nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of invest-
ments in these countries and the availability to a Portfolio of additional in-
vestments 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 to assess the value or prospects of an investment in such is-
suers.
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. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) 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 for-
eign 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 a Portfolio to establish a rate of ex-
change for a future point in time.
27
<PAGE>
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local Municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating organi-
zation. If unrated, the securities 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 invest-
ment 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 practica-
ble. Investments in securities of foreign issuers, which present additional in-
vestment considerations as described above under "International Portfolios,"
will be limited to 5% of the Portfolio's total assets.
The market value of the Balanced Portfolio's investments in fixed income corpo-
rate 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 securi-
ties 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 make significant investments in mortgage-related and
other asset-backed securities (i.e., securities backed by home equity loans,
installment sale contracts, credit card receivables or other assets) issued by
governmental entities and private issues.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, 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 obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers 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 multi-
ple 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 clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest 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 ("PACs") 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.
28
<PAGE>
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws 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 purchase would ac-
quire an interest superior to that of the holders of the related automobile re-
ceivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustees for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivable. 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 and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
other asset-backed securities will be based on estimates of average life which
take prepayments into account. The average life of a mortgage-related instru-
ment, in particular, is likely to be substantially less than the original matu-
rity of the mortgage pools underlying the securities as the result of scheduled
principal payments and mortgage prepayments. In general, the collateral sup-
porting non-mortgage asset-backed securities is of shorter maturity than mort-
gage loans and is less likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally 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 and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank or its affiliates. It
is possible that, under some circumstances, PNC Mortgage Securities Corp. or
its affiliates could have interests that are in conflict with the holders of
these mortgage-backed securities, and such holders could have rights against
PNC Mortgage Securities Corp. or its affiliates.
29
<PAGE>
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 are supported
by the full faith and credit of the U.S. Treasury. Others are supported by the
right of the issuer to borrow from the U.S. Treasury; and still others are sup-
ported only by the credit of the agency or instrumentality issuing the obliga-
tion. No assurance can be given that the U.S. Government will 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 Treasury income growth
receipts ("TIGRs") and certificates of accrual on Treasury certificates
("CATs")). The Balanced Portfolio may purchase these certificates, as well as
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 dis-
count to their "face value" and may (particularly in the case of stripped mort-
gage-backed securities) exhibit greater price volatility than ordinary debt se-
curities because of the manner in which their principal and interest are re-
turned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments) and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's subadviser believes that their return, on a pre-
tax basis, will be comparable to the returns of other permitted investments.
Dividends paid by the Portfolio that are derived from interest on municipal ob-
ligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-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 ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the 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 the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the 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 securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
30
<PAGE>
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for each Portfolio (including both the eq-
uity and fixed income portions of the Balanced Portfolio in the aggregate) and
for the Index Master Portfolio will not exceed 150%. A Portfolio's annual port-
folio turnover rate will not, however, be a factor preventing a sale or pur-
chase when the adviser or sub-adviser believes investment considerations war-
rant 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.
31
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. 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). Sev-
eral 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, in the case of
the Index Master Portfolio, obligations of instrumentalities of the U.S.
Government) 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 In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities 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
(33% of net assets in the case of the Index Master Portfolio) 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 Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions 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 de-
scribed 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.
32
<PAGE>
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 following persons currently
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional in-
formation about the trustees and officers of both the Fund and
The DFA Investment Trust Company.
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISERS Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund family is managed by a specialized portfolio manager who is
a member of one of PAMG's portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ----------- ------------------------------------
<S> <C> <C>
Value Equity PCM/(1)/ 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
manager since 1995.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------- ------------------------------------
<S> <C> <C>
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.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice
President of PCM since July 1996;
prior to joining PCM, Portfolio
Manager and Research Analyst with
Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank, National
Association from 1986 to 1995;
Portfolio manager since its
inception.
Mid-Cap Value Equity PCM(/1/) Benedict E. Capaldi (see above);
Portfolio co-manager since its
inception.
Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; portfolio manager with PEAC
during 1995; Portfolio co-manager
since its inception.
Mid-Cap Growth Equity PEAC(/2/) William J. Wykle (see above);
Portfolio co-manager since its
inception.
[insert McVail Bio]
International Equity Castle International(/4/) Gordon Anderson; Managing Director
and Chief Investment Officer since
1996; prior to joining
CastleInternational, Investment
Director of Dunedin Fund Managers
Ltd.; Portfolio manager since 1996.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------- ------------------------------------
<S> <C> <C>
International Emerging Castle International/(4)/ Euan Rae; Senior Investment Manager
Markets since 1996; prior to joining
CastleInternational, Head of
Emerging Markets at Dunedin Fund
Managers Ltd. and investment manager
with Edinburgh Fund Managers;
Portfolio manager since 1996.
Select Equity PCM/(1)/ Daniel B. Eagan (see above);
Portfolio manager since 1995.
Balanced PCM and Daniel B. Eagan (see above);
BlackRock/(1)//(3)/ 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.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary office at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.
PAMG was organized in 1994 to perform advisory services for in-
vestment 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 maximum annual rates set forth below. As stated under "What
Are the Expenses of the Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG and do not rep-
resent an extra charge to the Portfolios.
35
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO EXCEPT
THE INDEX EQUITY PORTFOLIO AND THE INTERNATIONAL PORTFOLIOS
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .550% .400%
$1 billion -- $2 billion .500 .350
$2 billion -- $3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EQUITY PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</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 be-
lieves it is comparable to the rates paid by many other funds
with similar investment objectives and policies and is appro-
priate for the Portfolio in light of its investment objective
and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Value Equity Portfolio, .50%; Growth Equity Portfolio,
.50%; Small Cap Value Equity Portfolio, .53%; Small Cap Growth
Equity Portfolio, .53%; International Equity Portfolio, .70%;
International Emerging Markets Portfolio, 1.15%; Select Equity
Portfolio, .50%; and Balanced Portfolio, .50%. For the period
36
<PAGE>
from October 1, 1995 through June 1, 1996, the Index Equity
Portfolio paid investment advisory fees to its former investment
adviser at the annual rate of % of its average daily net as-
sets.
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with Com-
pass Capital's distributor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
PORTFOLIO 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 in-
vestors. DFA's assets under management totalled approximately
$ billion at October 31, 1996. David G. Booth and Rex A.
Sinquefield, both of whom are trustees and officers of The DFA
Investment Trust Company and directors,officers and shareholders
of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made by
the Investment Committee of DFA, which meets on a regular basis
and also as needed to consider investment issues. The Investment
Committee is composed of certain officers and directors of DFA
who are elected annually. DFA provides the Index Master Portfo-
lio with a trading department and selects brokers and dealers to
effect securities transactions.
For the investment advisory services provided to the Index Mas-
ter Portfolio 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 Port-
folio's fiscal year ended November 30, 1996, DFA received a
monthly fee for its investment advisory services which, on an
annual basis, equaled .025% of the Index Master Portfolio's net
assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). 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.
37
<PAGE>
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 these services, CCG 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 CDI 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 Portfo-
lio'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 admin-
istration fees from a Portfolio. PFPC serves as the adminis-
trative services, dividend disbursing and transfer agent to
the Index Master Portfolio, for which PFPC is entitled to com-
pensation at the annual rate of .015% of the Index Master
Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
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 the investment adviser
and the Administrators, transfer agency and custodian fees,
trustee fees, taxes, interest, professional fees, shareholder
servicing and processing fees, fees and expenses in register-
ing and qualifying the Portfolios and their shares for distri-
bution under Federal and state securities laws, expenses of
preparing prospectuses and statements of additional informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders, ex-
penses 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 un-
der their agreements with the Fund. Any general expenses of
the Fund that do not belong to a particular investment portfo-
lio 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.
38
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous
basis by CDI as distributor. CDI 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 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Institutional Shares.
PURCHASE OF SHARES. Institutional Shares are offered to institutional invest-
ors, 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 computed
after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East-
ern 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) 441-7450. Orders re-
ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi-
ness 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 permis-
sible investments for the respective Portfolios. For further information, see
the Statement of Additional Information. The minimum initial investment for in-
stitutions is $5,000. There is no minimum subsequent investment requirement.
Compass Capital 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) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. 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 accordance with such procedures.
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 or-
ders received after 4:00 p.m. (Eastern Time) or on a day
39
<PAGE>
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 re-
demption 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, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
40
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio 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 its In-
stitutional Shares, less the liabilities charged to its Institutional Shares,
by the number of its Institutional Shares 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 as-
sets, 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 securities
exchanges are normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 Board of Trustees or, in the case of the
Index Master Portfolio, The DFA Investment Trust Company'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 a Portfolio's
sub-adviser under the supervision of the Board of Trustees determines such
method does not represent fair value.
41
<PAGE>
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 in-
come 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 declara-
tion. 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 frac-
tional Institutional Shares of the relevant Portfolio, 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 re-
spect to distributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses 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 Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
42
<PAGE>
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 dis-
tributed 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 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 qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
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 speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing 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.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities 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 Port-
folio 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 Interna-
tional 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
43
<PAGE>
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 is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
44
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Institutional Shares of the eleven Portfolios 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, 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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. In addition, the performance of each class of In-
vestor Shares may be different. The Fund offers various services and privileges
in connection with its Investor Shares that are not generally offered in con-
nection with its Institutional and Service Shares, including an automatic in-
vestment plan and an automatic withdrawal plan. For further information regard-
ing the Fund's Service or Investor Share classes, contact PFPC at (800) 441-
7764 (Service Shares) or (800) 441-7762 (Investor Shares).
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 that 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 , 1996, PNC Bank held of record approximately % of the Fund's outstand-
ing shares, as trustee on behalf of individual and institutional investors, 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 invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The
45
<PAGE>
Index Equity Portfolio purchases shares of the Index Master Portfolio at net
asset value. The net asset value of the Index Equity Portfolio responds to in-
creases 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 with-
draw its investment in the Index Master Portfolio at any time upon 30 days no-
tice to the Index Master Portfolio if the Board of Trustees of the Fund deter-
mines that it is in the best interests of the Index Equity Portfolio to do so.
Upon withdrawal, the Board of Trustees would consider what action might be tak-
en, 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 manage the In-
dex Equity Portfolio's assets in accordance with the investment policies de-
scribed 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 in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
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 are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns 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 Master Portfolio (and, indirectly, to the Index Equity
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 own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, 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 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 mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Port
46
<PAGE>
folio'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.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity 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.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees 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 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 invest-
ment 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 ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity 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 ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Index Master Portfolio, please
contact DFA at (310) 395-8005.
47
<PAGE>
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. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the measur-
ing 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 its
Institutional Shares are reinvested in Institutional Shares.
The yield of Institutional Shares of the Balanced Portfolio is computed by di-
viding the net income allocated to that class during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing 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 indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a Portfolio's Institu-
tional 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 Dow Jones Industrial Average, 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, as well as the benchmarks attached
to this Prospectus. Performance information may also include evaluations of the
Portfolios and their Institutional Shares published by nationally recognized
ranking services, and information as reported in financial publications such as
Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal 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 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 com-
pounding effects of dividends 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 re-
turn 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 Institutional 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. Perfor-
48
<PAGE>
mance 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 Institutional Shares will not be in-
cluded in the Portfolio performance calculations.
49
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
50
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Value Equity Russell 1000 Value Index An index composed of those Russell 1000
securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Growth Equity Russell 1000 Growth The Russell 1000 Growth Index contains
Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Equity Russell 2000 Index An index of the smallest 2000 companies in
the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Growth Equity Russell 2000 Growth An index composed of those Russell 2000
Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Equity Russell Midcap Value The Russell Midcap Value Index consists of
Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Equity Russell Midcap Growth The Russell Midcap Growth Index consists of
Index the bottom 800 securities of the Russell
1000 Index with greater-than-average growth
orientation as ranked by total market
capitalization.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
International Emerging MSCI Emerging Markets The Morgan Stanley Capital International
Markets Free Index (MSCI) Emerging Markets Free Index (EMF) is
a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, and the
Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad Investment An unmanaged index of 3500 bonds. The Broad
Grade Index Investment Grade Index is market
capitalization weighted and includes
Treasury, Government sponsored mortgages
and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
51
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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.
----------------
VALUE EQUITY PORTFOLIO
GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(SERVICE SHARES OF THE VALUE EQUITY PORTFOLIO,
GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY PORTFOLIO,
MID-CAP GROWTH EQUITY PORTFOLIO, CORE EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL EMERGING
MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Equity Portfolios Service Shares
January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes the Service Shares of eleven of those portfolios (the
"Portfolios"):
Value Equity Portfolio
Growth Equity Portfolio
Small Cap Value Equity Portfolio
Small Cap Growth Equity Portfolio
Mid-Cap Value Equity Portfolio
Mid-Cap Growth Equity Portfolio
International Equity Portfolio
International Emerging Markets Portfolio
Select Equity Portfolio
Index Equity Portfolio
Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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 ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios 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 begins on page 18 and a summary of
each Performance Benchmark is contained in the Appendix.
COMPASS PERFORMANCE LIPPER PEER GROUP
CAPITAL BENCHMARK
PORTFOLIO
Growth and Income
Russell 1000
Value Equity Value Index
Russell 1000 Growth
Growth Equity Growth Index
Small Cap Russell 2000 Small Company Growth
Value Equity Index
Small Cap Russell 2000 Small Company Growth
Growth Growth Index
Equity
Mid-Cap Value Russell Midcap
Equity Midcap Value
Index
Mid-Cap Russell Midcap
Growth Midcap
Equity Growth Index
International EAFE Index International
Equity
International MSCI Emerging Markets
Emerging Emerging
Markets Markets Free
Index
Select Equity S&P 500 Index Growth and Income
S&P 500 Index S&P 500 Index
Index Equity
S&P 500 Index Balanced
Balanced and Salomon
Broad
Investment
Grade Index
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visers 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 Portfo-
lio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
EQUITY different directions in equity investing. You may wish to use
PORTFOLIOS the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, 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 as-
sociated risks, deserve careful consideration. Certain risks
associated with international investments are heightened be-
cause of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies And Risks
Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?" and
CAPITAL FUNDS "What Special Purchase And Redemption Procedures May Apply?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 18
What Are The Differences Among The Portfolios?............... 19
What Additional Investment Policies And Risks Apply?......... 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 32
Who Manages The Fund?........................................ 33
How Are Shares Purchased And Redeemed?....................... 40
What Special Purchase And Redemption Procedures May Apply?... 42
How Is Net Asset Value Calculated?........................... 44
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 45
How Are Fund Distributions Taxed?............................ 46
How Is the Fund Organized?................................... 48
How Is Performance Calculated?............................... 51
How Can I Get More Information?.............................. 52
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios for the fiscal year ended September 30, 1996 as a percentage
of average daily net assets. Because the Mid-Cap Value Equity Portfolio and
Mid-Cap Growth Equity Portfolio are new, the figures shown for these two Port-
folios are estimates for the current fiscal year. An example based on the sum-
mary is also shown.
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE GROWTH MID-CAP MID-CAP
EQUITY EQUITY EQUITY EQUITY VALUE EQUITY GROWTH EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)/(1)/ .50% .50% .53% .53% .50% .50%
Other operating expenses .55 .55 .63 .63 .66 .66
------- ------- ----- ----- ------- -------
Administration fees
(after fee
waivers)/(1)/ .17 .15 .22 .22 .10 .10
Shareholder servicing
fee .15 .15 .15 .15 .15 .15
Other expenses .23 .25 .26 .26 .41 .41
------ ------ ---- ---- ------ ------
Total Portfolio
operating expenses
(after fee
waivers)/(1)/ 1.05% 1.05% 1.16% 1.16% 1.16% 1.16%
======= ======= ===== ===== ======= =======
<CAPTION>
INTERNATIONAL
INTERNATIONAL EMERGING SELECT INDEX
EQUITY MARKETS EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)/(1)//(2)/ .70% 1.15% .50% .025% .50%
Operating Expenses of
the Index Master
Portfolio .66 N/A N/A .038 N/A
Other operating expenses .93 .55 .417 .60
------- ------- ----- ----- -------
Administration fees
(after fee
waivers)/(1)/ .16 .18 .15 .045 .17
Shareholder servicing
fee .15 .15 .15 .150 .15
Other expenses .35 .60 .25 .222 .28
------ ---- ---- ------
Total Portfolio
operating expenses
(after fee
waivers)/(1)/ 1.36% 2.08% 1.05% .480% 1.10%
======= ======= ===== ===== =======
</TABLE>
/(1)/ Without waivers, advisory fees would be .75%, 1.25% and .025%,
respectively, for the International Equity, International Emerging Markets
and Index Equity Portfolios and .55% for each of the remaining Portfolios
and administration fees would be .23% for each Portfolio. 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 remainder of the current fiscal year at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: .61%,
.63%, .64%, .64%, .79%, .79%, .73%, .98%, .63%, .60% and .66%,
respectively, and "Total Portfolio operating expenses" would be: 1.16%,
1.18%, 1.19%, 1.19%, 1.34%, 1.34%,1.48%, 2.23%, 1.18%, .67%, and 1.21%,
respectively.
/(2)/ Advisory fees with respect to the Index Equity Portfolio represent
advisory fees of the Index Master Portfolio.
+ Includes the operating expenses of the Index Master Portfolio that are
allocable to the Index Equity Portfolio.
6
<PAGE>
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 Value Equity 12 37 64 141
Small Cap Growth Equity 12 37 64 141
Mid-Cap Value Equity 12 37 64 141
Mid-Cap Growth Equity 12 37 64 141
International Equity 14 43 74 164
International Emerging Markets 21 65 112 241
Select Equity 11 33 58 128
Index Equity 5 15 27 60
Balanced 11 35 61 134
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses (including the Index Equity Portfolio's 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 affiliates of the Portfolios' investment adviser
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 ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountant. This financial information
should be read together with those financial statements. Fur-
ther 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 shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7764. Information concerning the historical in-
vestment results of Service Shares of the Index Equity Portfo-
lio reflects the financial experience of that Portfolio prior
to its conversion on June 2, 1996 to feeder portfolio of the
Index Master Portfolio. During the periods presented the Mid-
Cap Value Equity Portfolio and Mid-Cap Growth Equity Portfolio
did not conduct investment operations.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 11.62 $ 11.68 $ 11.21
-------- -------- -------- -------
Income from investment operations
Net investment income 0.30 0.25 0.04
Net gain (loss) on investments
(both realized and unrealized) 2.55 0.16 0.48
-------- -------- -------- -------
Total from investment operations 2.85 0.41 0.52
-------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.30) (0.25) (0.05)
Distributions from net realized
capital gains (0.25) (0.22) - -
-------- -------- -------- -------
Total distributions (0.55) (0.47) (0.05)
-------- -------- -------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 13.92 $ 11.62 $ 11.68
======== ======== ======== =======
Total return % 25.40% 3.51% 4.64%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $170,832 $105,035 $23,137
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.95% 0.90% 0.91%/2/
Before advisory/administration fee
waivers % 1.09% 1.06% 0.94%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 2.40% 2.24% 2.44%/2/
Before advisory/administration fee
waivers % 2.26% 2.08% 2.41%/2/
PORTFOLIO TURNOVER RATE % 12% 11% 11%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 10.18 $ 11.57 $10.54
------- ------- ------- ------
Income from investment operations
Net investment income 0.10 0.03 - -
Net gain (loss) on investments (both
realized and unrealized) 2.87 (1.32) 1.03
------- ------- ------- ------
Total from investment operations 2.97 (1.29) 1.03
------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.13) - - - -
Distributions from capital - - - - - -
Distributions from net realized
capital gains - - (0.10) - -
------- ------- ------- ------
Total distributions (0.13) (0.10) - -
------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ $ 13.02 $ 10.18 $11.57
======= ======= ======= ======
Total return % 29.43% (11.20)% 9.77%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $76,769 $36,752 $8,606
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.95% 0.90% 0.89%/2/
Before advisory/administration fee
waivers % 1.13% 1.14% 0.95%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 0.91% 0.51% (0.03)%/2/
Before advisory/administration fee
waivers % 0.73% 0.26% (0.09)%/2/
PORTFOLIO TURNOVER RATE % 55% 212% 175%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 13.59 $ 13.08 $ 12.28
-------- ------- ------- -------
Income from investment operations
Net investment income 0.02 - - - -
Net gain (loss) on investments
(both realized and unrealized) 2.18 0.77 0.80
-------- ------- ------- -------
Total from investment operations 2.20 0.77 0.80
-------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.03) (0.01) - -
Distributions from net realized
capital gains (0.61) (0.25) - -
-------- ------- ------- -------
Total distributions (0.64) (0.26) - -
-------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 15.15 $ 13.59 $ 13.08
======== ======= ======= =======
Total return % 17.17% 5.96% 6.51%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $61,313 $45,372 $21,689
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 1.02% 0.98% 0.99%/2/
Before advisory/administration fee
waivers % 1.12% 1.10% 1.03%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 0.16% 0.03% 0.12%/2/
Before advisory/administration fee
waivers % 0.07% (0.09)% 0.08%/2/
PORTFOLIO TURNOVER RATE % 31% 18% 41%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/15/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 10.14 $ 10.47 $ 9.96
-------- ------- ------- ------
Income from investment operations
Net investment income (0.01) 0.01 - -
Net gain (loss) on investments
(both realized and unrealized) 4.89 (0.34) 0.51
-------- ------- ------- ------
Total from investment operations 4.88 (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 $ $ 15.02 $ 10.14 $10.47
======== ======= ======= ======
Total return % 48.13% (3.12)% 5.12%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $62,604 $22,648 $ 911
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 1.03% 0.71% 0.99%/2/
Before advisory/administration fee
waivers % 1.16% 1.27% 1.68%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % (0.07)% 0.21% (0.34)%/2/
Before advisory/administration fee
waivers % (0.20)% (0.34)% (1.03)%/2/
PORTFOLIO TURNOVER RATE % 74% 89% 9%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 13.41 $ 12.47 $ 11.76
-------- -------- ------- -------
Income from investment operations
Net investment income 0.11 0.14 0.02
Net realized gain (loss) on
investments 0.16 1.14 0.69
-------- -------- ------- -------
Total from investment operations 0.27 1.28 0.71
-------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.08) (0.09) - -
Distributions from net realized
capital gains (0.36) (0.25) - -
-------- -------- ------- -------
Total distributions (0.44) (0.34) - -
-------- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 13.24 $ 13.41 $ 12.47
======== ======== ======= =======
Total return % 2.19% 10.36% 6.03%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $106,045 $75,174 $11,985
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 1.25% 1.20% 1.18%/2/
Before advisory/administration fee
waivers % 1.42% 1.39% 1.24%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 1.16% 1.09% 1.01%/2/
Before advisory/administration fee
waivers % 0.98% 0.90% 0.95%/2/
Portfolio turnover rate % 105% 37% 31%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR 6/17/94/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $ 10.55 $10.00
-------- ------- ------
Income from investment operations
Net investment income 0.06 0.02
Net gain (loss) on investments (both realized
and unrealized) (2.15) 0.53
-------- ------- ------
Total from investment operations (2.09) 0.55
-------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.08) - -
Distributions from Capital (0.01) - -
Distributions from net realized capital gains (0.19) - -
-------- ------- ------
Total distributions (0.28) - -
-------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ $ 8.18 $10.55
======== ======= ======
Total return % (19.91)% 5.50%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ $15,020 $3,505
Ratios of expenses to average net assets
After advisory/administration fee waivers % 2.06% 2.00%/2/
Before advisory/administration fee waivers % 2.30% 2.98%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers % 1.72% 1.10%/2/
Before advisory/administration fee waivers % 1.48% 0.12%/2/
PORTFOLIO TURNOVER RATE % 75% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
(FORMERLY, THE CORE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR 9/15/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ $ 9.92 $ 9.97 $10.00
--- ------- ------- ------
Income from investment operations
Net investment income 0.22 0.19 - -
Net gain (loss) on investments (both
realized and unrealized) 2.05 (0.04) (0.03)
--- ------- ------- ------
Total from investment operations 2.27 0.15 (0.03)
--- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.19) (0.20) - -
Distributions from net realized capital
gains (0.12) - - - -
--- ------- ------- ------
Total distributions (0.31) (0.20) - -
--- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ $ 11.88 $ 9.92 $ 9.97
=== ======= ======= ======
Total return 23.43% 1.55% (.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $83,705 $49,293 $ 704
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.95% 0.90% 0.90%/2/
Before advisory/administration fee
waivers % 1.13% 1.18% 1.12%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 2.10% 1.96% 1.92%/2/
Before advisory/administration fee
waivers % 1.91% 1.68% 1.70%/2/
PORTFOLIO TURNOVER RATE % 51% 88% 2%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 10.93 $ 11.02 $ 10.76
--------- ------- ------- -------
Income from investment operations
Net investment income 0.35 0.29 0.05
Net gain (loss) on investments
(both realized and unrealized) 2.73 0.02 0.29
--------- ------- ------- -------
Total from investment operations 3.08 0.31 0.34
--------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.31) (0.29) (0.08)
Distributions from net realized
capital gains (0.12) (0.11) - -
--------- ------- ------- -------
Total distributions (0.43) (0.40) (0.08)
--------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 13.58 $ 10.93 $ 11.02
========= ======= ======= =======
Total return 28.99% 2.78% 3.16%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $61,536 $27,376 $12,441
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.45% 0.40% 0.41%/2/
Before advisory/administration fee
waivers % 0.79% 0.77% 0.53%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 2.62% 2.49% 3.04%/2/
Before advisory/administration fee
waivers % 2.28% 2.12% 2.92%/2/
PORTFOLIO TURNOVER RATE % 18% 17% 8%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ $ 11.98 $ 12.42 $ 12.05
-------- ------- ------- -------
Income from investment operations
Net investment income 0.44 0.34 0.06
Net realized gain (loss) on
investments 1.88 (0.38) 0.38
-------- ------- ------- -------
Total from investment operations 2.32 (0.04) 0.44
-------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.44) (0.34) (0.07)
Distributions from net realized
capital gains (0.14) (0.06) - -
-------- ------- ------- -------
Total distributions (0.58) (0.40) (0.07)
-------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ $ 13.72 $ 11.98 $ 12.42
======== ======= ======= =======
Total return 19.94% (0.36)% 3.66%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ $85,668 $66,024 $15,842
Ratios of expenses to average net
assets
After advisory/administration fee
waivers % 0.94% 0.90% 0.93%/2/
Before advisory/administration fee
waivers % 1.16% 1.16% 1.11%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers % 3.49% 2.96% 2.75%/2/
Before advisory/administration fee
waivers % 3.28% 2.70% 2.57%/2/
PORTFOLIO TURNOVER RATE % 154% 54% 32%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment
styles so that investors may participate across multiple dis-
ciplines in order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of
eleven investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity
sector. Eight of these Portfolios invest primarily 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 in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the investor's goals
and sentiments.
INVESTMENT
OBJECTIVES Each of the eleven Compass Capital Equity Portfolios seeks to
provide long-term Capital Appreciation.
The Select Equity, Value Equity, MId-Cap Value Equity and Mid-
Cap Growth Equity Portfolios pursue a secondary objective of
Current Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described below. No assurance
can be made that a Portfolio will achieve its investment ob-
jective.
18
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
Value Equity Pursues equity Stocks with price/earnings Russell 1000
securities (defined as and price/book ratios at Value Index
common stocks or time of purchase below
securities convertible average for benchmark and
into common stocks) capitalization in excess
which the sub-adviser of $1 billion.
believes are
undervalued. A
security's earnings
trend and its dividend
growth rate will also be
factors considered in
security selection.
Growth Equity Pursues stocks with Stocks with growth rate Russell 1000
earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization in excess
adviser considers to of $1 billion.
have favorable and
above-average earnings
growth prospects.
Small Cap Pursues small cap stocks Stocks with price/earnings Russell 2000
Value Equity which the sub-adviser and price/book ratios at Index
believes are time of purchase below
undervalued. A average for benchmark and
security's earnings capitalization below $1
trend and its dividend billion.
growth rate will also be
factors considered in
security selection.
Small Cap Pursues small cap stocks Stocks with growth rate Russell 2000
Growth Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
small cap stocks which capitalization below $1
the sub-adviser billion.
considers to have
favorable and above-
average earnings growth
prospects.
Mid-Cap Value Pursues mid cap stocks Stocks with low Russell Midcap
Equity and sectors which the price/earnings, Value Index
sub-adviser believes are price/book, price/cash
undervalued. [A flow or price/sales ratios
security's earnings at the time of purchase
trend and its dividend relative to their
growth rate will also be respective sectors or the
factors considered in benchmark and
security selection.] capitalization between $1
billion and $5 billion.
Mid-Cap Growth Pursues mid cap stocks Stocks with growth rate Russell Midcap
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization between $1
adviser considers to billion and $5 billion.
have favorable and
above-average earnings
growth prospects.
International Pursues non-dollar Portfolio assets are EAFE Index
Equity denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far security's home market or
East Index ("EAFE"). stock exchange.
Within this universe, a
value style of investing Diversification across
is employed to select countries, industry groups
stocks which the sub- and companies with
adviser believes are investment at all times in
undervalued. A at least three foreign
security's earnings countries.
trend and its price
momentum will also be
factors considered in
security selection. The
sub-adviser will also
consider 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>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
International Pursues non-dollar Portfolio assets are MSCI
Emerging denominated stocks of primarily invested in International
Markets issuers in emerging stocks of emerging market Emerging
country markets issuers. Markets Free
(generally any country Index
considered to be Stocks with price/earnings
emerging or developing ratios below average for a
by the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the
United Nations). Within Ordinarily, stocks of
this universe, a value issuers in at least three
style of investing is emerging markets will be
employed to select held.
stocks which the sub-
adviser believes are
undervalued. The sub-
adviser will also
consider 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.
Select Equity Combines value and Similar sector weightings S&P 500 Index
growth style as sub- as benchmark, with over-
adviser identifies or under-weighting in
market opportunity. particular securities
within those sectors.
Index Equity Invests all of its Holds substantially all S&P 500 Index
assets indirectly the stocks of the S&P 500
through the U.S. Large Index in approximately the
Company Series (the same proportions as they
"Index Master are represented in the
Portfolio") of The DFA Index.
Investment Trust Company
in the stocks of the S&P
500 Index using a
passive investment style
that pursues the
replication of the S&P
500 Index return.
Balanced Holds a blend of equity Maintains a minimum 25% S&P 500 and
and fixed income investment in fixed income Salomon Broad
securities to deliver senior securities. Investment
total return through Grade Index
capital appreciation and
current income.
Equity Portion: Combines Equity Portion: Similar
value and growth style sector weightings as
as sub-adviser benchmark, with over- or
identifies market under weighting in
opportunity. particular securities
within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation Dollar- denominated
and security selection investment grade bonds,
across a broad universe including U.S. Government,
of fixed income mortgage-backed, asset-
securities. backed and corporate debt
securities.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
20
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
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 se-
curities 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 convert-
ible 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.
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 De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying 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 con-
cerning 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. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, 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 when the aggregate premiums on outstanding op-
tions 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 mem-
bers if they default.
21
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes 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 con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest up to 5% of
22
<PAGE>
its net assets in certain short-term fixed income obligations in order to main-
tain liquidity or to invest temporarily recommitted cash balances.
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase 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 securities.
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 transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities 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 se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. 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 securi-
ties 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 ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio (except the Index Master Portfolio) through reverse repur-
chase agreements under which the Portfolio sells portfolio securities to finan-
cial institutions such as banks and broker-dealers and agrees to repurchase
them at a particular date and price. A Portfolio may use the proceeds of re-
verse repurchase agreements to purchase other securities either maturing, or
under an agreement to resell, on a date simultaneous with or prior to the expi-
ration of the reverse repurchase agreement. The Balanced Portfolio 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 Portfolio is obligated to repurchase and that the securi-
ties 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 appropri
23
<PAGE>
ate liquid 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
(33% in the case of the Index Master Portfolio). In addition, the Balanced
Portfolio may borrow up to an additional 5% of its total assets for temporary
purposes. Whenever borrowings exceed 5% of a Portfolio's total assets, the
Portfolios (other than the Index Master Portfolio and the Balanced Portfolio)
will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) 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. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (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 addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained 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 re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly 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 secu-
rities 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 re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties 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. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser 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 pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
24
<PAGE>
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of smaller-capitalized organizations (less than $1 billion at
the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid-
Cap Growth Equity Portfolio will invest, under normal market conditions, at
least 90% (and in any event at least 65%) or their respective total assets in
equity securities of medium-capitalized organizations (between $1 billion and
$5 billion at the time of purchase). These organizations will normally have
more limited product lines, markets and financial resources and will be more
dependent upon a limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500 (R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and, therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the 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 Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio and the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash.
- ------
* "Standard & Poor's(R)," "S&P," "S&P 500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
25
<PAGE>
S&P has no obligation or liability in connection with the administration, mar-
keting or trading of the Index Equity Portfolio or Index Master Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities 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 as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains 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 addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios 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 the
26
<PAGE>
higher cost of investment research, higher cost of custody of foreign securi-
ties, 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 Repub-
lic, Ecuador, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia,
Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam. Politi-
cal and economic structures in many of these countries may be undergoing sig-
nificant evolution and rapid development, and these countries may lack the so-
cial, political and economic stability characteristic of more developed coun-
tries. 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 nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of invest-
ments in these countries and the availability to a Portfolio of additional in-
vestments 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 to assess the value or prospects of an investment in such is-
suers.
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. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) 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 for-
eign 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 a Portfolio to establish a rate of ex-
change for a future point in time.
27
<PAGE>
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating agency.
If unrated, the securities 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 al-
though they have speculative characteristics. If a fixed income security is re-
duced below Baa by Moody's or BBB by S&P, the Portfolio's sub-adviser will dis-
pose of the security in an orderly fashion as soon as practicable. Investments
in securities of foreign issuers, which present additional investment consider-
ations as described above under "International Portfolios," will be limited to
5% of the Portfolio's total assets.
The market value of the Balanced Portfolio's investments in fixed income corpo-
rate 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 securi-
ties 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 make significant investments in mortgage-related and
other asset-backed securities (i.e., securities backed by home equity loans,
installment sale contracts, credit card receivables or other assets) issued by
governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, 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 obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers 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 multi-
ple 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 clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest 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 ("PACs") 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.
28
<PAGE>
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws 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 trustees 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 and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e. loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
other asset-backed securities will be based on estimates of average life which
take prepayments into account. The average life of a mortgage-related instru-
ment, in particular, is likely to be substantially less than the original matu-
rity of the mortgage pools underlying the securities as the result of scheduled
principal payments and mortgage prepayments. In general, the collateral sup-
porting non-mortgage asset-backed securities is of shorter maturity than mort-
gage loans and is less likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally 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 and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank or its affiliates. It
is possible that, under some circumstances, PNC Mortgage Securities Corp. or
its affiliates could have interests that are in conflict with the holders of
these mortgage-backed securities, and such holders could have rights against
PNC Mortgage Securities Corp. or its affiliates.
29
<PAGE>
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 are supported
by the full faith and credit of the U.S. Treasury. Others are supported by the
right of the issuer to borrow from the U.S. Treasury; and still others are sup-
ported only by the credit of the agency or instrumentality issuing the obliga-
tion. No assurance can be given that the U.S. Government will 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 Treasury income growth
receipts ("TIGRs") and certificates of accrual on Treasury certificates
("CATs")). The Balanced Portfolio may purchase these certificates, as well as
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 dis-
count to their "face value" and may (particularly in the case of stripped mort-
gage-backed securities) exhibit greater price volatility than ordinary debt se-
curities because of the manner in which their principal and interest are re-
turned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments) and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's sub-adviser believes that their return, on a
pre-tax basis, will be comparable to the returns of other permitted invest-
ments. Dividends paid by the Portfolio that are derived from interest on munic-
ipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-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 ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the 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 the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the 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 securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
30
<PAGE>
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for each Portfolio (including both the eq-
uity and fixed income portions of the Balanced Portfolio in the aggregate) and
for the Index Master Portfolio will not exceed 150%. A Portfolio's annual port-
folio turnover rate will not, however, be a factor preventing a sale or pur-
chase when the adviser or sub-adviser believes investment considerations war-
rant 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.
31
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. 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). Sev-
eral 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, in the case of
the Index Master Portfolio, obligations of instrumentalities of the U.S.
Government) 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 In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities 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
(33% of net assets in the case of the Index Master Portfolio) 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 Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions 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 de-
scribed 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.
32
<PAGE>
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 following persons currently
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional in-
formation about the trustees and officers of both the Fund and
The DFA Investment Trust Company.
ADVISER AND
SUB- The Adviser to Compass Capital Funds is PNC Asset Management
ADVISERS Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund family is managed by a specialized portfolio manager who is
a member of one of PAMG's portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- --------------- -----------------
<S> <C> <C>
Value Equity PCM/(1)/ 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
manager since 1995.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------ -----------------
<S> <C> <C>
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.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice
President of PCM since July 1996;
prior to joining PCM, Portfolio
Manager and Research Analyst with
Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank, National
Association from 1986 to 1995;
Portfolio manager since its
inception.
Mid-Cap Value Equity PCM(/1/) Benedic E. Capaldi (see above);
Portfolio co-manager since its
inception.
Mid-Cap Growth Equity PEAC(/2/) Daniel B. Egan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; portfolio manager with PEAC
during 1995; Portfolio co-manager
prior to inception. William J. Wykle
(see above); Portfolio co-manager
since its inception.
[McVail Bio]
International Equity CastleInternational(/4/) Gordon Anderson; Managing Director
and Chief Investment Officer since
1996; prior to joining
CastleInternational, Investment
Director of Dunedin Fund Managers
Ltd.; Portfolio manager since 1996.
International Emerging CastleInternational(/4/) Euan Rae; Senior Investment Manager
Markets since 1996; prior to joining
CastleInternational, Head of
Emerging Markets at Dunedin Fund
Managers Ltd. and investment manager
with Edinburgh Fund Managers;
Portfolio manager since 1996.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- -----------------
<S> <C> <C>
Select Equity PCM(/1/) Daniel B. Eagan (see above);
Portfolio manager since 1995.
Balanced PCM and Daniel B. Eagan (see above);
BlackRock(/1/) (/3/) 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.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary offices at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.
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, com-
puted daily on a portfolio-by-portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are the Expenses of the Portfolios?" PAMG
and the sub-advisers intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
EXCEPT THE INDEX EQUITY PORTFOLIO AND THE INTERNATIONAL
PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
Average Daily Net Assets
first $1 billion .550% .400%
$1 billion--$2 billion .500 .350
$2 billion--$3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
35
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EQUITY PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
Average Daily Net Assets
first $1 billion .750% .600%
$1 billion--$2 billion .700 .550
$2 billion--$3 billion .675 .525
greater than $3 billion .650 .500
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EMERGING MARKETS PORTFOLIO
(BEFORE WAIVERS)
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 0.950
</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 be-
lieves it is comparable to the rates paid by many other funds
with similar investment objectives and policies and is appro-
priate for the Portfolio in light of its investment objective
and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Value Equity Portfolio, .50%; Growth Equity Portfolio,
.50%; Small Cap Value Equity Portfolio, .53%; Small Cap Growth
Equity Portfolio, .53%; International Equity Portfolio, .70%;
International Emerging Markets Portfolio, 1.15%; Select Equity
Portfolio, .50%; and Balanced Portfolio, .50%. For the period
from October 1, 1995 through June 1, 1996, the Index Equity
Portfolio paid investment advisory fees to its former invest-
ment adviser at the annual rate of % of its average daily
net assets.
The sub-advisers to each Portfolio strive to achieve best exe-
cution on all transactions. Infrequently, brokerage transac-
tions for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor.
36
<PAGE>
ADVISER TO
INDEX Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
PORTFOLIO 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 in-
vestors. DFA's assets under management totalled approximately
$ billion at October 31, 1996. David G. Booth and Rex A.
Sinquefield, both of whom are trustees and officers of The DFA
Investment Trust Company and directors, officers and sharehold-
ers of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made by
the Investment Committee of DFA, which meets on a regular basis
and also as needed to consider investment issues. The Investment
Committee is composed of certain officers and directors of DFA
who are elected annually. DFA provides the Index Master Portfo-
lio with a trading department and selects brokers and dealers to
effect securities transactions.
For the investment advisory services provided to the Index Mas-
ter Portfolio 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 Port-
folio's fiscal year ended November 30, 1996, DFA received a
monthly fee for its investment advisory services which, on an
annual basis, equaled .025% of the Index Master Portfolio's net
assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). 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 these services, CCG 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
CDI 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 as-
sets, .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
37
<PAGE>
time to time the Administrators may waive some or all of their
administration fees from a Portfolio. PFPC serves as the ad-
ministrative services, 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 net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The
Expenses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER
SERVICING The Fund intends to enter into service arrangements with in-
stitutional investors ("Institutions") (including PNC Bank,
National Association and its affiliates) which provide that
the Institutions will render support services to their custom-
ers 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 a
shareholder processing fee of up to .15% (on an annualized ba-
sis) of the average daily net asset value of Service Shares
owned beneficially by their customers, Institutions may pro-
vide one or more of the following services: processing pur-
chase and redemption requests from customers and placing or-
ders with the Fund's transfer agent or the distributor;
processing dividend payments from the Fund on behalf of cus-
tomers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information nec-
essary for sub-accounting; and providing other similar servic-
es. In consideration for payment of a separate shareholder
servicing fee of up to .15% (on an annualized basis) of the
average daily net asset value of Service Shares owned benefi-
cially by their customers, Institutions may provide one or
more of these additional services to such customers: respond-
ing to customer inquiries relating to the services performed
by the Institution and to customer inquiries concerning their
investments in Service Shares; assisting customers in desig-
nating and changing dividend options, account designations and
addresses; and providing 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.
38
<PAGE>
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 Re-
serve Board and state banking commissions, and investment advis-
ers 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 under-
writing securities. It is intended that the services provided by
Institutions under their service agreements will not be prohib-
ited under these laws. Under state securities laws, banks and
financial institutions that receive payments from the Fund may
be required to register as dealers.
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 the investment adviser and
the Administrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servicing
and processing fees, fees and expenses in registering and quali-
fying the Portfolios and their shares for distribution under
Federal and state securities laws, expenses of preparing pro-
spectuses and statements of additional information and of print-
ing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to
shareholder reports, shareholder meetings and proxy solicita-
tions, 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 equita-
ble.
39
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous
basis by CDI as distributor (the "Distributor"). CDI 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 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
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 Compass Capital Group of Funds at the time of its
combination with The PNC(R) Fund during the first quarter of 1996. 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 week-
day 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) 441-7450. 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.
Compass Capital 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
40
<PAGE>
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) 441-7450.
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 employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. 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 accordance with such
procedures.
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 or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed 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 bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
41
<PAGE>
What Special Purchase And Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC(R) Fund
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 de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. 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 with respect to
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, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders which
are received by PFPC, together with payment, before the close of regular trad-
ing 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.
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 which may be obtained from PFPC. The minimum pre-au-
thorized 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, Dela-
ware 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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee 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 cor-
poration, 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
42
<PAGE>
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.
Compass Capital 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, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed 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.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, 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 in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") 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 pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed 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 which may be obtained
from PFPC.
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. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
43
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern 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 its
Service Shares, less the liabilities charged to its Service Shares, by the num-
ber of its Service Shares that are outstanding. The net asset value per share
of the Index Master Portfolio is calculated as of the close of the NYSE by di-
viding the total market value of its investments and other assets, less any li-
abilities, 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 securities
exchanges are normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 Board of Trustees or, in the case of the
Index Master Portfolio, The DFA Investment Trust Company'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 a Portfolio's
sub-adviser under the supervision of the Board of Trustees determines such
method does not represent fair value.
44
<PAGE>
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 in-
come 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 declara-
tion. 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 frac-
tional Service Shares of the relevant Portfolio, 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 distribu-
tions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses 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 Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
45
<PAGE>
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 dis-
tributed 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 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 qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
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 speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing 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.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities 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 Port-
folio 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 Interna-
tional 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
46
<PAGE>
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 is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
47
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Service Shares of the eleven Portfolios described here-
in.
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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. In addition, the performance of each class of In-
vestor Shares may be different. The Fund offers various services and privileges
in connection with its Investor Shares that are not generally offered in con-
nection with its Institutional and Service Shares, including an automatic in-
vestment plan and an automatic withdrawal plan. For further information regard-
ing the Fund's Institutional or Investor Share classes, contact PFPC at (800)
441-7764 (Institutional Shares) or (800) 441-7762 (Investor Shares).
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 that 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 __________, 1996, PNC Bank held of record approximately __% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, 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 invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The
48
<PAGE>
Index Equity Portfolio purchases shares of the Index Master Portfolio at net
asset value. The net asset value of the Index Equity Portfolio responds to in-
creases 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 with-
draw its investment in the Index Master Portfolio at any time upon 30 days no-
tice to the Index Master Portfolio if the Board of Trustees of the Fund deter-
mines that it is in the best interests of the Index Equity Portfolio to do so.
Upon withdrawal, the Board of Trustees would consider what action might be tak-
en, 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 manage the In-
dex Equity Portfolio's assets in accordance with the investment policies de-
scribed 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 in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
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 are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns 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 Master Portfolio (and, indirectly, to the Index Equity
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 own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, 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 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 mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Port
49
<PAGE>
folio'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.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity 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.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees 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 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 invest-
ment 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 ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity 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 ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Master Index Portfolio, please
contact DFA at (310) 395-8005.
50
<PAGE>
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 calcu-
lated on an average annual total return basis for various periods. Average an-
nual 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 to-
tal return reflects the total percentage change in value over the measuring pe-
riod. Both methods of calculating total return assume that dividend and capital
gain distributions made by a Portfolio with respect to its Service Shares are
reinvested in shares of the same class.
The yield of Service Shares of the Balanced Portfolio is computed by dividing
the net income allocated to its Service Shares during a 30-day (or one month)
period by the net asset value per 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 perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, 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 com-
pared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and to the per-
formance of the Dow Jones Industrial Average, 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, as well as the benchmarks attached to this Prospectus. Performance
information may also include evaluations of the Portfolios and their Service
Shares published by nationally recognized ranking services, and information as
reported in financial publications such as Business Week, Fortune, Institu-
tional 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 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 dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn 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 invest-
ment 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 institu-
tions directly to their customer accounts in connection with investments in
Service Shares will not be included in the Portfolio performance calculations.
51
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
52
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Value Equity Russell 1000 An index composed of those Russell 1000
Value Index securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Growth Equity Russell 1000 The Russell 1000 Growth Index contains
Growth Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Equity Russell 2000 An index of the smallest 2000 companies in
Index the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Growth Equity Russell 2000 An index composed of those Russell 2000
Growth Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Equity Russell Midcap The Russell Midcap Value Index consists of
Value Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Equity Russell Midcap The Russell Midcap Growth Index consists of
Growth Index the bottom 800 securities of the Russell
1000 Index with greater-than-average growth
orientation as ranked by total market
capitalization.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
International Emerging MSCI Emerging The Morgan Stanley Capital International
Markets Markets Free (MSCI) Emerging Markets Free Index (EMF) is
Index a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, and the
Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad An unmanaged index of 3500 bonds. The Broad
Investment Investment Grade Index is market
Grade Index capitalization weighted and includes
Treasury, Government sponsored mortgages
and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
54
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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 PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
VALUE EQUITY PORTFOLIO
GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
SERVICE SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR A AND INVESTOR B SHARES OF THE VALUE EQUITY
PORTFOLIO, GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY
PORTFOLIO, MID-CAP GROWTH EQUITY PORTFOLIO, CORE EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL
EMERGING MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Equity Portfolios Investor Shares
January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Investor Shares of eleven of those portfolios (the
"Portfolios"):
Value Equity Portfolio
Growth Equity Portfolio
Small Cap Value Equity Portfolio
Small Cap Growth Equity Portfolio
Mid-Cap Value Equity Portfolio
Mid-Cap Growth Equity Portfolio
International Equity Portfolio
International Emerging Markets Portfolio
Select Equity Portfolio
Index Equity Portfolio
Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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 ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios 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 begins on page 20 and a summary of
each Performance Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Russell 1000 Value
Value Equity Index Growth and Income
Russell 1000 Growth
Growth Equity Index Growth
Small Cap Value Eq-
uity Russell 2000 Index Small Company Growth
Small Cap Growth Eq- Russell 2000 Growth
uity Index Small Company Growth
Russell Midcap Value
Mid-Cap Value Equity Index Midcap
Mid-Cap Growth Equity Russell Midcap Growth
Index Midcap
International Equity EAFE Index International
International Emerg-
ing MSCI Emerging Markets
Emerging Markets Free
Markets Index
Select Equity S&P 500 Index Growth and Income
Index Equity S&P 500 Index S&P 500 Index
Balanced S&P 500 Index and Balanced
Salomon Broad
Investment Grade
Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visers 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 Portfo-
lio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
EQUITY different directions in equity investing. You may wish to use
PORTFOLIOS the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, 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 height-
ened because of currency fluctuations and investments in
emerging markets. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are
CAPITAL FUNDS Shares Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 10
What Are The Portfolios?..................................... 20
What Are The Differences Among The Portfolios?............... 21
What Additional Investment Policies And Risks Apply?......... 23
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 33
Who Manages The Fund?........................................ 34
What Pricing Options Are Available To Investors?............. 42
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 44
How Are Shares Purchased?.................................... 46
How Are Shares Redeemed?..................................... 48
What Are The Shareholder Features Of The Fund?............... 50
What Is The Schedule Of Sales Charges And Exemptions?........ 53
How Is Net Asset Value Calculated?........................... 59
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 60
How Are Fund Distributions Taxed?............................ 61
How Is The Fund Organized?................................... 63
How Is Performance Calculated?............................... 66
How Can I Get More Information?.............................. 68
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a
percentage of average daily net assets. Because the Mid-Cap Value Equity Port-
folio and Mid-Cap Growth Equity Portfolio are new, the figures shown for these
two Portfolios are estimates for the current fiscal year. An example based on
the summary is also shown.
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY GROWTH EQUITY VALUE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 4.5% None 4.5% None 4.5% None
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% None 4.5% None 4.5%
Sales Charge on
Reinvested Dividends None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .50% .50% .50% .50% .53% .53%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00 .75
Other operating expenses
(after fee waivers)
(/3/) .72 .72 .72 .72 .80 .80
------ ------ ------ ------ ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .40 .40
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.22% 1.97% 1.22% 1.97% 1.33% 2.08%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and administration fees
would be .23% for each class of each Portfolio. 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 neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .78%, .80% and
.81%, respectively, for Investor A Shares; and (ii) .78%, .80% and .81%,
respectively, for Investor B Shares; and "Total Portfolio operating ex-
penses" would be: (iii) 1.33%, 1.35% and 1.36%, respectively, for Investor
A Shares; and (iv) 2.08%, 2.10% and 2.11%, respectively, for Investor B
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%) dur-
ing the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are The Key Considerations In Selecting A Pricing
Option?" on page 44. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor B Shares (as well as investors in Investor
A Shares if 12b-1 fees are charged in the future) 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").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP MID-CAP MID-CAP
GROWTH VALUE GROWTH
EQUITY EQUITY EQUITY INTERNATIONAL EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<CAPTION>
INTERNATIONAL
EMERGING
MARKETS
PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B
INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.5% None 4.5% None 4.5% None 5.0% None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% None 4.5% None 4.5% None 4.5%
Sales Charge on
Reinvested
Dividends None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .53% .53% .50% .50% .50% .50% .70% .70%
12b-1
fees(/3/)(/4/) .00 .75 .00 .75 .00 .75 .00 .75
Other operating
expenses (after
fee
waivers)(/3/) .80 .80 .83 .83 .83 .83 .83 .83
------ ------ ------ ------ ------ ------ ------ ------
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .40 .40 .43 .43 .43 .43 .43 .43
---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.33% 2.08% 1.33% 2.08% 1.33% 2.08% 1.53% 2.28%
====== ====== ====== ====== ====== ====== ====== ======
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 5.0% None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5%
Sales Charge on
Reinvested
Dividends None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) 1.15% 1.15%
12b-1
fees(/3/)(/4/) .00 .75
Other operating
expenses (after
fee
waivers)(/3/) 1.10 1.10
------ ------
Shareholder
servicing fee .25 .25
Shareholder
processing fee .15 .15
Other expenses .70 .70
---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 2.25% 3.00%
====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .55%, .55%, .75% and
1.25% for the Small Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap Growth
Equity, International Equity and International Emerging Markets Portfolios,
respectively, and administration fees would be .23% for each class of each
Portfolio. 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 remainder of the current fiscal year at the
levels set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .89%, .96%, .96%, .90% and 1.15%, respectively, for Investor
A Shares; and (ii) .81%, .96%, .96%, .90% and 1.15%, respectively, for In-
vestor B Shares; and "Total Portfolio operating expenses" would be: (iii)
1.36%, 1.51%, 1.51%, 1.65% and 2.40%, respectively, for Investor A Shares;
and (iv) 2.11%, 2.26%, 2.26%, 2.40% and 3.15%, respectively, for Investor B
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) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" on page 44. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor B Shares (as well as investors in Investor A
Shares if 12b-1 fees are charged in the future) may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECT EQUITY INDEX EQUITY BALANCED
PORTFOLIO PORTFOLIO+ PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 4.5% None 3.0% None 4.5% None
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% None 4.5% None 4.5%
Sales Charge on
Reinvested Dividends None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/)(/4/) .50% .50% .025% .025% .50% .50%
12b-1 fees(/3/)(/5/) .00 .75 .00 .75 .00 .75
Operating expenses of
the Index Master
Portfolio N/A N/A .04 .04 N/A N/A
Other operating expenses
(after fee
waivers)(/3/) .72 .72 .585 .585 .71 .77
------ ------ ----- ------ ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .185 .185 .31 .37
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.22% 1.97% .65% 1.40% 1.21% 2.02%
====== ====== ===== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and .55% for the Select
Equity and Balanced Portfolios, respectively, and administration fees
would be .23% for each class of each Portfolio. 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 neces-
sary to maintain the Portfolio's total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .88%, .78% and
.77%, respectively, for Investor A Shares; and (ii) .80%, .78% and .83%,
respectively, for Investor B Shares; and "Total Portfolio operating ex-
penses" would be: (iii) 1.35%, .84% and 1.32%, respectively, for Investor
A Shares; and (iv) 2.10%, 1.74% and 2.13%, respectively, for Investor B
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%) dur-
ing the current fiscal year.
(4) Advisory fees with respect to the Index Equity Portfolio represent advi-
sory fees of the Index Master Portfolio.
(5) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are The Key Considerations In Selection A Pricing
Option?" on page 44. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor B Shares (as well as investors in Investor
A Shares if 12b-1 fees are charged in the future) may pay more than the
economic equivalent of the maximum front-end sales charges permitted by
the rules of the NASD.
+ Includes the operating expenses of the Index Master Portfolio that are al-
locable to the Index Equity Portfolio.
8
<PAGE>
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment 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 99 129 210***
B Shares (No Redemption) 20 62 106 210***
Growth Equity Portfolio
A Shares* 57 82 109 186
B Shares (Redemption)** 65 99 129 210***
B Shares (No Redemption) 20 62 106 210***
Small Cap Value Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 134 222***
B Shares (No Redemption) 21 65 112 222***
Small Cap Growth Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 134 222***
B Shares (No Redemption) 21 65 112 222***
Mid-Cap Value Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 134 222***
B Shares (No Redemption) 21 65 112 222***
Mid-Cap Growth Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 134 222***
B Shares (No Redemption) 21 65 112 222***
International Equity Portfolio
A Shares* 65 96 129 223
B Shares (Redemption)** 68 108 144 242***
B Shares (No Redemption) 23 71 122 242***
International Emerging Markets
Portfolio
A Shares* 72 117 164 296
B Shares (Redemption)** 75 129 179 314***
B Shares (No Redemption) 30 93 158 314***
Select Equity Portfolio
A Shares* 57 82 109 186
B Shares (Redemption)** 65 99 129 210***
B Shares (No Redemption) 20 62 106 210***
Index Equity Portfolio
A Shares* 36 50 65 109
B Shares (Redemption)** 59 82 100 147***
B Shares (No Redemption) 14 44 77 147***
Balanced Portfolio
A Shares* 57 82 108 185
B Shares (Redemption)** 66 100 131 214***
B Shares (No Redemption) 21 63 109 214***
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning 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 Tables and Example are intended to assist investors in under-
standing the costs and expenses (including the Index Equity Portfolio's pro
rata share of the Index Master Portfolio's advisory fees and operating ex-
penses) an investor will bear either directly or indirectly. They do not re-
flect any charges that may be imposed by brokers or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
For a detailed description of the expenses, see "Who Manages The Fund?"
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
9
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountants. This financial informa-
tion 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 shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7762. Information concerning the historical in-
vestment results of Investor A Shares of the Index Equity
Portfolio reflects the financial experience of that Portfolio
prior to its conversion on June 2, 1996 to a feeder portfolio
of the Index Master Portfolio. During the periods presented
the Mid-Cap Value Equity Portfolio and Mid-Cap Growth Equity
Portfolio did not conduct investment operations.
10
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/02/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.62 $ 11.69 $ 9.78 $10.00
------- ------- ------- ------ ------
Income from investment
operations
Net investment income 0.27 0.23 0.22 0.12
Net gain (loss) on
investments (both
realized and
unrealized) 2.56 0.15 1.91 (0.24)
------- ------- ------- ------ ------
Total from investment
operations 2.83 0.38 2.13 (0.12)
------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28) (0.23) (0.22) (0.10)
Distributions from net
realized capital gains (0.25) (0.22) - - - -
------- ------- ------- ------ ------
Total distributions (0.53) (0.45) (0.22) (0.10)
------- ------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 13.92 $ 11.62 $11.69 $ 9.78
======= ======= ======= ====== ======
Total return 25.22%/3/ 3.32%/3/ 21.95%/3/ (1.19)%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $16,910 $10,412 $4,865 $ 16
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.11% 1.05% 0.92% 0.85%/2/
Before
advisory/administration
fee waivers 1.25% 1.21% 0.95% 0.85%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.24% 2.08% 1.96% 2.62%/2/
Before
advisory/administration
fee waivers 2.10% 1.92% 1.93% 2.62%/2/
PORTFOLIO TURNOVER RATE 12% 11% 11% 13%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
PERIOD
YEAR YEAR YEAR YEAR 5/02/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.16 $ 11.57 $ 9.92 $10.09
------- ------- ------- ------ ------
Income from investment
operations
Net investment income 0.08 0.02 0.02 0.08
Net gain (loss) on
investments (both
realized and
unrealized) 2.87 (1.33) 2.10 (0.10)
------- ------- ------- ------ ------
Total from investment
operations 2.95 (1.31) 2.12 (0.02)
------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.10) - - (0.07) (0.15)
Distributions from
capital - - - - (0.01) - -
Distributions from net
realized capital gains - - (0.10) (0.39) - -
------- ------- ------- ------ ------
Total distributions (0.10) (0.10) (0.47) (0.15)
------- ------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 13.01 $ 10.16 $11.57 $ 9.92
======= ======= ======= ====== ======
Total return 29.26%/3/ (11.38)%/3/ 22.08%/3/ (0.17)%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $10,034 $ 5,049 $2,362 $ 239
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.11% 1.05% 0.91% 0.85%/2/
Before
advisory/administration
fee waivers 1.29% 1.29% 0.97% 0.86%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.76% 0.29% 0.18% 2.07%/2/
Before
advisory/administration
fee waivers 0.58% 0.05% 0.12% 2.06%/2/
PORTFOLIO TURNOVER RATE 55% 212% 175% 162%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 6/02/92/1/ YEAR 10/02/94/1/
ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.58 $ 13.07 $10.14 $10.06 $ 13.51
------- ------- ------- ------ ------ ------- -------
Income from investment
operations
Net investment income - - (0.01) 0.03 0.02 (0.05)
Net gain (loss) on
investments (both
realized and
unrealized) 2.17 0.77 3.02 0.07 2.21
------- ------- ------- ------ ------ ------- -------
Total from investment
operations 2.17 0.76 3.05 0.09 2.16
------- ------- ------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income - - - - (0.04) (0.01) - -
Distributions from net
realized capital gains (0.61) (0.25) (0.08) - - (0.61)
------- ------- ------- ------ ------ ------- -------
Total distributions (0.61) (0.25) (0.12) (0.01) (0.61)
------- ------- ------- ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 15.14 $ 13.58 $13.07 $10.14 $ 15.06
======= ======= ======= ====== ====== ======= =======
Total return 16.96%/3/ 5.93%/3/ 30.36%/3/ 0.89%/4/ 16.95%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $21,563 $16,884 $9,084 $ 62 $ 1,477
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.18% 1.13% 0.94% 0.85%/2/ 1.80%/2/
Before
advisory/administration
fee waivers 1.28% 1.25% 0.98% 0.89%/2/ 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.00% (0.11)% 0.19% 0.51%/2/ (0.61)%/2/
Before
advisory/administration
fee waivers (0.09)% (0.23)% 0.15% 0.47%/2/ (0.70)%/2/
PORTFOLIO TURNOVER RATE 31% 18% 41% 17% 31%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 9/15/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $10.12 $10.47 $ 9.96
------- ------ ------ ------
Income from investment
operations
Net investment income (0.02) - - - -
Net gain (loss) on investments
(both realized and unrealized) 4.88 (0.35) 0.51
------- ------ ------ ------
Total from investment
operations 4.86 (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 $14.98 $10.12 $10.47
======= ====== ====== ======
Total return 48.02%/3/ (3.33)%/3/ 5.12%/3/
RATIOS/SUPPLEMENTAL DATA
NET ASSETS AT END OF PERIOD (IN
THOUSANDS) $7,348 $1,620 $ 41
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.20% 0.86% 1.13%/2/
Before advisory/administration
fee waivers 1.33% 1.42% 1.82%/2/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers (0.24)% 0.07% (0.48)%/2/
Before advisory/administration
fee waivers (0.36)% (0.49)% (1.17)%/2/
PORTFOLIO TURNOVER RATE 74% 89% 9%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 6/02/92/1/ YEAR 10/03/94/1/
ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.40 $ 12.47 $ 9.87 $10.68 $ 13.35
------ ------- ------- ------ ------ ------ -------
Income from investment
operations
Net investment income 0.11 0.12 0.12 0.09 0.05
Net gain (loss) on
investments
(both realized and
unrealized) 0.13 1.15 2.59 (0.83) 0.16
------ ------- ------- ------ ------ ------ -------
Total from investment
operations 0.24 1.27 2.71 (0.74) 0.21
------ ------- ------- ------ ------ ------ -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.04) (0.09) (0.11) (0.07) - -
Distributions from net
realized capital gains (0.36) (0.25) - - - - (0.36)
------ ------- ------- ------ ------ ------ -------
Total distributions (0.40) (0.34) (0.11) (0.07) (0.36)
------ ------- ------- ------ ------ ------ -------
NET ASSET VALUE AT END OF
PERIOD $ 13.24 $ 13.40 $12.47 $ 9.87 $ 13.20
====== ======= ======= ====== ====== ====== =======
Total return 2.00%/3/ 10.24%/3/ 27.72%/3/ (6.94)%/4/ 1.77%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $17,721 $14,433 $3,669 $ 58 $ 1,071
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.40% 1.35% 1.25% 1.20%/2/ 2.06%/2/
Before
advisory/administration
fee waivers 1.58% 1.54% 1.31% 1.21%/2/ 2.23%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.97% 0.96% 1.27% 2.59%/2/ 0.59%/2/
Before
advisory/administration
fee waivers 0.80% 0.77% 1.21% 2.58%/2/ 0.41%/2/
PORTFOLIO TURNOVER RATE 105% 37% 31% 16% 105%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
4Contingent deferred sales charge not reflected in total return.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 6/17/94/1/
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $10.54 $10.00
------ ------ ------
Income from investment operations
Net investment income 0.03 0.02
Net gain (loss) on investments (both
realized and unrealized) (2.14) 0.52
------ ------ ------
Total from investment operations (2.11) 0.54
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.05) - -
Distribution from capital (0.01) - -
Distributions from net realized capital
gains (0.19) - -
------ ------ ------
Total distributions (0.25) - -
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 8.18 $10.54
====== ====== ======
Total return (20.12)%/3/ 5.40%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $2,563 $2,857
Ratios of expenses to average net assets
After advisory/administration fee waivers 2.20% 2.15%/2/
Before advisory/administration fee waivers 2.44% 3.13%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 1.54% 0.74%
Before advisory/administration fee waivers 1.30% (0.24)%/2/
PORTFOLIO TURNOVER RATE 75% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
(FORMERLY THE CORE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 10/13/93/1/
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.92 $ 9.96
------ ------ ------
Income from investment operations
Net investment income 0.20 0.18
Net gain (loss) on investments (both
realized and unrealized) 2.06 (0.03)
------ ------ ------
Total from investment operations 2.26 0.15
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.18) (0.19)
Distributions from net realized capital
gains (0.12) - -
------ ------ ------
Total distributions (0.30) (0.19)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $11.88 $ 9.92
====== ====== ======
Total return 23.29%/3/ 1.54%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $3,808 $ 601
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.12% 1.05%/2/
Before advisory/administration fee waivers 1.30% 1.34%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 1.91% 1.89%/2/
Before advisory/administration fee waivers 1.73% 1.60%/2/
PORTFOLIO TURNOVER RATE 51% 88%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 7/29/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.93 $11.02 $10.06 $10.07
--- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.34 0.25 0.27 0.10
Net gain (loss) on
investments (both
realized and
unrealized) 2.73 0.04 0.96 (0.01)
--- ------ ------ ------ ------
Total from investment
operations 3.07 0.29 1.23 0.09
--- ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.30) (0.27) (0.27) (0.10)
Distributions from net
realized capital gains (0.12) (0.11) - - - -
--- ------ ------ ------ ------
Total distributions (0.42) (0.38) (0.27) (0.10)
--- ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $13.58 $10.93 $11.02 $10.06
=== ====== ====== ====== ======
Total return 28.77%/3/ 2.66%/3/ 12.33%/3/ 0.91%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $6,501 $2,632 $1,263 $ 56
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.55% 0.49% 0.45%/2/
Before
advisory/administration
fee waivers 0.95% 0.92% 0.61% 0.64%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.44% 2.35% 2.48% 2.85%/2/
Before
advisory/administration
fee waivers 2.10% 1.98% 2.36% 2.66%/2/
PORTFOLIO TURNOVER RATE 18% 17% 8% 23%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
<CAPTION>
INVESTOR B
SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 5/14/90/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 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> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.98 $ 12.42 $ 11.53 $10.82 $ 9.13 $10.00
------- ------- ------- ------- ------ ------ ------
Income from investment
operations
Net investment income 0.43 0.32 0.30 0.34 0.38 0.12
Net realized gain (loss)
on investments 1.88 (0.38) 1.14 1.22 1.77 (0.88)
------- ------- ------- ------- ------ ------ ------
Total from investment
operations 2.31 (0.06) 1.44 1.56 2.15 (0.76)
------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.42) (0.32) (0.29) (0.39) (0.34) (0.11)
Distributions from net
realized capital gains (0.14) (0.06) (0.26) (0.46) (0.12) - -
------- ------- ------- ------- ------ ------ ------
Total distributions (0.56) (0.38) (0.55) (0.85) (0.46) (0.11)
------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 13.73 $ 11.98 $ 12.42 $11.53 $10.82 $ 9.13
======= ======= ======= ======= ====== ====== ======
Total return 19.86%/3/ (0.50)%/3/ 12.80%/3/ 15.17%/3/ 24.04%/3/ (7.64)%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period
(in thousands) $67,892 $62,307 $39,529 $8,481 $4,265 $3,960
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.07% 1.05% 0.91% 0.95% 1.15% 1.15%/2/
Before
advisory/administration
fee waivers 1.28% 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 3.38% 2.77% 2.79% 3.28% 3.70% 3.07%/2/
Before
advisory/administration
fee waivers 3.16% 2.51% 2.61% 2.72% 2.99% 2.32%/2/
PORTFOLIO TURNOVER RATE 154% 54% 32% 36% 45% 37%
FOR THE
PERIOD
YEAR 10/03/94/1/
ENDED THROUGH
9/30/96 9/30/95
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.95
------- -------------
Income from investment
operations
Net investment income 0.33
Net realized gain (loss)
on investments 1.93
------- -------------
Total from investment
operations 2.26
------- -------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.38)
Distributions from net
realized capital gains (0.14)
------- -------------
Total distributions (0.52)
------- -------------
NET ASSET VALUE AT END OF
PERIOD $13.69
======= =============
Total return 19.38%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period
(in thousands) $3,124
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.72%/2/
Before
advisory/administration
fee waivers 1.94%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.71%/2/
Before
advisory/administration
fee waivers 2.49%/2/
PORTFOLIO TURNOVER RATE 154%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
19
<PAGE>
What Are The Portfolios?
- -------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 30 portfolios and
has been structured to include many different investment
styles so that investors may participate across multiple dis-
ciplines in order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of
eleven investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity
sector. Eight of these Portfolios invest primarily 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 peri-
ods, 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 eleven Compass Capital Equity Portfolios seeks to
provide long-term Capital Appreciation.
The Select Equity, Value Equity, Mid-Cap Value Equity and
Mid-Cap Growth Equity Portfolios pursue a secondary objective
of Current Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described below. No assurance
can be given that a Portfolio will achieve its investment ob-
jective.
20
<PAGE>
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 Stocks with price/earnings Russell 1000
(defined as common stocks or and price/book ratios at Value Index
securities convertible into time of purchase below
common stocks) which the average for benchmark and
sub-adviser believes are capitalization in excess of
undervalued. A security's $1 billion.
earnings trend and its
dividend growth rate will
also be factors considered
in security selection.
Growth Equity Pursues stocks with earnings Stocks with growth rate Russell 1000
growth potential. Emphasizes estimates in excess of Growth Index
stocks which the sub-adviser average for benchmark and
considers to have favorable capitalization in excess of
and above-average earnings $1 billion.
growth prospects.
Small Cap Value Equity Pursues small cap stocks Stocks with price/earnings Russell 2000
which the sub-adviser and price/book ratios at Index
believes are undervalued. A time of purchase below
security's earnings trend average for benchmark and
and its dividend growth rate capitalization below $1
will also be factors billion.
considered in security
selection.
Small Cap Growth Equity Pursues small cap stocks Stocks with growth rate Russell 2000
with earnings growth estimates in excess of Growth Index
potential. Emphasizes small average for benchmark and
cap stocks which the sub- capitalization below $1
adviser considers to have billion.
favorable and above-average
earnings growth prospects.
Mid-Cap Value Equity Pursues mid cap stocks and Stocks with low Russell
sectors which the sub- price/earnings, price/book, Midcap Value
adviser believes are price/cash flow or Index
undervalued. [A security's price/sales ratios at the
earnings trend and its time of purchase relative to
dividend growth rate will their respective sectors or
also be factors considered the benchmark and
in security selection.] capitalization between $1
billion and $5 billion.
Mid-Cap Growth Equity Pursues mid cap stocks with Stocks with growth rate Russell
earnings growth potential. estimates in excess of Midcap
Emphasizes stocks which the average for benchmark and Growth Index
sub-adviser considers to capitalization between $1
have favorable and above- billion and $5 billion.
average earnings growth
prospects.
International Equity Pursues non-dollar Portfolio assets are EAFE Index
denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far East security's home market or
Index ("EAFE"). Within this stock exchange.
universe, a value style of
investing is employed to Diversification across
select stocks which the sub- countries, industry groups
adviser believes are and companies with
undervalued. A security's investment at all times in
earnings trend and its price at least three foreign
momentum will also be countries.
factors considered in
security selection. The sub-
adviser will also consider
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>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
21
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
International Emerging Pursues non-dollar Portfolio assets are MSCI
Markets denominated stocks of primarily invested in stocks Emerging
issuers in emerging country of emerging market issuers. Markets Free
markets (generally any Index
country considered to be Stocks with price/earnings
emerging or developing by ratios below average for a
the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the United
Nations). Within this Ordinarily, stocks of
universe, a value style of issuers in at least three
investing is employed to emerging markets will be
select stocks which the sub- held.
adviser believes are
undervalued. The sub-adviser
will also consider
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.
Select Equity Combines value and growth Similar sector weightings as S&P 500
style as sub-adviser benchmark, with over- or Index
identifies market under-weighting in
opportunity. particular securities within
those sectors.
Index Equity Invests all of its assets Holds substantially all the S&P 500
indirectly through the U.S. stocks of the S&P 500 Index Index
Large Company Series (the in approximately the same
"Index Master Portfolio") of proportions as they are
The DFA Investment Trust represented in the Index.
Company, in the stocks of
the S&P 500 Index using a
passive investment style
that pursues the replication
of the S&P 500 Index return.
Balanced Holds a blend of equity and Maintains a minimum 25% S&P 500 and
fixed income securities to investment in fixed income Salomon
deliver total return through senior securities. Broad
capital appreciation and Investment
current income. Grade Index
Equity Portion: Equity Portion:
Combines value and growth Similar sector weightings as
style as sub-adviser benchmark, with over- or
identifies market under- weighting in
opportunity. particular securities within
those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and Dollar-denominated
security selection across a investment grade bonds,
broad universe of fixed including U.S. Government,
income securities. mortgage-backed, asset-
backed and corporate debt
securities.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
22
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
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 se-
curities 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 convert-
ible 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.
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 De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying 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 con-
cerning 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. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, 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 when the aggregate premiums on outstanding op-
tions 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 mem-
bers if they default.
23
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes 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 con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest up to 5% of its
net assets in certain short-term fixed income obligations in order to maintain
liquidity or to invest temporarily uncommitted cash balances.
24
<PAGE>
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase 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 securities.
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 transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities 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 se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. 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 securi-
ties 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 ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio (except the Index Master Portfolio) through reverse repur-
chase agreements under which the Portfolio sells portfolio securities to finan-
cial institutions such as banks and broker-dealers and agrees to repurchase
them at a particular date and price. A Portfolio may use the proceeds of re-
verse repurchase agreements to purchase other securities either maturing, or
under an agreement to resell, on a date simultaneous with or prior to the expi-
ration of the reverse repurchase agreement. The Balanced Portfolio 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 Portfolio is obligated to repurchase and that the securi-
ties 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 liq-
uid securities having a value at least equal to the repurchase price. A Portfo-
lio's reverse repurchase agreements, together with any other borrowings, will
not exceed, in the aggregate, 33 1/3% of the value
25
<PAGE>
of its total assets (33% in the case of the Index Master Portfolio). In addi-
tion, the Balanced Portfolio may borrow up to an additional 5% of its total as-
sets for temporary purposes. Whenever borrowings exceed 5% of a Portfolio's to-
tal assets, the Portfolios (other than the Index Master Portfolio and the Bal-
anced Portfolio) will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) 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. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (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 addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained 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 re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly 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 secu-
rities 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 re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties 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. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser 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 pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
SMALL CAP AND MID-CAP PORTFOLIOS.
Under normal market conditions, the Small Cap Growth Equity Portfolio and Small
Cap Value Equity Portfolio will invest at least 90% (and in any event at least
65%) of their respective total
26
<PAGE>
assets in equity securities of smaller-capitalized organizations (less than $1
billion at the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio
and Mid-Cap Growth Equity Portfolio will invest, under normal market condi-
tions, at least 90% (and in any event at least 65%) of their respective total
assets in equity securities of medium-capitalized organizations (between $1
billion and $5 billion at the time of purchase). These organizations will nor-
mally have more limited product lines, markets and financial resources and will
be dependent upon a more limited management group than larger capitalized com-
panies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and, therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the 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 Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash. S&P has no obligation or liability in connection with the ad-
ministration, marketing or trading of the Index Equity Portfolio or Index Mas-
ter Portfolio.
- ------
* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been li-
censed for use by the Fund and The DFA Investment Trust Company.
27
<PAGE>
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities 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 as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains 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 addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios 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 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.
28
<PAGE>
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 Repub-
lic, Ecuador, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia,
Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam. Politi-
cal and economic structures in many of these countries may be undergoing sig-
nificant evolution and rapid development, and these countries may lack the so-
cial, political and economic stability characteristic of more developed coun-
tries. 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 nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of invest-
ments in these countries and the availability to a Portfolio of additional in-
vestments 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 to assess the value or prospects of an investment in such is-
suers.
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. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) 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 for-
eign 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 a Portfolio to establish a rate of ex-
change for a future point in time.
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guar-
29
<PAGE>
anteed investment contracts (GICs), obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities and state and local munic-
ipal obligations. 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"), Standard & Poor's Ratings Group ("S&P") or another nationally
recognized statistical rating organization. If unrated, the securities will be
determined at the time of purchase to be of comparable quality by the sub-ad-
viser. 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 or-
derly fashion as soon as practicable. Investments in securities of foreign is-
suers, which present additional investment considerations as described above
under "International Portfolios," will be limited to 5% of the Portfolio's to-
tal assets.
The market value of the Balanced Portfolio's investments in fixed income corpo-
rate 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 securi-
ties 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 make significant investments in mortgage-related and
other asset-backed securities (i.e., securities backed by home equity loans,
installment sale contracts, credit card receivables or other assets) issued by
governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, 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 obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers 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 multi-
ple 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 clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest 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 ("PACs") 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.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are enti
30
<PAGE>
tled to the protection of a number of state and Federal consumer credit laws
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 ve-
hicles 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 and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
other asset-backed securities will be based on estimates of average life which
take prepayments into account. The average life of a mortgage-related instru-
ment, in particular, is likely to be substantially less than the original matu-
rity of the mortgage pools underlying the securities as the result of scheduled
principal payments and mortgage prepayments. In general, the collateral sup-
porting non-mortgage asset-backed securities is of shorter maturity than mort-
gage loans and is less likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally 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 and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank or its affiliates. It
is possible that, under some circumstances, PNC Mortgage Securities Corp. or
its affiliates could have interests that are in conflict with the holders of
these mortgage-backed securities, and such holders could have rights against
PNC Mortgage Securities Corp. or its affiliates.
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 are supported
by the full faith and credit of the U.S.
31
<PAGE>
Treasury. Others are supported by the right of the issuer to borrow from the
U.S. Treasury; and still others are supported only by the credit of the agency
or instrumentality issuing the obligation. No assurance can be given that the
U.S. Government will provide financial support to U.S. Government-sponsored in-
strumentalities 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 certifi-
cates (such as Treasury income growth receipts ("TIGRs") and certificates of
accrual on Treasury certificates ("CATs")). The Balanced Portfolio may purchase
these certificates, as well as Treasury receipts and other stripped securities,
which represent beneficial ownership interests in either future interest pay-
ments or the future principal payments on U.S. Government obligations. These
instruments are issued at a discount to their "face value" and may (particu-
larly 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) and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's sub-adviser believes that their return, on a
pre-tax basis, will be comparable to the returns of other permitted invest-
ments. Dividends paid by the Portfolio that are derived from interest on munic-
ipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-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 ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the 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 the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the 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 securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's
32
<PAGE>
right to purchase or repurchase securities may be restricted. Successful use of
mortgage dollar rolls may depend upon the sub-adviser's ability to correctly
predict interest rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for each Portfolio (including both the eq-
uity and fixed income portions of the Balanced Portfolio in the aggregate) and
for the Index Master Portfolio will not exceed 150%. A Portfolio's annual port-
folio turnover rate will not, however, be a factor preventing a sale or pur-
chase when the adviser or sub-adviser believes investment considerations war-
rant 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.
33
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. 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). Sev-
eral 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, in the case of
the Index Master Portfolio, obligations of instrumentalities of the U.S.
Government) 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 In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities 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
(33% of net assets in the case of the Index Master Portfolio) 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 Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions 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 de-
scribed 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.
34
<PAGE>
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 following persons currently
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional in-
formation about the trustees and officers of both the Fund and
The DFA Investment Trust Company.
ADVISER AND
SUB- The Adviser to Compass Capital Funds is PNC Asset Management
ADVISERS Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund family is managed by a specialized portfolio manager who is
a member of one of PAMG's portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ----------- ------------------------------------
<S> <C> <C>
Value Equity PCM(/1/) 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
manager since 1995.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
---------------------------- ------------------------ ------------------------------------------
<C> <S> <C>
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.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice President of
PCM since July 1996; prior to joining PCM,
Portfolio Manager and Research Analyst
with Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager with
PEAC since 1995; investment manager with
PNC Bank, National Association from 1986
to 1995; Portfolio manager since its
inception.
Mid-Cap Value Equity PCM(/1/) Benedit E. Capaldi (see above); Portfolio
co-manager since its inception.
Daniel B. Eagan; portfolio manager with
PCM since 1995; director of investment
strategy at PAMC during 1995; portfolio
manager with PEAC during 1995; Portfolio
co-manager since its inception.
Mid-Cap Growth Equity PEAC(/2/) William J. Wykle (see above); Portfolio
co-manager since its inception.
[Insert McVail Bio]
International Equity CastleInternational(/4/) Gordon Anderson; Managing Director and
Chief Investment Officer since 1996; prior
to joining CastleInternational, Investment
Director of Dunedin Fund Managers Ltd.;
Portfolio manager since 1996.
International Emerging CastleInternational(/4/) Euan Rae; Senior Investment Manager since
1996; prior to joining
CastleInternational, Head of Emerging
Markets at Dunedin Fund Managers Ltd., and
Investment Manager with Edinburgh Fund
Managers; Portfolio manager since 1996.
Select Equity PCM(/1/) Daniel B. Eagan (see above); Portfolio
manager since 1995.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
---------------------------- ------------------- ------------------------------------------
<C> <S> <C>
Balanced PCM and Daniel B. Eagan (see above); Portfolio co-
BlackRock(/1/)(/3/) 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.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary offices at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.
PAMG was organized in 1994 to perform advisory services for in-
vestment 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 maximum annual rates set forth below. As stated under "What
Are the Expenses of the Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG and do not rep-
resent an extra charge to the Portfolios.
37
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO EXCEPT
THE INDEX EQUITY PORTFOLIO AND THE INTERNATIONAL PORTFOLIOS
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .550% .400%
$1 billion -- $2 billion .500 .350
$2 billion -- $3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EQUITY PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</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 be-
lieves it is comparable to the rates paid by many other funds
with similar investment objectives and policies and is appro-
priate for the Portfolio in light of its investment objective
and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Value Equity Portfolio, .50%; Growth Equity Portfolio,
.50%; Small Cap Value Equity Portfolio, .53%; Small Cap Growth
Equity Portfolio, .53%; International Equity Portfolio, .70%;
International Emerging Markets Portfolio, 1.15%; Select
38
<PAGE>
Equity Portfolio, .50%; and Balanced Portfolio, .50%. For the
period from October 1, 1995 through June 1, 1996, the Index Eq-
uity Portfolio paid investment advisory fees to its former in-
vestment advisor at the annual rate of % of its average daily
net assets.
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with Com-
pass Capital's distributor.
ADVISER TO
INDEX Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
PORTFOLIO 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 in-
vestors. DFA's assets under management totalled approximately $
billion at October 31, 1996. David G. Booth and Rex A.
Sinquefield, both of whom are trustees and officers of The DFA
Investment Trust Company and directors, officers and sharehold-
ers of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made by
the Investment Committee of DFA, which meets on a regular basis
and also as needed to consider investment issues. The Investment
Committee is composed of certain officers and directors of DFA
who are elected annually. DFA provides the Index Master Portfo-
lio with a trading department and selects brokers and dealers to
effect securities transactions.
For the investment advisory services provided to the Index Mas-
ter Portfolio 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 Port-
folio's fiscal year ended November 30, 1996, DFA received a
monthly fee for its investment advisory services which, on an
annual basis, equaled .025% of the Index Master Portfolio's net
assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding
39
<PAGE>
stock of PDI is owned by its officers and the remaining out-
standing 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 these services, CCG 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 CDI 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 Portfo-
lio'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 admin-
istration fees from a Portfolio. PFPC serves as the adminis-
trative services, dividend disbursing and transfer agent to
the Index Master Portfolio, for which PFPC is entitled to com-
pensation at the annual rate of .015% of the Index Master
Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN Investor Shares of the Portfolios bear the expense of payments
("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank, National Asso-
ciation ("PNC Bank") for distribution and sales support serv-
ices. The distribution fees may be used to compensate the Dis-
tributor for distribution services and to compensate the Dis-
tributor 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 pay-
able 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
40
<PAGE>
value of each Portfolio's outstanding Investor B Shares. Pay-
ments under the Plan are not tied directly to out-of-pocket ex-
penses and therefore may be used by the recipients as they
choose (for example, to defray their overhead expenses). The
Plan also permits the Distributor, PAMG, the Administrators and
other companies that receive fees from the Fund to make payments
relating to distribution and sales support activities out of
their past profits or other sources available to them.
Under the Plan, the Fund intends to enter into service arrange-
ments with Service Organizations (including PNC Bank and its af-
filiates) with respect to each class of Investor Shares pursuant
to which Service Organizations will render certain support serv-
ices to their customers who are the beneficial owners of In-
vestor 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 Organiza-
tions may provide one or more of the following services: re-
sponding to customer inquiries relating to the services per-
formed by the Service Organization and to customer inquiries
concerning their investments in Investor Shares; assisting cus-
tomers in designating and changing dividend options, account
designations and addresses; and providing other similar share-
holder liaison services. In consideration for a separate share-
holder processing fee of up to .15% (annualized) of the average
daily net asset value of Investor Shares owned by their custom-
ers, Service Organizations may provide one or more of these ad-
ditional services to such customers: processing purchase and re-
demption 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-ac-
counting with respect to Investor Shares beneficially owned by
customers or the information necessary for sub-accounting; and
providing other similar services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of In-
vestor Shares should read this Prospectus in light of the terms
and fees governing their accounts with Service Organizations.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. Under state securities laws, banks
and financial institutions that receive payments from the Fund
may be required to register as dealers.
41
<PAGE>
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 the investment adviser
and the Administrators, transfer agency and custodian fees,
trustee fees, taxes, interest, professional fees, shareholder
servicing and processing fees, distribution fees, fees and ex-
penses in registering and qualifying the Portfolios and their
shares for distribution under Federal and state securities
laws, expenses of preparing prospectuses and statements of ad-
ditional information and of printing and distributing prospec-
tuses and statements of additional information to existing
shareholders, expenses relating to shareholder reports, share-
holder meetings and proxy solicitations, insurance premiums,
the expense of independent pricing services, and other ex-
penses 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 particu-
lar investment portfolio will be allocated among all invest-
ment portfolios by or under the direction of the Board of
Trustees in a manner the Board determines to be fair and equi-
table.
42
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Equity Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of 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 ongoing expenses
Free exchanges with other A Shares in the Compass Capital Funds
family
A Shares may make sense for investors with a long-term invest-
ment horizon who prefer to pay a one-time front-end sales charge
and have reduced ongoing 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 years from a high of 4.50%
Automatically convert to A Shares eight years from purchase
B Shares may make sense for investors who prefer to pay for pro-
fessional investment advice on an ongoing basis (asset-based
sales charge) rather than with a traditional, one-time front-end
sales charge.
43
<PAGE>
THE PRICING OPTIONS FOR EACH PORTFOLIO ARE DESCRIBED IN THE TABLES BELOW:
Value Equity, Growth Equity, Small Cap Value Equity, Small Cap Growth Equity,
Mid-Cap Value Equity, Mid-Cap Growth Equity, Select Equity and Balanced
Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 4.50% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
International Equity and International Emerging Markets Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 5.00% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
Index Equity Portfolio
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 3.00% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</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 shares of the Portfolios may do so either by
mailing the investment application attached to this Prospectus along with a
check or by wiring money as specified below under "How Are Shares Purchased?".
The Fund also offers a third pricing option for shares of the Portfolios--In-
vestor C Shares--which are described in a separate prospectus. See "How Is The
Fund Organized?"
44
<PAGE>
What Are The Key Considerations In Selecting A Pricing Option?
- --------------------------------------------------------------------------------
In deciding which class of Investor Shares to purchase, investors should con-
sider the following:
Intended Holding Period. Over time, the cumulative distribution fees on a Port-
folio's Investor B 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 Shares' aggregate distribution fees would be equal to the In-
vestor A Shares' initial maximum sales charge from four to seven years after
purchase (depending on the Portfolio). Thereafter, Investor B 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.
Any positive investment return on the additional invested amount would par-
tially or wholly offset the higher annual expenses borne by Investor B 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 rein-
vestment.
Investor B shareholders also pay a contingent deferred sales charge if they re-
deem during the first six years after purchase, unless a sales charge waiver
applies. Investors expecting to redeem during this period should consider the
cost of the applicable contingent deferred sales charge in addition to the ag-
gregate annual Investor B distribution fees, as compared with the cost of the
applicable initial sales charges applicable to the Investor A Shares.
Investor B Shares of the Portfolios purchased on or before January 12, 1996 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 a Portfolio purchased on or before January 12, 1996 convert to Investor A
Shares of the Portfolio at the end of six years after purchase. For more infor-
mation about Investor B Shares purchased on or before January 12, 1996 and the
deferred sales charge payable on their redemption, call PFPC at (800) 441-7762.
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 advanta-
geous 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 $1,000,000 or more of Investor B Shares.
45
<PAGE>
Waiver of Sales Charges. The entire initial sales charge on Investor A Shares
of a Portfolio may be waived for certain eligible purchasers allowing their en-
tire purchase price to be immediately invested in a Portfolio. The contingent
deferred sales charge may be waived upon redemption of certain Investor B
Shares.
46
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties 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 In-
vestment 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 em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
When placing purchase orders, investors should specify whether the order is for
Investor A or Investor B 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. 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 sales charge. Payment for an order may be made by the broker in
Federal funds or other funds immediately available to the Portfolios' custodian
no later than 4:00 p.m. (Eastern time) on the third Business Day following re-
ceipt 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 pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to 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, specify
the class of Investor Shares and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (cur-
47
<PAGE>
rently 4:00 p.m. Eastern time) on any Business Day (as defined below) are
priced at the applicable net asset value next determined on that day, plus any
applicable sales charge.
OTHER PURCHASE INFORMATION. Shares of each Portfolio of the Fund are sold on a
continuous basis by CDI as the Distributor. CDI 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. No
certificates will be issued for shares. Payments for shares of a Portfolio may,
in the discretion of the Fund's investment adviser, be made in the form of se-
curities that are permissible investments for that Portfolio. Compass Capital
reserves the right to reject any purchase order or to waive the minimum initial
investment requirement.
48
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. 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 OR INVESTOR B SHARES. If a redeem-
ing shareholder owns both Investor A Shares and Investor B 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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee 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 documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
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 desig-
nated 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 de-
scribed 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, Delaware 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 share-
holder's bank. To change the name of the single desig-
49
<PAGE>
nated 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 em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the required minimum initial investment as the re-
sult 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 their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of Investor B 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 ac-
ceptance by PFPC of the request and any other necessary documents in proper or-
der. 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 re-
cently 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
50
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
COMPASS CAPITAL FUNDS offers 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 from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor A and Investor B Shares of each Portfolio may be
exchanged for shares of the same class of other portfolios of the Fund which
offer that class of shares, based on their respective net asset values. Ex-
changes of Investor A Shares may be subject to the difference between the sales
charge previously paid on the exchanged shares and the higher sales charge (if
any) payable with respect to the shares acquired in the exchange.
Investor A Shares of 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 pur-
chase 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 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 re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide 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 sub-
stantial economic or market change, telephone exchanges may be difficult to
complete and shareholders may have to submit exchange requests to PFPC in writ-
ing.
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 speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
51
<PAGE>
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. 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 mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling 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. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
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 which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual 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 Fund offers 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 cur-
rent 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 withdraw-
als 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 which may be obtained from PFPC.
52
<PAGE>
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 PFPC. 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, are discouraged. No contingent
deferred sales charge will be assessed on redemptions of Investor B Shares made
through the SWP that do not exceed 12% of an account's net asset value on an
annualized basis. For example, monthly, quarterly and semi-annual SWP redemp-
tions of Investor B Shares will not be subject to the CDSC if they do not ex-
ceed 1%, 3% and 6%, respectively, of an account's net asset value on the re-
demption date. SWP redemptions of Investor B Shares in excess of this limit are
still subject to the applicable CDSC.
53
<PAGE>
What Is The Schedule Of Sales Charges And Exemptions?
- -------------------------------------------------------------------------------
INVESTOR A Investor A Shares are subject to a front-end sales charge de-
SHARES termined in accordance with the following schedules:
ALL PORTFOLIOS EXCEPT INTERNATIONAL PORTFOLIOS AND INDEX EQUITY PORTFOLIO
<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% 4.71% 4.00%
$25,000 but less than $50,000 4.25 4.44 3.75
$50,000 but less than $100,000 4.00 4.17 3.50
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
INTERNATIONAL EQUITY AND INTERNATIONAL 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% 5.26% 4.50%
$25,000 but less than $50,000 4.75 4.99 4.25
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 4.00 4.17 3.50
$250,000 but less than $500,000 3.00 3.09 2.50
$500,000 but less than $1,000,000 2.00 2.04 1.50
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
* There is no initial sales charge on purchases of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after
purchase.
** The Distributor may pay placement fees to dealers of up to 1.00% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
54
<PAGE>
INDEX EQUITY PORTFOLIO
<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 3.00% 3.09% 2.50%
$25,000 but less than $50,000 2.75 2.83 2.25
$50,000 but less than $100,000 2.50 2.56 2.00
$100,000 but less than $250,000 2.00 2.04 1.75
$250,000 but less than $500,000 1.50 1.52 1.25
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
* There is no initial sales charge on purchases of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 0.75% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
55
<PAGE>
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 Dis-
tributor. Dealers who receive 90% or more of the sales charge may be deemed to
be "underwriters" under the 1933 Act. The amount of the sales charge not
reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp.
who provide sales support services.
SALES CHARGE WAIVERS--INVESTOR A 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 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 representa-
tives of 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
(c). The following persons may also buy Investor A Shares without paying a
sales charge: (a) persons investing through an authorized payroll deduction
plan; (b) persons investing through an authorized investment plan for organiza-
tions which operate under Section 501(c)(3) of the Internal Revenue Code; (c)
registered investment advisers, trust companies and bank trust departments ex-
ercising discretionary investment authority with respect to amounts to be in-
vested in a Portfolio, provided that the aggregate amount invested pursuant to
this exemption equals at least $250,000; and (d) persons participating in a
"wrap account" or similar program under which they pay advisory fees to a bro-
ker-dealer or other financial institution. 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) pay-
able by qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate in purchases of Investor A 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 em-
ployees eligible to participate in purchases of Investor A Shares of the Port-
folios aggregating less than $500,000 will be 2.50% (1.50% with respect to
shares of the Index Equity Portfolio). The above schedule will apply to pur-
chases by such Qualified Plans of Investor A Shares aggregating $500,000 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, pur-
chases 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 com-
pany, 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 ex-
pense. An organized group does not include a group of
56
<PAGE>
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 fidu-
ciary 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 re-
ceive the cumulative quantity reduction, previous purchases of Investor A
Shares must be called to the attention of PFPC 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 another non-money market portfolio of the Fund), a share-
holder has a one-time right, to be exercised within 45 days, to reinvest the
redemption proceeds without any sales charges. PFPC must be notified of the re-
investment in writing by the purchaser, or by his or her broker, at the time
purchase is made in order to eliminate a sales charge. An investor should con-
sult 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 de-
ferred 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 or her financial institution, at the time the purchase of Investor A
Shares is made.
LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a 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 In-
tent 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 PFPC upon making subsequent purchases
that such purchases are subject to a Letter of Intent. All dividends and capi-
tal 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 In-
vestor 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
57
<PAGE>
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 ex-
piration 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 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 six years of purchase. The deferred sales charge on Investor B Shares is
based on the lesser of the offering price or the net asset value of the In-
vestor B Shares on the redemption date. Brokers will receive commissions equal
to 4.0% of Investor B Shares sold by them plus ongoing fees under the Fund's
Distribution and Service Plan and described under "Who Manages the Fund?" These
commissions may be different than the reallowances or placement fees paid to
dealers in connection with sales of Investor A Shares.
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<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 4.50%
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 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
More than seven, but less than eight 0.00
</TABLE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor B Shares is not charged in connection with: (1) ex-
changes described in "What Are The Shareholder Features Of The Fund?--Exchange
Privilege"; (2) redemptions made in connection with minimum required distribu-
tions 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 pur-
chase of Investor B Shares; (4) involuntary redemptions of Investor B Shares in
accounts with low balances as described in "How Are Shares Redeemed?"; and (5)
redemptions made
58
<PAGE>
pursuant to the Systematic Withdrawal Plan, subject to the limitations set
forth above under "What Are The Shareholder Features Of The Fund?--Systematic
Withdrawal Plan." In addition, no contingent deferred sales charge is charged
on Investor B Shares acquired through the reinvestment of dividends or distri-
butions.
When an investor redeems Investor B Shares, the redemption order is processed
to minimize the amount of the contingent deferred sales charge that will be
charged. Investor B Shares are redeemed first from those shares that are not
subject to the deferred sales load (i.e., shares that were acquired through re-
investment of dividends or distributions) and after that from the shares that
have been held the longest.
59
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio 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 secu-
rities 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 securities
exchanges are normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 Board of Trustees or, in the case of the
Index Master Portfolio, The DFA Investment Trust Company'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 a Portfolio's
sub-adviser under the supervision of the Board of Trustees determines such
method does not represent fair value.
60
<PAGE>
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 in-
come 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 declara-
tion. 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 frac-
tional shares of the same class on which the distributions are paid, unless a
shareholder elects to receive distributions in cash. This election, or any rev-
ocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses 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 Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
61
<PAGE>
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 dis-
tributed 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 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 qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
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 speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing 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 an-
other 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 privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged shares for the purpose of determining gain or
loss but may be included (subject to the same limitation) in the tax basis of
the new shares.
62
<PAGE>
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities 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 Port-
folio 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 Interna-
tional 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 proportion-
ate amount of such taxes against a shareholder's U.S. Federal income tax lia-
bilities, or (b) if a shareholder itemizes deductions, to deduct such propor-
tionate amounts from U.S. Federal taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
63
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Investor A Shares and Investor B Shares of the eleven
Portfolios 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, 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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. In addition, the performance of each class of In-
vestor Shares may be different. The Fund offers various services and privileges
in connection with its Investor Shares that are not generally offered in con-
nection with its Institutional and Service Shares, including an automatic in-
vestment plan and an automatic withdrawal plan. For further information regard-
ing the Fund's Institutional, Service and Investor C Share classes, contact
PFPC at (800) 441-7762.
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 that 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 December , 1996, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of institutional and individual in-
vestors, 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 invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The Index Equity Portfolio
purchases shares of the Index Master Portfolio at net asset value. The net as-
set value of the Index Equity Portfolio responds to increases and decreases in
the value
64
<PAGE>
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 30 days notice to the Index Master Portfolio
if the Board of Trustees of the Fund determines that it is in the best inter-
ests 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 manage the Index Equity Portfolio's as-
sets 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 in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
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 are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns 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 Master Portfolio (and, indirectly, to the Index Equity
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 own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, 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 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 mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio 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 sharehold-
ers) of the Index Master Portfolio.
65
<PAGE>
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity 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.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees 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 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 invest-
ment 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 ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity 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 ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Index Master Portfolio, please
contact DFA at (310) 395-8005 or contact your broker.
66
<PAGE>
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 Investor Shares of a Portfolio over the measuring pe-
riod. 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 re-
flecting the sales load.
The yield of a class of shares of the Balanced Portfolio is computed by divid-
ing the net income allocated to that class during a 30-day (or one month) pe-
riod 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 indices, as
well as to ratings or rankings prepared by independent services or other finan-
cial or industry publications that monitor the performance of mutual funds. For
example, the performance of a class of shares may be compared to data prepared
by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. and Wei-
senberger Investment Company Service, and to the performance of the Dow Jones
Industrial Average, the "stocks, bonds and inflation Index" published annually
by Ibbotson Associates, the Lipper International Fund Index, the Lehman Govern-
ment Corporate Bond Index and the Financial Times World Stock Index, as well as
the benchmarks attached to this Prospectus. Performance information may also
include evaluations of the Portfolios and their share classes published by na-
tionally recognized ranking services, and information as reported in financial
publications such as Business Week, Fortune, Institutional Investor, Money Mag-
azine, 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 dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Investor Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for In-
vestor Shares of a Portfolio cannot necessarily be used to compare an invest-
67
<PAGE>
ment 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 institu-
tions directly to their customer accounts in connection with investments in In-
vestor Shares will not be included in the Portfolio performance calculations.
68
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
69
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Value Equity Russell 1000 Value Index An index composed of those Russell 1000
securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Growth Equity Russell 1000 Growth The Russell 1000 Growth Index contains
Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Equity Russell 2000 Index An index of the smallest 2000 companies in
the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Growth Equity Russell 2000 Growth An index composed of those Russell 2000
Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Equity Russell Midcap Value The Russell Midcap Value Index consists of
Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Equity Russell Midcap Growth The Russell Midcap Growth Index consists of
Index the bottom 800 securities of the Russell
1000 Index with greater-than-average growth
orientation as ranked by total market
capitalization.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
International Emerging MSCI Emerging Markets The Morgan Stanley Capital International
Markets Free Index (MSCI) Emerging Markets Free Index (EMF) is
a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, and the
Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad Investment An unmanaged index of 3500 bonds. The Broad
Grade Index Investment Grade Index is market
capitalization weighted and includes
Treasury, Government sponsored mortgages
and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
70
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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 PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
VALUE EQUITY PORTFOLIO
GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
INVESTOR SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR C SHARES OF THE VALUE EQUITY
PORTFOLIO, GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY
PORTFOLIO, MID-CAP GROWTH EQUITY PORTFOLIO, CORE EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL
EMERGING MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- -------------- --------
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
<PAGE>
The Equity Portfolios Investor C Shares
January 1, 1997
- --------------------------------------------------------------------------------
Compass Capital FundsSM ("Compass Capital" or the "Fund") con-
sist of thirty investment portfolios. This Prospectus de-
scribes the Investor C Shares of eleven of those portfolios
(the "Portfolios"):
Value Equity Portfolio
Growth Equity Portfolio
Small Cap Value Equity Portfolio
Small Cap Growth Equity Portfolio
Mid-Cap Value Equity Portfolio
Mid-Cap Growth Equity Portfolio
International Equity Portfolio
International Emerging Markets Portfolio
Select Equity Portfolio
Index Equity Portfolio
Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 1, 1997 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, 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, OBLI-
GATIONS 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 ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios 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 begins on page 10 and a summary of
each Performance Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
COMPASS
CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Value Equity Russell 1000 Growth and Income
Value Index
Growth Equity Russell 1000 Growth
Growth
Index
Small Cap Russell 2000 Small Company Growth
Value Equity Index
Small Cap Russell 2000 Small Company Growth
Growth Equity Growth
Index
Mid-Cap Value Russell Midcap
Equity Midcap
Value Index
Mid-Cap Growth Russell Midcap
Equity Midcap
Growth
Index
International EAFE Index International
Equity
International MSCI Emerging Markets
EmergingMarkets Emerging
Markets
Free Index
Select Equity S&P 500 Growth and Income
Index
Index Equity S&P 500 S&P 500 Index
Index
Balanced S&P 500 Balanced
Index and
Salomon
Broad
Investment
Grade Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visers 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 Portfo-
lio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
EQUITY different directions in equity investing. You may wish to use
PORTFOLIOS the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, 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 as-
sociated risks, deserve careful consideration. Certain risks
associated with international investments are heightened be-
cause of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies And Risks
Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased?" and "How Are
CAPITAL FUNDS Shares Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?...............
What Are The Portfolios?..................................... 10
What Are The Differences Among The Portfolios?............... 11
What Additional Investment Policies And Risks Apply?......... 13
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 24
Who Manages The Fund?........................................ 25
What Pricing Options Are Available To Investors?............. 33
How Are Shares Purchased?.................................... 34
How Are Shares Redeemed?..................................... 36
What Are The Shareholder Features Of The Fund?............... 38
What Sales Charge And Exemptions Apply To Investor C
Shares?..................................................... 40
How Is Net Asset Value Calculated?........................... 41
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 42
How Are Fund Distributions Taxed?............................ 43
How Is The Fund Organized?................................... 45
How Is Performance Calculated?............................... 48
How Can I Get More Information?.............................. 50
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor C
Shares of the Value Equity, Small Cap Growth Equity, Select Equity and Index
Equity Portfolios for the fiscal year ended September 30, 1996 as a percentage
of average daily net assets. Because the Mid-Cap Value Equity Portfolio and
Mid-Cap Growth Equity Portfolio are new and no Investor C Shares of the Growth
Equity, Small Cap Value Equity, International Equity, International Emerging
Markets and Balanced Portfolios were outstanding during the fiscal year ended
September 30, 1996, the figures shown for these Portfolios are estimates for
the current fiscal year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY GROWTH EQUITY VALUE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C INVESTOR C
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None None None
Deferred Sales Charge(/1/)
(as a percentage of offering price) 1.0% 1.0% 1.0%
Sales Charge on Reinvested Dividends None None None
ANNUAL PORTFOLIO OPERATING EXPENSES
( AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/2/) .50% .50% .53%
12b-1 fees(/3/) .75 .75 .75
Other operating expenses (after fee
waivers)(/2/) .72 .72 .80
------- ------- -------
Shareholder servicing fee .25 .25 .25
Shareholder processing fee .15 .15 .15
Other expenses .32 .32 .40
----- ----- -----
Total Portfolio operating expenses
(after fee waivers)(/2/) 1.97% 1.97% 2.08%
======= ======= =======
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and administration fees
would be .23% for each Portfolio. 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 remainder of the cur-
rent fiscal year at the levels set forth in the table. Without waivers,
"Other operating expenses" would be .78%, .80% and .81%, respectively, and
"Total Portfolio operating expenses" would be 2.08%, 2.10% and 2.14%, re-
spectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares 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").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP MID-CAP MID-CAP INTERNATIONAL INTERNATIONAL
GROWTH EQUITY VALUE EQUITY GROWTH EQUITY EQUITY EMERGING MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C INVESTOR C INVESTOR C INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge
(as a percentage of
offering price) None None None None None
Deferred Sales
Charge(/1/)
(as a percentage of
offering price) 1.0% 1.0% 1.0% 1.0% 1.0%
Sales Charge on
Reinvested Dividends None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/2/) .53% .50% .50% .70% 1.15%
12b-1 fees(/3/) .75 .75 .75 .75 .75
Other operating expenses
(after fee
waivers )(/2/) .80 .83 .83 .83 1.10
------- ------- ------- ------- ---------
Shareholder servicing
fee .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15
Other expenses .40 .43 .43 .43 .70
----- ----- ----- ----- -------
Total Portfolio
operating expenses
(after fee
waivers)(/2/) 2.08% 2.08% 2.08% 2.28% 3.00%
======= ======= ======= ======= =========
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .55%, .55%, .75% and
1.25% for the Small Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap Growth
Equity, International Equity and International Emerging Markets Portfolios,
respectively, and administration fees would be .23% for each Portfolio.
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 ex-
penses during the remainder of the current fiscal year at the levels set
forth in the table. Without waivers, "Other operating expenses" would be
.81%, .96%, .96%, .90% and 1.15%, respectively, and "Total Portfolio oper-
ating expenses" would be 2.11%, 2.26%, 2.26%, 2.40% and 3.15%, respective-
ly, for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECT EQUITY INDEX EQUITY BALANCED
PORTFOLIO PORTFOLIO+ PORTFOLIO
INVESTOR C INVESTOR C INVESTOR C
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None None None
Deferred Sales Charge(/1/)
(as a percentage of offering price) 1.0% 1.0% 1.0%
Sales Charge on Reinvested Dividends None None None
ANNUAL PORTFOLIO OPERATING EXPENSES
(AFTER FEE WAIVERS AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/2/)(/3/) .50% .025% .50%
12b-1 fees(/4/) .75 .75 .75
Operating expenses of the Index Master
Portfolio N/A .04 N/A
Other operating expenses (after fee
waivers)(/2/) .72 .585 .77
------- ------- ------
Shareholder servicing fee .25 .25 .25
Shareholder processing fee .15 .15 .15
Other expenses .32 .185 .37
----- ----- ----
Total Portfolio operating expenses
(after fee waivers)(/2/) 1.97% 1.40% 2.02%
======= ======= ======
</TABLE>
(1) This amount applies to redemptions during the first 12 months. No deferred
sales charge is charged after the first 12 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% for the Select Equity
and Balanced Portfolios, and administration fees would be .23% for each
Portfolio. 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 remainder of the current fiscal year at the
levels set forth in the table. Without waivers, "Other operating expenses"
would be .80%, .78% and .83%, respectively, and "Total Portfolio operating
expenses" would be 2.10%, 1.59% and 2.13%, respectively, for Investor C
Shares.
(3) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
(4) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
8
<PAGE>
EXAMPLE
An investor in Investor C 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 $20 $62 $106 $230
Growth Equity Portfolio 20 62 106 230
Small Cap Value Equity Portfolio 21 65 112 241
Small Cap Growth Equity Portfolio 21 65 112 241
Mid-Cap Value Equity Portfolio 21 65 112 241
Mid-Cap Growth Equity Portfolio 21 65 112 241
International Equity Portfolio 23 71 122 262
International Emerging Markets
Portfolio 30 93 158 332
Select Equity Portfolio 20 62 106 230
Index Equity Portfolio 17 44 77 168
Balanced Portfolio 21 63 109 235
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses (including the Index Equity Portfolio's pro
rata share of the Index Master Portfolio's advisory fees and operating ex-
penses) an investor will bear either directly or indirectly. They do not re-
flect any charges that may be imposed by brokers or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
For a detailed description of the expenses, see "Who Manages the Fund?"
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are 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 IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
9
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment
styles so that investors may participate across multiple dis-
ciplines in order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of
eleven investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity
sector. Eight of these Portfolios invest primarily 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 in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the individual's in-
vestment goals and sentiments.
INVESTMENT
OBJECTIVES Each of the eleven Compass Capital Equity Portfolios seeks to
provide long-term Capital Appreciation.
The Select Equity, Value Equity, Mid-Cap Value Equity and Mid-
Cap Growth Equity Portfolios pursue a secondary objective of
Current Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described below. No assurance
can be given that a Portfolio will achieve its investment ob-
jective.
10
<PAGE>
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 Stocks with price/earnings Russell 1000
(defined as common stocks or and price/book ratios at Value Index
securities convertible into time of purchase below
common stocks) which the average for benchmark and
sub-adviser believes are capitalization in excess of
undervalued. A security's $1 billion.
earnings trend and its
dividend growth rate will
also be factors considered
in security selection.
Growth Equity Pursues stocks with earnings Stocks with growth rate Russell 1000
growth potential. Emphasizes estimates in excess of Growth Index
stocks which the sub-adviser average for benchmark and
considers to have favorable capitalization in excess of
and above-average earnings $1 billion.
growth prospects.
Small Cap Value Equity Pursues small cap stocks Stocks with price/earnings Russell 2000
which the sub-adviser and price/book ratios at Index
believes are undervalued. A time of purchase below
security's earnings trend average for benchmark and
and its dividend growth rate capitalization below $1
will also be factors billion.
considered in security
selection.
Small Cap Growth Equity Pursues small cap stocks Stocks with growth rate Russell 2000
with earnings growth estimates in excess of Growth Index
potential. Emphasizes small average for benchmark and
cap stocks which the sub- capitalization below $1
adviser considers to have billion.
favorable and above-average
earnings growth prospects.
Mid-Cap Value Equity Pursues mid cap stocks and Stocks with low Russell
sectors which the sub- price/earnings, price/book, Midcap Value
adviser believes are price/cash flow or Index
undervalued. [A security's price/sales ratios at the
earnings trend and its time of purchase relative to
dividend growth rate will their respective sectors or
also be factors considered the benchmark and
in security selection.] capitalization between $1
billion and $5 billion.
Mid-Cap Growth Equity Pursues mid cap stocks with Stocks with growth rate Russell
earnings growth potential. estimates in excess of Midcap
Emphasizes stocks which the average for benchmark and Growth Index
sub-adviser considers to capitalization between $1
have favorable and above- billion and $5 billion.
average earnings growth
prospects.
International Equity Pursues non-dollar Portfolio assets are EAFE Index
denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far East security's home market or
Index ("EAFE"). Within this stock exchange.
universe, a value style of
investing is employed to Diversification across
select stocks which the sub- countries, industry groups
adviser believes are and companies with
undervalued. A security's investment at all times in
earnings trend and its price at least three foreign
momentum will also be countries.
factors considered in
security selection. The sub-
adviser will also consider
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>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
International Emerging Pursues non-dollar Portfolio assets are MSCI
Markets denominated stocks of primarily invested in stocks Emerging
issuers in emerging country of emerging market issuers. Markets Free
markets (generally any Index
country considered to be Stocks with price/earnings
emerging or developing by ratios below average for a
the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the United
Nations). Within this Ordinarily, stocks of
universe, a value style of issuers in at least three
investing is employed to emerging markets will be
select stocks which the sub- held.
adviser believes are
undervalued. The sub-adviser
will also consider
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.
Select Equity Combines value and growth Similar sector weightings as S&P 500
style as sub-adviser benchmark, with over- or Index
identifies market under-weighting in
opportunity. particular securities within
those sectors.
Index Equity Invests all of its assets Holds substantially all of S&P 500
indirectly through the U.S. the stocks of the S&P 500 Index
Large Company Series (the Index in approximately the
"Index Master Portfolio") of same proportions as they are
The DFA Investment Trust represented in the Index.
Company, in the stocks of
the S&P 500 Index using a
passive investment style
that pursues the replication
of the S&P 500 Index return.
Balanced Holds a blend of equity and Maintains a minimum 25% S&P 500 and
fixed income securities to investment in fixed income Salomon
deliver total return through senior securities. Broad
capital appreciation and Investment
current income. Grade Index
Equity Portion: Combines Equity Portion:
value and growth style as Similar sector weightings as
sub-adviser identifies benchmark, with over- or
market opportunity. under-weighting in
particular securities within
those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and Dollar-denominated
security selection across a investment grade bonds,
broad universe of fixed including U.S. Government,
income securities. mortgage-backed, asset-
backed and corporate debt
securities.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
12
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
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 se-
curities 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 convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depository receipts.
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 De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying 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 con-
cerning 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. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, 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 when the aggregate premiums on outstanding op-
tions 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 mem-
bers if they default.
13
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes 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 con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency 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 contract, 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 ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid 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 instru-
ments 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 re-
sulting 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 inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest up to 5% of
14
<PAGE>
its net assets in certain short-term fixed income obligations in order to main-
tain liquidity or to invest temporarily uncommitted cash balance.
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar-denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase 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 securities.
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 transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities 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 se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. 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 securi-
ties 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 ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. 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 de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio (except the Index Master Portfolio) through reverse repur-
chase agreements under which the Portfolio sells portfolio securities to finan-
cial institutions such as banks and broker-dealers and agrees to repurchase
them at a particular date and price. A Portfolio may use the proceeds of re-
verse repurchase agreements to purchase other securities either maturing, or
under an agreement to resell, on a date simultaneous with or prior to the expi-
ration of the reverse repurchase agreement. The Balanced Portfolio 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 Portfolio is obligated to repurchase and that the securi-
ties 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 appropri
15
<PAGE>
ate liquid 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
(33% in the case of the Index Master Portfolio). In addition, the Balanced
Portfolio may borrow up to an additional 5% of its total assets for temporary
purposes. Whenever borrowings exceed 5% of a Portfolio's total assets, the
Portfolios (other than the Index Master Portfolio and the Balanced Portfolio)
will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) 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. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (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 addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained 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 re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly 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 secu-
rities 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 re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties 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. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser 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 pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
16
<PAGE>
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of smaller-capitalized organizations (less than $1 billion at
the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid-
Cap Growth Equity Portfolio will invest, under normal market conditions, at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of medium-capitalized organizations (between $1 billion and
$5 billion at the time of purchase). These organizations will normally have
more limited product lines, markets and financial resources and will be depen-
dent upon a more limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the 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 Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash.
- ------
*"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of the McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
17
<PAGE>
S&P has no obligation or liability in connection with the administration, mar-
keting or trading of the Index Equity Portfolio or Index Master Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities 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 as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, 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 is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains 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 addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios 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 the
18
<PAGE>
higher cost of investment research, higher cost of custody of foreign securi-
ties, 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 Repub-
lic, Ecuador, Greece, Hungary, India, Indonesia Israel, Lebanon, Malaysia, Mex-
ico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa,
South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam. Politi-
cal and economic structures in many of these countries may be undergoing sig-
nificant evolution and rapid development, and these countries may lack the so-
cial, political and economic stability characteristic of more developed coun-
tries. 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 nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of invest-
ments in these countries and the availability to a Portfolio of additional in-
vestments 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 to assess the value or prospects of an investment in such is-
suers.
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. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) 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 for-
eign 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 a Portfolio to establish a rate of ex-
change for a future point in time.
19
<PAGE>
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating organi-
zation. If unrated, the securities 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 invest-
ment 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 practica-
ble. Investments in securities of foreign issuers, which present additional in-
vestment considerations as described above under "International Portfolios,"
will be limited to 5% of the Portfolio's total assets.
The market value of the Balanced Portfolio's investments in fixed income corpo-
rate 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 securi-
ties 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 make significant investments in mortgage-related and
purchase other asset-backed securities (i.e., securities backed by home equity
loans, installment sale contracts, credit card receivables) or other assets is-
sued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, 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 obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers 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 multi-
ple 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 clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest 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 ("PACs") 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.
20
<PAGE>
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws 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 come
cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other 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 be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
In calculating the average weighted maturity of a Portfolio, the maturity of
other asset-backed securities will be based on estimates of average life which
take prepayments into account. The average life of a mortgage-related instru-
ment, in particular, is likely to be substantially less than the original matu-
rity of the mortgage pools underlying the securities as the result of scheduled
principal payments and mortgage prepayments. In general, the collateral sup-
porting non-mortgage asset-backed securities is of shorter maturity than mort-
gage loans and is less likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally 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 and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank or its affiliates. It
is possible that, under some circumstances, PNC Mortgage Securities Corp. or
its affiliates could have interests that are in conflict with the holders of
these mortgage-backed securities, and such holders could have rights against
PNC Mortgage Securities Corp. or its affiliates.
21
<PAGE>
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 are supported
by the full faith and credit of the U.S. Treasury. Others are supported by the
right of the issuer to borrow from the U.S. Treasury; and still others are sup-
ported only by the credit of the agency or instrumentality issuing the obliga-
tion. No assurance can be given that the U.S. Government will 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 Treasury income growth
receipts ("TIGRs") and certificates of accrual on Treasury certificates
("CATs")). The Balanced Portfolio may purchase these certificates, as well as
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 dis-
count to their "face value" and may (particularly in the case of stripped mort-
gage-backed securities) exhibit greater price volatility than ordinary debt se-
curities because of the manner in which their principal and interest are re-
turned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments), and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's sub-adviser believes that their return, on a
pre-tax basis, will be comparable to the returns of other permitted invest-
ments. Dividends paid by the Portfolio that are derived from interest on munic-
ipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-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 ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the 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 the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the 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 securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
22
<PAGE>
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for each Portfolio (including both the eq-
uity and fixed income portions of the Balanced Portfolio in the aggregate) and
for the Index Master Portfolio will not exceed 150%. A Portfolio's annual port-
folio turnover rate will not, however, be a factor preventing a sale or pur-
chase when the adviser or sub-adviser believes investment considerations war-
rant 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.
23
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. 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). Sev-
eral 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, in the case of
the Index Master Portfolio, obligations of instrumentalities of the U.S.
Government) 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 In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities 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
(33% of net assets in the case of the Index Master Portfolio) 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 Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions 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 de-
scribed 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.
24
<PAGE>
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 following persons currently
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional in-
formation about the trustees and officers of both the Fund and
The DFA Investment Trust Company.
ADVISER AND
SUB-ADVISERS The Adviser to COMPASS CAPITAL FUNDS is PNC Asset Management
Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund family is managed by a specialized portfolio manager who is
a member of one of PAMG's portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ----------- ------------------------------------
<S> <C> <C>
Value Equity PCM(/1/) 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
manager since 1995.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------- ------------------------------------
<S> <C> <C>
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.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice
President of PCM since July 1996;
prior to joining PCM, Portfolio
Manager and Research Analyst with
Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank, National
Association from 1986 to 1995;
Portfolio manager since its
inception. [INSERT MCVAIL BIO]
Mid-Cap Value Equity PCM(/1/) Benedict E. Capaldi (see above);
Portfolio co-manager since its
inception.
Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; portfolio manager with PEAC
during 1995; portfolio co-manager
since its inception.
Mid-Cap Growth Equity PEAC(/2/) William J. Wykle (see above);
Portfolio co-manager since its
inception. [INSERT MCVAIL BIO]
International Equity Castle International(/4/) Gordon Anderson; Managing Director
and Chief Investment Officer since
1996; prior to joining
CastleInternational, Investment
Director of Dunedin Fund Managers
Ltd.; Portfolio manager since 1996.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------ ------------------------------------
<S> <C> <C>
International Emerging CastleInternational(/4/) Euan Rae; Senior Investment Manager
Markets since 1996; prior to joining
CastleInternational, Head of
Emerging Markets at Dunedin Fund
Managers Ltd. and investment manager
with Edinburgh Fund Managers;
Portfolio manager since 1996.
Select Equity PCM(/1/) Daniel B. Eagan (see above);
Portfolio manager since 1995.
Balanced PCM and Daniel B. Eagan (see above);
BlackRock(/1/)(/3/) 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.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary offices at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.
PAMG was organized in 1994 to perform advisory services for in-
vestment 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 maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG and do not rep-
resent an extra charge to the Portfolios.
27
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO EXCEPT THE INDEX EQUITY
PORTFOLIO AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE
- ----------------- ------------ ------------
<S> <C> <C>
first $1 billion .550% .400%
$1 billion--$2 billion .500 .350
$2 billion--$3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL EQUITY PORTFOLIO
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE
- ----------------- ------------ ------------
<S> <C> <C>
first $1 billion .750% .600%
$1 billion--$2 billion .700 .550
$2 billion--$3 billion .675 .525
greater than $3 billion .650 .500
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL EMERGING MARKETS
PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
- ------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion--$2 billion 1.200 1.050
$2 billion--$3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</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 be-
lieves it is comparable to the rates paid by many other funds
with similar investment objectives and
28
<PAGE>
policies and is appropriate for the Portfolio in light of its
investment objective and policies.
For their last fiscal year the Portfolios paid investment advi-
sory fees at the following annual rates (expressed as a percent-
age of average daily net assets) after voluntary fee waivers:
Value Equity Portfolio, .50%; Growth Equity Portfolio, .50%;
Small Cap Value Equity Portfolio, .53%; Small Cap Growth Equity
Portfolio, .53%; International Equity Portfolio, .70%; Interna-
tional Emerging Markets Portfolio, 1.15%; Select Equity Portfo-
lio, .50%; and Balanced Portfolio, .50%. For the period from Oc-
tober 1, 1995 through June 1, 1996, the Index Equity Portfolio
paid investment advisory fees to its former investment adviser
at the annual rate of % of its average daily net assets.
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor.
ADVISER TO
INDEX Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
PORTFOLIO 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 in-
vestors. DFA's assets under management totalled approximately $
billion at October 31, 1996. David G. Booth and Rex A.
Sinquefield, both of whom are trustees and officers of The DFA
Investment Trust Company and directors, officers and sharehold-
ers of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made by
the Investment Committee of DFA, which meets on a regular basis
and also as needed to consider investment issues. The Investment
Committee is composed of certain officers and directors of DFA
who are elected annually. DFA provides the Index Master Portfo-
lio with a trading department and selects brokers and dealers to
effect securities transactions.
For the investment advisory services provided to the Index Mas-
ter Portfolio 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 Port-
folio's fiscal year ended November 30, 1996, DFA received a
monthly fee for its investment advisory services which, on an
annual basis, equaled .025% of the Index Master Portfolio's net
assets.
29
<PAGE>
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). 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 these services, CCG 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 CDI 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 Portfo-
lio'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 admin-
istration fees from a Portfolio. PFPC serves as the adminis-
trative services, dividend disbursing and transfer agent to
the Index Master Portfolio, for which PFPC is entitled to com-
pensation at the annual rate of .015% of the Index Master
Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank, National Association ("PNC Bank") serves as the
AGENT, Portfolios' custodian and PFPC serves as their transfer agent
DIVIDEND and dividend disbursing agent.
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE
PLAN
Under the Fund's Distribution and Service Plan (the "Plan"),
Investor C Shares of the Portfolios bear the expense of pay-
ments ("distribution fees") made to CDI, as the Fund's dis-
tributor (the "Distributor"), or affiliates of PNC Bank for
distribution and sales support services. The distribution fees
may be used to compensate the Distributor for distribution
services and to compensate the Distributor and PNC Bank affil-
iates for sales support services provided in connection with
the offering and sale of Investor C Shares. The distribution
fees may also be used to reimburse the Distributor and PNC
Bank affiliates for related
30
<PAGE>
expenses, including payments to brokers, dealers, financial in-
stitutions and industry professionals ("Service Organizations")
for sales support services and related expenses. Distribution
fees payable under the Plan will not exceed .75% (annualized) of
the average daily net asset value of each Portfolio's outstand-
ing Investor C Shares. Payments under the Plan are not tied di-
rectly to out-of-pocket expenses and therefore may be used by
the recipients as they choose (for example, to defray their
overhead expenses). The Plan also permits the Distributor, PAMG,
the Administrators and other companies that receive fees from
the Fund to make payments relating to distribution and sales
support activities out of their past profits or other sources
available to them.
Under the Plan, the Fund intends to enter into service arrange-
ments with Service Organizations (including PNC Bank and its af-
filiates) with respect to Investor C Shares pursuant to which
Service Organizations will render certain support services to
their customers who are the beneficial owners of Investor C
Shares. In consideration for a shareholder servicing fee of up
to .25% (annualized) of the average daily net asset value of In-
vestor C Shares owned by their customers, Service Organizations
may provide one or more of the following services: responding to
customer inquiries relating to the services performed by the
Service Organization and to customer inquiries concerning their
investments in Investor C Shares; assisting customers in desig-
nating and changing dividend options, account designations and
addresses; and providing other similar shareholder liaison serv-
ices. In consideration for a separate shareholder processing fee
of up to .15% (annualized) of the average daily net asset value
of Investor C Shares owned by their customers, Service Organiza-
tions may provide one or more of these additional services to
such customers: 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
Investor C Shares beneficially owned by customers or the infor-
mation necessary for sub-accounting; and providing other similar
services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of In-
vestor C Shares should read this Prospectus in light of the
terms and fees governing their accounts with Service Organiza-
tions.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws.
31
<PAGE>
Under state securities laws, banks and financial institutions
that receive payments from the Fund may be required to regis-
ter as dealers.
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 the investment adviser
and the Administrators, transfer agency and custodian fees,
trustee fees, taxes, interest, professional fees, shareholder
servicing and processing fees, distribution fees, fees and ex-
penses in registering and qualifying the Portfolios and their
shares for distribution under Federal and state securities
laws, expenses of preparing prospectuses and statements of ad-
ditional information and of printing and distributing prospec-
tuses and statements of additional information to existing
shareholders, expenses relating to shareholder reports, share-
holder meetings and proxy solicitations, insurance premiums,
the expense of independent pricing services, and other ex-
penses 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 particu-
lar investment portfolio will be allocated among all invest-
ment portfolios by or under the direction of the Board of
Trustees in a manner the Board determines to be fair and equi-
table.
32
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Equity Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes. The Investor C Share pricing option is described below:
C SHARES (LEVEL LOAD)
Contingent deferred sales charge (CDSC) of 1.00% if shares are
redeemed within 12 months of purchase
Investor C Shares of all Portfolios:
<TABLE>
<CAPTION>
C SHARES
<S> <C>
Maximum Front-End Sales Charge 0.00%
12b-1 Fee 0.75%
CDSC (Redemption Charge) 1.00%
(If redeemed within 12
months of purchase)
</TABLE>
The Fund also offers two additional pricing options for shares
of the Portfolios--Investor A Shares (which are sold with a
front-end sales load) and Investor B Shares (which are subject
to a back-end load if redeemed within six years 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 ongoing 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
years of purchase. Brokers will receive commissions equal to 1%
of Investor C Shares sold by them plus ongoing fees under the
Fund's Distribution and Service Plan and described under "Who
Manages the Fund?". These commissions and payments may be dif-
ferent than the reallowances or placement fees paid to dealers
in connection with sales of Investor A Shares and Investor B
shares. For more information on A Shares and B Shares of the
Portfolios, call (800) 441-7762.
Investors wishing to purchase shares of the Portfolios may do so
either by mailing the investment application attached to this
Prospectus along with a check or by wiring money as specified
below under "How Are Shares Purchased?"
33
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor C 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 In-
vestment 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 em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through
brokers which have entered into dealer agreements with the Distributor. Pur-
chase 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. Payment for an order may be made by the broker in Federal
funds or other funds immediately available to the Portfolios' 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 C
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 pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to 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, specify
the class of Investor Shares and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East-
ern time) on any Business Day (as defined below) are priced at the applicable
net asset value next determined on that day.
34
<PAGE>
OTHER PURCHASE INFORMATION. Shares of each Portfolio of the Fund are sold on a
continuous basis by CDI as the Distributor. CDI 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. No
certificates will be issued for shares. Payments for shares of a Portfolio may,
in the discretion of the Fund's investment adviser, be made in the form of se-
curities that are permissible investments for that Portfolio. Compass Capital
reserves the right to reject any purchase order or to waive the minimum initial
investment requirement.
35
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. Shareholders may also place redemption requests through a broker or
other institution, which may charge a fee for this service.
WHEN REDEEMING SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE THAT THEY
ARE REDEEMING INVESTOR C SHARES. If a redeeming shareholder owns both Investor
A Shares and Investor B or Investor C Shares in the same Portfolio, the In-
vestor A Shares will be redeemed first unless the shareholder indicates other-
wise.
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 rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, 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 guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Additional documentary evidence of authority is re-
quired by PFPC in the event redemption is requested by a corporation, partner-
ship, 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 desig-
nated 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 de-
scribed above. During periods of substantial economic or market change, tele-
phone redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 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 share-
holder's bank. To change the name of the single designated bank account to re-
ceive 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.
36
<PAGE>
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 em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the required minimum initial investment as the re-
sult 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 their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of 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 ac-
ceptance by PFPC of the request and any other necessary documents in proper or-
der. 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 re-
cently 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 pay-
ment 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 responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
37
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
COMPASS CAPITAL FUNDS offers 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 from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor C Shares of each Portfolio may be exchanged for
Investor C Shares of other portfolios of the Fund which offer that class of
shares, based on their respective net asset values.
The exchange of 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 re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. 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 col-
lect (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 speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic 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 ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. 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 mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
38
<PAGE>
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. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine. Exchange orders may also be sent by mail to the shareholder's
broker or to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.
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 which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs. 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 Fund offers 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 cur-
rent 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 withdraw-
als 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 which may be obtained from PFPC.
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. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC. No con-
tingent deferred sales charge will be assessed on redemptions of Investor C
Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor C Shares will not be subject to the CDSC if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. SWP redemptions of Investor C Shares in excess of this limit
are still subject to the applicable CDSC.
39
<PAGE>
What Sales Charge And Exemptions Apply To Investor C Shares?
- --------------------------------------------------------------------------------
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor C Shares is not charged in connection with: (1) ex-
changes described in "What Are The Shareholder Features Of The Fund?--Exchange
Privilege"; (2) redemptions made in connection with minimum required distribu-
tions from IRA, 403(b)(7) and qualified employee benefit 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 C Shares; (4) involuntary redemptions of
Investor C Shares in accounts with low balances as described in "How Are Shares
Redeemed?"; and (5) redemptions made pursuant to the Systematic Withdrawal
Plan, subject to the limitations set forth above under "What Are The Share-
holder Features Of The Fund?--Systematic Withdrawal Plan." In addition, no con-
tingent deferred sales charge is charged on Investor C Shares acquired through
the reinvestment of dividends or distributions.
When an investor redeems Investor C Shares, the redemption order is processed
to minimize the amount of the contingent deferred sales charge that will be
charged. 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 re-
investment of dividends or distributions) and after that from the shares that
have been held the longest.
40
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Investor C Shares of each Portfo-
lio 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 its In-
vestor C Shares, less the liabilities charged to its Investor C Shares, by the
number of its Investor C Shares 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 securities
exchanges are normally valued at the preceding closing values of such securi-
ties on their respective exchanges. 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 Board of Trustees or, in the case of the
Index Master Portfolio, The DFA Investment Trust Company'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 a Portfolio's
sub-adviser under the supervision of the Board of Trustees determines such
method does not represent fair value.
41
<PAGE>
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 in-
come 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 declara-
tion. 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 frac-
tional Investor C Shares of the relevant Portfolio, 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 dis-
tributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses 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 Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
42
<PAGE>
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 dis-
tributed 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 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 qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
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 speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing 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.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities 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 Port-
folio 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 Interna-
tional 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
43
<PAGE>
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 is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realised and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors 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, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
44
<PAGE>
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 com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Investor C Shares of the eleven Portfolios described
herein. Prior to the date of this prospectus, no Investor C Shares had been
sold to the public.
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 ex-
pected 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 Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. In addition, the performance of each class of In-
vestor Shares may be different. The Fund offers various services and privileges
in connection with its Investor Shares that are not generally offered in con-
nection with its Institutional and Service Shares, including an automatic in-
vestment plan and an automatic withdrawal plan. For further information regard-
ing the Fund's Institutional, Service Share classes and the other Investor
Share classes, contact PFPC at (800) 441-7762.
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 that 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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of institutional and individual invest-
ors, 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 invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The
45
<PAGE>
Index Equity Portfolio purchases shares of the Index Master Portfolio at net
asset value. The net asset value of the Index Equity Portfolio responds to in-
creases 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 with-
draw its investment in the Index Master Portfolio at any time upon 30 days no-
tice to the Index Master Portfolio if the Board of Trustees of the Fund deter-
mines that it is in the best interests of the Index Equity Portfolio to do so.
Upon withdrawal, the Board of Trustees would consider what action might be tak-
en, 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 manage the In-
dex Equity Portfolio's assets in accordance with the investment policies de-
scribed 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 in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
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 are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns 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 Master Portfolio (and, indirectly, to the Index Equity
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 own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, 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 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 mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master
46
<PAGE>
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.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity 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.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees 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 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 invest-
ment 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 ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity 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 ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Master Index Portfolio, please
contact DFA at (310) 395-8005 or contact your broker.
47
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Investor C Shares of the Portfolios may be quoted
in advertisements and communications to shareholders. Total return will be cal-
culated 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 Investor C Shares of a Portfolio over the measuring period.
Total return may also be calculated on an aggregate total return basis. Aggre-
gate total return reflects the total percentage change in value over the mea-
suring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to Investor C
Shares are reinvested in Investor C Shares, and also reflect the deferred sales
load charged by the Portfolio with respect to Investor C Shares. When, however,
a Portfolio compares the total return of Investor C Shares to that of other
funds or relevant indices, total return may also be computed without reflecting
the sales load.
The yield of Investor C Shares of the Balanced Portfolio is computed by divid-
ing the net income allocated to Investor C Shares during a 30-day (or one
month) period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis.
The performance of Investor C Shares may be compared to the performance of
other mutual funds with similar investment objectives and to relevant indices,
as well as to ratings or rankings prepared by independent services or other fi-
nancial or industry publications that monitor the performance of mutual funds.
For example, the performance of Investor C Shares may be compared to data pre-
pared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
and Weisenberger Investment Company Service, and to the performance of the Dow
Jones Industrial Average, the "stocks, bonds and inflation Index" published an-
nually by Ibbotson Associates, the Lipper International Fund Index, the Lehman
Government Corporate Bond Index and the Financial Times World Stock Index, as
well as the benchmarks attached to this Prospectus. Performance information may
also include evaluations of the Portfolios and their Investor C Shares pub-
lished by nationally recognized ranking services, and information as reported
in financial publications such as Business Week, Fortune, Institutional Invest-
or, 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 Investor C 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 dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Investor C Shares, when redeemed,
48
<PAGE>
may be worth more or less than their original cost. Since performance will
fluctuate, performance data for Investor C Shares of a Portfolio cannot neces-
sarily be used to compare an investment in such shares with bank deposits, sav-
ings 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 connec-
tion with investments in Investor C Shares will not be included in the Portfo-
lio performance calculations.
49
<PAGE>
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, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
50
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Value Equity Russell 1000 Value Index An index composed of those Russell 1000
securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Growth Equity Russell 1000 Growth The Russell 1000 Growth Index contains
Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Russell 2000 Index An index of the smallest 2000 companies in
Equity the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Russell 2000 Growth An index composed of those Russell 2000
Growth Equity Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Russell Midcap Value The Russell Midcap Value Index consists of
Equity Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Russell Midcap Growth The Russell Midcap Growth Index consists of
Equity Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
International EAFE Index An index composed of a sample of companies
Equity representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
International Emerging MSCI Emerging Markets The Morgan Stanley Capital International
Markets Free Index (MSCI) Emerging Markets Free Index (EMF) is
a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, and the
Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad Investment An unmanaged index of 3500 bonds. The Broad
Grade Index Investment Grade Index is market
capitalization weighted and includes
Treasury, Government sponsored mortgage and
investment grade fixed rate corporates with
a maturity of 1 year or longer.
</TABLE>
52
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION 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 PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
VALUE EQUITY PORTFOLIO
GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
INVESTOR C SHARES
Prospectus
January 1, 1997
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(FORMERLY, THE PNC(R) FUND)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to 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, Mid-Cap Value Equity, International Equity, International
Emerging Markets, Balanced, Small Cap Growth Equity, Mid-Cap Growth Equity,
Select Equity (formerly, the Core Equity Portfolio), Managed Income, Tax-Free
Income, Intermediate Government Bond (formerly, the Intermediate Government
Portfolio), Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Low Duration
Bond (formerly, the Short Government 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 (collectively, the "Portfolios")
of Compass Capital Funds (the "Fund"). 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
called "Money Market Portfolios," and the other Portfolios are 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 January ___, 1997, 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 January ___, 1997. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the
Prospectuses.
<PAGE>
CONTENTS
Page
----
Investment Policies...........................................
Trustees and Officers.........................................
Investment Advisory, Administration,
Distribution and Servicing Arrangements......................
Portfolio Transactions........................................
Purchase and Redemption Information...........................
Valuation of Portfolio Securities.............................
Performance Information.......................................
Taxes.........................................................
Additional Information Concerning Shares......................
Miscellaneous.................................................
Financial Statements..........................................
Appendix A.................................................... A-1
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.
-2-
<PAGE>
INVESTMENT POLICIES
The following supplements information contained in the Prospectuses
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 including the Index Equity
Portfolio; and (ii) where indicated the investment policies of the Index Master
Portfolio.
ADDITIONAL INFORMATION ON INVESTMENT STRATEGY
The Value Equity, Growth Equity, Mid-Cap Value Equity and Mid-Cap
Growth Equity Portfolios will invest primarily in securities of established
companies. For this purpose, an established company is one which, together with
its predecessors, has at least three years of continuous operating history.
The Low Duration Bond Portfolio will seek to maintain a duration for
its portfolio in a range of +/-20% of the current duration of the Merrill Lynch
1-3 Year Treasury Index. The Government Income Portfolio will seek to maintain
an interest rate sensitivity within a range comparable to that of 7 to 10 year
U.S. Treasury bonds.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio (including the Index
Master 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 Money Market Portfolios") 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"). While reverse repurchase transactions are outstanding, a Portfolio
will maintain in a segregated account liquid assets 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
-3-
<PAGE>
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 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 be deemed to have a maturity equal to either 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, depending on the type of
instrument involved.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. Each 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
-4-
<PAGE>
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 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, Low Duration Bond,
Intermediate Bond, Government Income, International Bond, Core Bond, Tax-Free
Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-
Free Income Portfolios (the "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 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 CMOs and REMICs, which are known
as "regular" interests or "residual" interests. The residual in a CMO or REMIC
structure generally represents the interest in any excess cash flow remaining
after making required payments of principal of and
-5-
<PAGE>
interest on the CMOs or REMICs, as well as the related administrative expenses
of the issuer. Residual interests generally are junior to, and may be
significantly more volatile than, "regular" CMO and REMIC interests. The
Portfolios do not currently 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 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
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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.
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.
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, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, 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 FNMA,
Federal Home Loan Bank and the Federal Housing Administration.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Portfolios 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
chartered to promote economic development.
LEASE OBLIGATIONS. The 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 relating
to lease obligations. 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
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.
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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 sub-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 a Portfolio, 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 a Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, a Portfolio could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and a Portfolio
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 might take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase a Portfolio's
operating expenses and adversely affect the net asset value of a Portfolio.
When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and a Portfolio would not have the right to take
possession of the assets. Any income derived from a Portfolio's ownership or
operation of such assets may not be tax-exempt. In addition, a Portfolio's
intention to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended, may limit the extent to which a Portfolio may
exercise its rights by taking possession of such assets, because as a regulated
investment company a Portfolio 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
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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 debt 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 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 which 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 to equal at least the repurchase price
(including accrued interest). In addition, the Portfolio's adviser or sub-
adviser will require that the value of this collateral, after transaction costs
(including loss of interest) reasonably expected to be incurred on a default, be
equal to or greater than the repurchase price (including accrued premium)
provided in the repurchase agreement. The accrued premium is the amount
specified in the repurchase agreement or the daily amoritization of the
difference between the purchase price and the repurchase price specified in the
repurchase agreement. The Portfolio's adviser or sub-adviser will mark-to-
market daily the value of the securities. Securities subject to repurchase
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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 may enter into repurchase agreements, but
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 is
approved by the Investment Committee of DFA. DFA 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 securities
underlying the repurchase agreements will be limited to U. S. Government and
agency obligations described under "U.S. 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 and
the Low Duration Bond, Intermediate Government Bond and Government Income
Portfolios, may 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. The Portfolios may
enter into "when-issued" and "forward" commitments, including "TBA" (to be
announced) purchase commitments, to purchase or sell securities at a fixed price
at a future date. When a Portfolio agrees to purchase securities on this basis,
the custodian will set aside liquid assets equal to the amount of the commitment
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
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account in order to ensure that the value of the account remains equal to the
amount of the Portfolio's commitments. It may be expected that the market value
of a Portfolio's net assets will fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it sets
aside cash. Because a Portfolio's liquidity and ability to manage its portfolio
might be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of its total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, 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, TBA or 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 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. Each equity Portfolio
(except the Index Master Portfolio) and the Balanced Portfolio 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 a Portfolio could lose the
purchase value of a right or 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
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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. A 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, a 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 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. 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 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 liquid assets equal to
the amount of the Portfolio's assets that could
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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, liquid assets 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 liquid assets 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 liquid assets 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 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
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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
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.
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Successful use of futures by a Portfolio is also subject to a sub-
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 also 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 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.
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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 a 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 as a
realized gain or loss when the commitment is exercised or expires.
TAX-EXEMPT DERIVATIVES. The Municipal Money Market 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 debt
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
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interest to tender (or put) the underlying municipal debt obligation to a third
party at periodic intervals and to receive the principal amount thereof. In some
cases, municipal debt obligations are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying securities held by the custodian. Under
such arrangements, the holder of the custodial receipt has the option to tender
the underlying securities at their 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 securities' fixed coupon rate and the rate that
would cause the securities, 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 debt 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 opinions of counsel to the sponsors of such derivative
securities. Neither the Fund nor its investment adviser or sub-advisers 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 may be invested in any of the following instruments: (a) obligations
issued or guaranteed as to principal and interest by the U.S. Government or
agencies or instrumentalities thereof; (b) commercial paper; (c) certificates of
deposit; (d) bankers' acceptances; (e) bilateral and triparty repurchase
agreements with respect to the securities listed in (a) through (d); (f) bank
time deposits issued or guaranteed as to principal and interest by an entity,
except a broker/dealer, named on an "approved list" provided by the investment
adviser or sub-adviser; (g) shares issued by unaffiliated money market funds;
and (h) other high-yielding short-term investments which the adviser or sub-
adviser believes give liquidity to pay back the borrower when the loaned
securities are returned. In any event, cash collateral shall only be invested
in instruments, including repurchase agreements, that mature on or before the
maturity date of the applicable lending transaction.
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
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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 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, Duff & Phelps Credit Co. ("Duff & Phelps"),
Fitch Investor Services, Inc. ("Fitch") 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. A Portfolio's adviser or sub-adviser will consider such an
event in determining whether the Portfolio should continue to hold the security.
INTEREST RATE TRANSACTIONS AND CURRENCY SWAPS. The Bond 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. 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 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.
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 International Bond Portfolio 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 specified currencies.
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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 or currency
swap on a daily basis and will deliver an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess to a custodian
that satisfies the requirements of the 1940 Act. If the other party to an
interest rate swap defaults, a Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
received. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. A Portfolio will not enter into any interest rate or currency swap
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party is rated either "A" or "A-1" or better by S&P, Duff & Phelps or
Fitch, or "A" or "P-1" or better by Moody's.
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 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.
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SPECIAL CONSIDERATION REGARDING THE OHIO TAX FREE INCOME PORTFOLIO.
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 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 strategies.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN OHIO MUNICIPAL
OBLIGATIONS. The Ohio Tax-Free Money Market and Ohio Tax-Free Income Portfolios
(the "Ohio Portfolios") will invest most of their respective 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 economic, political 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 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.
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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 1994 is 11,102,000.
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
16% 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 five years the State rates were below the national rates
(4.8% versus 5.6% in 1995). 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 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). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
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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.
Pursuant to the general appropriations act for the entire biennium, passed
on July 11, 1991, $200 million was transferred from the BSF to the GRF in FY
1992.
Based on updated results and forecasts in the course of that FY, both
in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed a FY 1992 imbalance in GRF resources and
expenditures. 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.
None of the spending reductions were applied to appropriations needed
for debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
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 had an
April 3, 1996 balance of over $828 million).
The GRF appropriations act for the current 1995-96 biennium was passed
on June 28, 1995 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, was transferred to the BSF and other funds, including school assistance
funds and, in anticipation of
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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 14 constitutional amendments, the last adopted in 1995, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At April 3, 1996, $892 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding.
The only such State debt at that date still authorized to be incurred were
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
($39.6 million outstanding); (b) $240 million of obligations authorized for
local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year ($805.4 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 ($47.2 million outstanding,
with no more than $50 million to be issued in any one year).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes 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 State general obligation debt for a variety of purposes, with 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.
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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, $4.8 billion of which was outstanding or awaiting
delivery at April 3, 1996.
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 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 approximately 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. 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 appealed and a court of appeals
reversed
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the trial court's findings for plaintiff districts. The case is now pending on
appeal in the Ohio Supreme Court. 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 $71.1 million for 29 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 19 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.
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
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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 have
resulted in surpluses the last three years; and as of June 30, 1995, the General
Fund has had a surplus of $688.3 million. The deficit in the Commonwealth's
unreserved/undesignated funds also has been eliminated, and there was a surplus
of $79.2 million as of June 30, 1994.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suits relating to the following matters: (a) the ACLU
has filed suit in Federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
because of that settlement. After its earlier denial was reversed by the Third
Circuit Court of Appeals, the district
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court granted class certification to the ACLU, and the parties are proceeding
with discovery; (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) 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; and (d) both the Commonwealth and the City of Philadelphia are involved
in Commonwealth Court cases that may result in their being required to fund
remedies for the unintentional racial segregation in the Philadelphia public
schools.
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 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. Philadelphia
currently is operating under a five year plan approved by the Authority on April
17, 1995 with technical amendments officially incorporated on July 18, 1995.
The audited balance of the City's General Fund as of June 30, 1995 was $80.5
million.
The Authority's power to issue further bonds to finance capital
projects or deficit expired on December 31, 1994. The Authority may continue to
issue debt to finance a cash flow deficit until December 31, 1996, and its
ability to refund outstanding bonds is unrestricted. The Authority had $1,237.5
million in special revenue bonds outstanding as of December 31, 1995.
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Most recently, Moody's has rated the long-term general obligation
bonds of the Commonwealth "A1," and Standard & Poor's has rated such bonds "AA-
." There can be no assurance that the economic conditions on which these
ratings are based will continue or that particular bonds issues may not be
adversely affected by changes in economic or political conditions.
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 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
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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. Fiscal year
1995 ended with a positive General Fund balance of approximately $343.4 million
on an unaudited basis and $3.1 million on an audited basis, after an accounting
charge of $340.3 million to the beginning fund balance to reflect the impact of
the implementation for fiscal 1995 of GASB Statement No. 22, Accounting for
Taxpayer-Assessed Tax Revenues in Governmental Funds. For fiscal year 1995,
$146.3 million was reserved in the Savings Reserve (bringing the total reserve
to $423.6 million after prior contributions) and $146.3 million was reserved in
the Reserve for Repair and Renovation of State Facilities (bringing the total
reserve to $146.3 million after prior withdrawals), leaving an unrestricted
General Fund balance at June 30, 1995 of $292.6 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, 1994, and 1995 was
$681.5 million, $900.6 million, and $1,024.6 million, respectively. The
foregoing amounts for fiscal years 1994 and 1995 reflect adjustments for GASB
Statement No. 22 adopted by the State during fiscal 1995.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along
with $157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of North Carolina's intangible personal property
tax and
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reductions in North Carolina's unemployment and personal income taxes. The
General Assembly also took several measures that benefitted North Carolina's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
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 1996 to be 4.4% of the labor force, as
compared with an unemployment rate of 5.6% nationwide.
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 v. State of North Carolina -- State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
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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,
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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 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
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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
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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
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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 ruled in favor of the
defendants in the companion federal case, and a petition for reconsideration was
denied. Plaintiffs appealed to the United States Court of Appeals, which
concurred with the lower court's ruling. The United States Supreme Court
rejected an appeal, ruling that the lawsuit was a state matter, leaving the
North Carolina Supreme Court's ruling in force.
An additional lawsuit was filed in 1995 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
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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.
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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. Potential refunds exceed $300 million. This case
has been suspended pending final judgment in Bailey (discussed below), and no
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court date has been set. The North Carolina Attorney General believes that
sound legal authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina -- 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
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-
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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 has appealed 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 Corp. v. Justus. 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 was 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. In 1996 the United States Supreme Court reversed, ruled in the
plaintiff's favor that the tax was discriminatory, and ordered the case back to
the State Court for a ruling on the appropriate remedy. It is anticipated that
the State Court will order the State to pay refunds aggregating between $130
million and $140 million, including interest, although other alternative
remedies are possible. In April 1995, the North Carolina General Assembly
repealed the State's intangible personal property tax, 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
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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, S&P and Fitch 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 information has been obtained from recent fiscal statements
prepared by the Commonwealth of Virginia relating to its securities and no
independent investigation has been undertaken to verify its accuracy. Moreover,
the information relates only to the state itself and not to the numerous special
purpose or local government units whose issues may also be held by the
Portfolio. The credits represented by such issues may be affected by a wide
variety of local factors or structuring concerns and no disclosure is made here
relating to such matters.
The rate of economic growth in the Commonwealth of Virginia has
increased steadily over the past decade. Per capita income in Virginia has been
consistently above national levels during that time. The services sector in
Virginia generates the largest number of jobs, followed by wholesale and retail
trade, state and local government and manufacturing. Because of Northern
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Virginia, with its proximity to Washington, D.C. and Hampton Roads, which has
the nation's largest concentration of military installations, the Federal
government has a greater economic impact on Virginia relative to its size than
any state other than Alaska and Hawaii. It is unclear what effect the current
efforts by the Federal government to restructure the defense budget will have on
long-term economic conditions in Virginia.
According to statistics published by the U.S. Department of Labor,
Virginia 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. 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.
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. 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. 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 for
the three preceding fiscal years.
General Fund revenues are principally composed of direct taxes. In
recent fiscal years, most of the total tax revenues have been 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.
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
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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 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 Section 9 of Article X. Section 9 of Article X
contains several different provisions for the issuance of general obligation and
other debt, and the Commonwealth is well within its limit for each:
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
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of the same average tax revenues, these debt limits are separately computed and
apply separately to each type of debt.
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.
The Commonwealth Transportation Board ("CTB") is a substantial issue
of bonds for highway projects. 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 which are secured by a portion of
the Transportation Trust Fund.
Virginia is involved in numerous leases that are subject to
appropriation of funding by the General Assembly. Virginia also finances the
acquisition of certain personal property and equipment through installment
purchase agreements.
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 in the Commonwealth is comprised of 95 counties, 41
incorporated cities, and 188 incorporated towns. The Commonwealth is unique
among the several states in that cities and counties are independent, and their
land areas do not overlap. The largest expenditure by local governments in the
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Commonwealth are for education, but local governments also provide other
services such as water and sewer, police and fire protection and recreational
facilities. The Virginia Constitution imposes numerous restrictions on local
indebtedness, affecting both its incurrence and amount.
In Davis v. Michigan (decided March 28, 1989), the United States
Supreme Court ruled unconstitutional states' exempting from state income tax the
retirement benefits paid by the state
or local governments without exempting retirement benefits paid by the Federal
government. At that time, Virginia exempted state and local retirement benefits
but not Federal retirement benefits. At a Special Session held in April 1989,
the General Assembly repealed the exemption of state and local retirement
benefits. Following Davis, at least five suits, some with multiple plaintiffs,
for refunds of Virginia income taxes, were filed by Federal retirees. These
suits were consolidated under the name of Harper v. Virginia Department of
Taxation.
In a Special Session, the Virginia General Assembly on July 9, 1994,
passed emergency legislation to provide payments to Federal retirees in a
settlement of the retirees' claims as a result of Davis. The settlement
payments are to be made over a five-year period, commencing March 31, 1995. The
total amount of authorized appropriations for the settlement is $340 million
(payable to participating retirees in installments of $60 million on March 31,
1995, and $70 million on each succeeding March 31 through March 31, 1999,
subject to appropriation by the General Assembly).
On September 15, 1995, the Virginia Supreme Court rendered its
decision in Harper, reversing the judgment of the trial court, entering final
------
judgment in favor of the plaintiff retirees who elected not to settle, and
dictating that the amounts unlawfully collected be refunded with statutory
interest. The total cost to Virginia of the settlement and judgment will be
approximately $394.9 million, of which approximately $203.2 million has been
paid.
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
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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. 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.
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Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies, while power and electric facilities
may be subject to increased costs resulting from environmental restrictions,
fluctuations in fuel costs, delays in licensing procedures and the general
regulatory framework in which these facilities operate. All of these entities
are constructed and operated under rigid regulatory guidelines.
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 or revenue or a significant
unanticipated expenditure: (i) several labor unions have challenged 1994
legislation that caused changes to the State's funding of several public
employee pension funds and resulted in significant ongoing annual savings to the
State; the Court of Appeals for the Third Circuit has upheld the federal
district court's decision to grant summary judgment on some of the plaintiffs'
claims and to deny summary judgment on the remainder; (ii) the New Jersey
Hospital Association and certain hospitals have challenged the adequacy of
Medicaid reimbursement for hospital services; the Court of Appeals for the Third
Circuit has affirmed denial of the plaintiffs' application for a preliminary
injunction; (iii) various hospitals have challenged the calculation of the
hospital assessment authorized by the Health Care Reform Act of 1992; the case
has been remanded by the Appellate Division to the Department of Health, which
held a hearing on August 30, 1995, and a determination is now pending; (iv) the
County of Passaic and other parties have filed suit alleging the State and the
New Jersey Department of Environmental
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Protection violated a 1984 consent order concerning the construction of a
resource recovery facility in that county; the plaintiffs have appealed the
trial court's grant of summary judgment to the defendants; (v) Robert E. Brennan
has sued two members of the New Jersey Bureau of Securities asserting numerous
violations of his rights and abuse of state power; he has appealed the trial
court's grant of summary judgment to the defendants; (vi) several cases filed in
the State courts challenge 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; most of those cases are now
pending before the Appellate Division; (vii) a coalition of churches and church
leaders in Hudson County have filed suits asserting the State-owned Liberty
State Park in Jersey City violates environmental standards and seeking
injunctive and monetary relief; (viii) Waste Management of Pennsylvania, Inc.
and an affiliate have filed suit alleging their constitutional rights were
violated by the State's issuance of two emergency redirection orders and a draft
permit; and (ix) representatives of the trucking industry have filed a
constitutional challenge to annual hazardous and solid waste licensure renewal
fees, seeking a declaratory judgment, injunctive relief, a refund of past fees
and attorneys fees; they are seeking class certification of their action.
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.
Although there can be no assurance that such conditions will continue,
the State's general obligation bonds are currently rated "AA+" by S&P and "AA1"
by Moody's.
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:
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1) Each of the Money Market, Municipal Money Market and U.S. Treasury
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 Money
Market Portfolio) 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.
3) Each of the 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 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
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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.
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.
NON-MONEY MARKET PORTFOLIOS:
Each of the Non-Money Market 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
-43-
<PAGE>
by the guarantor, and owned by the Portfolio, does not exceed 10% of the value
of the Portfolio's total assets.
Each of the Non-Money Market 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 Non-Money Market Portfolio (other than the Managed Income,
Intermediate Government Bond, Low Duration Bond, Intermediate Bond, Government
Income, International Bond, Core Bond and Balanced 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.
None of the Managed Income, Intermediate Government Bond, Low Duration
Bond, Intermediate Bond, Government Income, Core Bond, International Bond and
Balanced Portfolios may:
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 aggregating not more than 33 1/3% of the
value of its total assets (calculated when the loan is made) to take advantage
of
-44-
<PAGE>
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.
ALL 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.
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
-45-
<PAGE>
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 (except to the extent a portfolio security may be
subject to a "demand feature" or "put" as permitted under SEC regulations for
money market funds). 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.
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;
-46-
<PAGE>
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;
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.
-47-
<PAGE>
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 DFA, 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 DFA 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 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>
William O. Albertini Trustee Executive Vice President
Bell Atlantic Corporation and Chief Financial
1717 Arch Street Officer since February
47th Floor West 1995, Vice President and
Philadelphia, PA 19103 Chief Financial Officer
Age:
February 1995, Bell Atlantic
Corporation (a diversified
telecommuni-cations company);
Chairman, President and
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------------------- ------------------ ------------------------
<S> <C> <C>
Chief Executive Officer from
August 1989 -January 1991,
Bell Atlantic Enterprises
International, Inc.; Director,
Group Iusacell, S.A. de C.V.
since June from January 1991 -
1994; Director, American
Waterworks, Inc. since May
1990; Trustee, The Carl E. &
Emily I. Weller Foundation
since October 1991.
Raymond J. Clark/1/ Trustee, Treasurer of Princeton
Office of the Treasurer President and University since 1987;
Princeton University Treasurer Trustee, The Compass
3 New South Building Capital Group of Funds
P.O. Box 35 from 1987 to 1996;
Princeton, New Jersey 08540 Trustee, United-Way
Age: Princeton Area Communities
from 1992-94; Trustee,
Chemical Bank, New Jersey
Advisory Board from 1994 until
1995; Trustee, American Red
Cross - Mercer County Chapter
since 1995; and Trustee,
United Way-Greater Mercer
County since 1995.
Robert M. Hernandez Trustee Director since 1991, Vice
USX Corporation Chairman and Chief Financial
600 Grant Street Officer since 1994, Executive
6105 USX Tower Vice President -from 1991 to
Pittsburgh, PA 15219 1994, SeniorVice President -
Age: Finance and Treasurer from
1990 to 1991, USX Corporation
(a diversified company
principally engaged in
</TABLE>
- ------------------------------
/1/ This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-49-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------------------- ------------------ ------------------------
<S> <C> <C>
energy and steel
businesses); Director, ACE
Limited; Trustee, Allegheny
General Hospital and
Allegheny Accounting &
Finance and Health,
Education and Chief
Financial Officer Research
Foundation; Director,
Marinette Marine
Corporation; Director,
Pittsburgh Baseball, Inc.;
and Director and Chairman
of the Board, RMI Titanium
Company.
Anthony M. Santomero Vice Chairman Deputy Dean from
The Wharton School of the Board 1990 to 1994, Richard
University of Pennsylvania K. Mellon Professor
Room 2344 of Finance since April
Steinberg Hall-Dietrich Hall 1984, Director, Wharton
Philadelphia, PA 19104-6367 Financial Institutions
Age: 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 of
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------------------- ------------------ ------------------------
<S> <C> <C>
Municipal Fund for
California Investors, Inc.
and Municipal Fund for New
York Investors, Inc.
David R. Wilmerding, Jr. Chairman of President, Gates,
One Aldwyn Center the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: (investment advisers)
since February 1989;
Director, Beaver Management
Corporation; Director,
Independence Square Income
Securities, Inc.; 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
and its affiliates.
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:
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" or "Distributor")
$10,000 annually and $275 per Portfolio for each full meeting of the Board that
they attend. The Fund pays the Chairman and Vice Chairman of the Board an
additional $10,000 and $5,000 per year, respectively, for their service in
-51-
<PAGE>
such capacities. 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 Corporation ("PIMC"), Provident Capital Management,
Inc. ("PCM"), BlackRock Financial Management, Inc. ("BlackRock"), PNC Equity
Advisors Company ("PEAC"), Morgan Grenfell Investment Services Limited ("Morgan
Grenfell"), CastleInternational Asset Management Limited
("CastleInternational"), PFPC Inc. ("PFPC"), Compass Capital Group, Inc.
("CCG"), CDI (collectively with PFPC and CCG, the "Administrators"), 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, 1996:
<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,/*/ $ N/A N/A (4)/2/ $
Trustee
Robert R. Fortune,/*/ $ N/A N/A (6)/2 /$
Trustee
Rodney D. Johnson,/*/ $ N/A N/A (6)/2 /$
Trustee
</TABLE>
- ------------------------
/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 investment company boards trustee served on within the
Fund Complex.
-52-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
G. Willing Pepper,/*/ $ N/A N/A (7)/2/$
President and former
Chairman of the
Board
Anthony M. $ N/A N/A (6)/2/$
Santomero, Trustee
David R. Wilmerding, $ N/A N/A (7)/2/$
Jr., Trustee
</TABLE>
<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>
William O. $ N/A N/A (1)/1/ $
Albertini, Trustee**
Raymond J. Clark, $ N/A N/A (1)/2/ $
Trustee**
Robert M. Hernandez, $ N/A N/A (1)/2/ $
Trustee**
</TABLE>
* Messrs. Coldwell, Fortune, Johnson and Pepper resigned as trustees of the
Fund on January 4, 1996.
** Messrs. Albertini, Clark and Hernandez were elected as trustees by the
shareholders of the Fund on January 4, 1996.
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 are 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 investment company boards trustee served on within the
Fund Complex.
-53-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
TRUSTEES POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ----------------------------
<S> <C> <C>
David G. Booth* Trustee, President President, Chairman-Chief
Santa Monica, and Chairman-Chief Executive Officer and Director of
CA Executive Officer all DFA Entities, except
Age: 50 Dimensional Fund Advisors Ltd.,
of which he is Chairman and
Director
PRINCIPAL OCCUPATION DURING
TRUSTEES POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ----------------------------
George M. Trustee Leo Melamed Professor of Finance,
Constantinides Graduate School of Business,
Chicago, IL University of Chicago. Director,
Age: 49 DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
John P. Gould Trustee Steven G. Rothmeier Distinguished
Chicago, IL Service Professor of Economics,
Age: 58 Graduate School of Business,
University of Chicago. Trustee,
First Prairie Funds (registered
investment companies). Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc. and Harbor
Investment Advisors. Executive
Vice President, Lexacon Inc.
(economics, law, strategy, and
finance consulting).
Roger G. Trustee Professor in Practice of Finance,
Ibbotson Yale School of Management.
New Haven, CT Director, DFA Investment
Age: 53 Dimensions 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 and
President, Ibbotson Associates,
Inc., Chicago, IL (software,
data, publishing and consulting).
</TABLE>
-54-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
TRUSTEES POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ---------------------------
<S> <C> <C>
Merton H. Trustee Robert R. McCormick Distinguished
Miller Service Professor Emeritus,
Chicago, IL Graduate School of Business,
Age: 73 University of Chicago. Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
Public Director, Chicago
Mercantile Exchange.
Myron S. Trustee Limited Partner, Long-Term
Scholes Capital Management L.P. (money
Greenwich, CT manager). Frank E. Buck
Age: 55 Professor of Finance, Graduate
School of Business and Professor
of Law, Law School, Senior
Research Fellow, Hoover
Institution, (all) Stanford
University (on leave). 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.
Rex A. Trustee, Chairman Chairman, Chief Investment
Sinquefield* and Chief Officer and Director of all DFA
Santa Monica, Investment Officer Entities, except Dimensional Fund
CA Advisors Ltd., of which he is
Age: 52 Chairman, Chief Executive Officer
and Director.
</TABLE>
*Interested
Trustees of the
Trust.
_____________
-55-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
OFFICERS POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ----------------------------
<S> <C> <C>
Arthur Barlow Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 42
Truman Clark Vice President Vice President of all DFA
Santa Monica, Entities. Consultant until
CA October 1995 and Principal and
Age: 55 Manager of Product Development,
Wells Fargo Nikko Investment
Advisors from 1990-1994.
Maureen Connors Vice President
Santa Monica, Vice President of all DFA
CA Entities.
Age: 61
Robert Deere Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 40
Irene R. Vice President, Vice President and Secretary of
Diamant Secretary all DFA Entities, except
Santa Monica, Dimensional Fund Advisors Ltd.,
CA for which she is Vice President.
Age: 46
Eugene Fama, Vice President Vice President of all DFA
Jr. Entities.
Santa Monica,
CA
Age: 36
David Plecha Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 36
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
OFFICERS POSITION WITH TRUST LAST FIVE YEARS
- --------------- -------------------- ----------------------------------
<S> <C> <C>
George Sands Vice President Vice President of all DFA
Santa Monica, Entities. Managing Director,
CA Assets Strategy Consulting, Los
Age: 40 Angeles, CA from 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, Controller of all DFA Entities.
CA and Treasurer
Age: 42
Cem Severoglu Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 33
Jeanne C. Executive Vice Executive Vice President of all
Sinquefield, President DFA Entities.
Ph.D.
Santa Monica,
CA
Age: 51
</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, 1996 and the total compensation received from all
four registered investment companies for which Dimensional Fund Advisors Inc.
("DFA") served as investment adviser during that same fiscal year.
-57-
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL TRUST COMPLEX/1/
NAME OF PERSON, FROM PART OF TRUST BENEFITS UPON Paid to
POSITION REGISTRANT EXPENSES RETIREMENT Trustees
- --------------- ------------ -------------- ------------- ------------------
<S> <C> <C> <C> <C>
George M. $5,000 N/A N/A $30,000
Constantinides,
Trustee
John P. Gould, $5,000 N/A N/A $30,000
Trustee
Roger G. Ibbotson, $5,000 N/A N/A $30,000
Trustee
Merton H. Miller, $5,000 N/A N/A $30,000
Trustee
Myron S. Scholes, $5,000 N/A N/A $30,000
Trustee
</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.
- ----------------
/1./ A Trust 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.
-58-
<PAGE>
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 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,
CastleInternational 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
and the Administrators may from time to time voluntarily waive its advisory fees
with respect to a Portfolio and may voluntarily reimburse the 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 the
commencement of operations of each Portfolio (other than the Index Equity, New
Jersey Municipal Money Market, New Jersey Tax-Free Income, Core Bond,
-59-
<PAGE>
Low Duration Bond and International Bond Portfolios) until January 4, 1996 (June
1, 1996 in the case of the Index Equity Portfolio), PIMC served as adviser.
From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolios of the
International Bond, New Jersey Tax-Free Income and New Jersey Municipal Money
Market Portfolios. From January 1, 1996 through January 12, 1996 (February 12,
1996 with respect to the predecessor portfolio of the International Bond
Portfolio): (i) PAMG and Morgan Grenfell served as investment adviser and sub-
adviser, respectively, to the predecessor portfolio to the International Bond
Portfolio; (ii) PIMC served as investment adviser to the predecessor portfolio
to the New Jersey Municipal Money Market Portfolio; and (iii) BlackRock served
as investment adviser to the predecessor portfolio to the New Jersey Tax-Free
Income Portfolio pursuant to interim advisory and sub-advisory agreements
approved by the shareholders of the Compass Capital Group of Funds. From
December 9, 1992 to January 13, 1996, BlackRock served as investment adviser to
the predecessor portfolio of the Core Bond Portfolio. From July 17, 1992 to
January 13, 1996, BlackRock served as investment adviser to the predecessor
portfolio of the Low Duration Bond Portfolio.
PCM renders sub-advisory services to the Balanced, Value Equity, Small Cap
Value Equity and Select Equity Portfolios pursuant to Sub-Advisory Agreements.
CastleInternational renders sub-advisory services to the International Equity
and International Emerging Markets Portfolios pursuant to a Sub-Advisory
Agreement. 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 Bond, Tax-Free Income,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Low Duration 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
advisory services to the Index Master Portfolio, the registered investment
company in which the Index Equity Portfolio invests all of its assets, pursuant
to an Investment Management Agreement. The Investment Advisory Agreement with
PAMG, the Investment Management Agreement with DFA and the above-referenced Sub-
Advisory Agreements are collectively referred to as the "Advisory Contracts."
-60-
<PAGE>
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 to September
10, 1993, PCM served as sub-adviser to the Intermediate Government Bond
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 Bond
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 13, 1993
(commencement of operations) to March 29, 1995, PNC Bank served as sub-adviser
to the Select 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 Portfolio. PCM served as sub-
adviser to the International Equity and International Emerging Markets
Portfolios from commencement of operations (April 27, 1992 in the case of the
International Equity Portfolio; June 17, 1994 in the case of the International
Emerging Markets Portfolio) to April 19, 1996.
PNC Bank served as sub-adviser for the Money Market Portfolio from October
4, 1989 (commencement of operations) to January 4, 1996; for the Municipal Money
Market Portfolio from September 10, 1993 to January 4, 1996; for the U.S.
Treasury Money Market Portfolio from November 1, 1989 (commencement of
operations) to January 4, 1996; for the Ohio Municipal Money Market Portfolio
from June 1, 1993 (commencement of operations) to January 4, 1996; for the
Pennsylvania Municipal Money Market Portfolio from June 1, 1993 (commencement of
operations) to January 4, 1996; for the North Carolina Municipal Money Market
Portfolio from May 4, 1993 (commencement of operations) to January 4, 1996; for
the Virginia Municipal Money Market Portfolio from July 25, 1994 (commencement
of operations) to January 4, 1996; and for the New Jersey Municipal Money Market
Portfolio from January 13, 1996 to June 6, 1996. From April 4, 1990
(commencement of operations) to January 4, 1996, PNC Bank served as sub-adviser
to the Balanced Portfolio. From March 1, 1993 to January 4, 1996, PEAC served
as sub-adviser to the Select Equity Portfolio. From March 29, 1995 to June 1,
1996, PEAC served as sub-adviser to the Index Equity Portfolio.
-61-
<PAGE>
Under the relevant Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock,
Morgan Grenfell and CastleInternational 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,
CastleInternational 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,
BlackRock or CastleInternational, as the case may be. PAMG, PIMC, PCM, PEAC,
Morgan Grenfell, BlackRock and CastleInternational 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 period from October 1, 1995 through January 4, 1996, the Fund paid
PIMC advisory fees, and PIMC waived advisory fees and reimbursed expenses, as
follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- ---------- ------- -----------
<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
Virginia Municipal Money Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government Bond
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- ---------- ------- -----------
<S> <C> <C> <C>
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging Markets
Balanced
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio), the
Fund paid PAMG (PIMC in the case of the Index Equity Portfolio) advisory fees,
and PAMG (PIMC in the case of the Index Equity Portfolio) waived advisory fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- ---------- ------- -----------
<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
Virginia Municipal Money Market
New Jersey Municipal Money Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- ---------- ------- -----------
<S> <C> <C> <C>
New Jersey Tax-Free Income
International Bond
Core Bond
Low Duration Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging Markets
Balanced
</TABLE>
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 WAIVERS) REIMBURSE-
PORTFOLIOS WAIVERS Waivers MENTS
- ---------- --------------- ---------- -----------
<S> <C> <C> <C>
Money Market $ 1,051,446 $5,217,130 $ 0
Municipal Money Market 189,929 921,718 0
U.S. Treasury Money Market 489,209 2,327,266 0
Ohio Municipal Money Market 49,133 245,955 0
Pennsylvania Municipal Money 304,651 1,264,187 0
Market
North Carolina Municipal Money
Market 46,472 369,591 4,999
Managed Income 1,790,332 767,285 0
Tax-Free Income 0 49,671 1,599
Intermediate Government Bond 379,534 569,302 0
Ohio Tax-Free Income 0 42,044 6,713
Pennsylvania Tax-Free Income 161,038 137,951 0
Intermediate Bond 342,301 335,908 0
Value Equity 2,832,644 746,727 0
Growth Equity 866,271 324,851 0
Small Cap Growth Equity 618,374 137,615 0
Select Equity 691,447 259,293 0
Index Equity 30,772 382,205 0
Small Cap Value Equity 1,143,071 114,307 0
International Equity 2,391,607 597,902 0
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER WAIVERS) REIMBURSE-
PORTFOLIOS WAIVERS Waivers MENTS
- ---------- --------------- ---------- -----------
<S> <C> <C> <C>
Balanced 642,763 241,037 0
Virginia Municipal Money Market 0 85,063 35,957
International Emerging Markets 258,648 52,186 0
Government Income/1/ 0 37,256 11,980
</TABLE>
/1/ For the period from commencement of operations (October 3, 1994) through
September 30, 1995.
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) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $ 951,230 $3,359,847 $ 0
Municipal Money Market 171,405 599,920 0
U.S. Treasury Money
Market 281,771 986,201 0
Ohio Municipal Money
Market 6,724 217,938 20,660
Pennsylvania Municipal
Money Market 42,612 336,382 19,022
North Carolina Municipal
Money Market 0 249,914 26,804
Managed Income 1,398,343 599,290 0
Tax-Free Income 0 47,655 35,898
Intermediate Government 368,546 552,819 0
Bond
Ohio Tax-Free Income 0 35,709 35,496
Pennsylvania Tax-Free
Income 49,646 227,003 9,645
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
Select 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 4,816
International Emerging
Markets/2/ 7,672 16,051 0
</TABLE>
-65-
<PAGE>
/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.
For the period from October 1, 1995 through January 4, 1996, 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
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government
Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging Markets
Balanced
</TABLE>
-66-
<PAGE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio),
PAMG (PIMC in the case of the Index Equity Portfolio) 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
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
New Jersey Municipal Money
Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government
Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
New Jersey Tax-Free Income
International Bond
Core Bond
Low Duration Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging Markets
Balanced
</TABLE>
-67-
<PAGE>
For the year or periods 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 $ 0 $721,072
Municipal Money Market 0 123,516
U.S. Treasury Money Market 0 312,942
Ohio Municipal Money Market 0 32,788
Pennsylvania Municipal Money
Market 0 174,315
North Carolina Municipal Money
Market 0 46,229
Managed Income 1,253,232 537,100
Tax-Free Income 0 34,770
Intermediate Government 265,674 398,511
Bond
Ohio Tax-Free Income 0 29,431
Pennsylvania Tax-Free Income 112,727 96,566
Intermediate Bond 239,611 235,136
Value Equity 2,060,105 543,074
Growth Equity 630,015 236,255
Small Cap Growth Equity 449,727 100,084
Select Equity 502,871 188,576
Index Equity 30,772 286,654
Small Cap Value Equity 831,324 83,132
International Equity 1,913,286 478,322
Balanced 467,464 175,299
Virginia Municipal Money Market 0 9,451
International Emerging Markets 227,610 45,924
Government Income/1/ 0 26,079
</TABLE>
/1/ Commenced operations October 3, 1994.
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:
-68-
<PAGE>
<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
Tax-Free Income 0 33,359
Intermediate Government Bond 276,410 368,546
Ohio Tax-Free Income 0 24,996
Pennsylvania Tax-Free Income 33,198 160,456
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
Select 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 Markets/2/ 6,723 14,153
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
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,
1994, 1995 and 1996, the Index Master Portfolio paid advisory fees to DFA
totalling $10,833, $18,816 and $________, respectively. The Index Equity
Portfolio did not invest in the Index Master Portfolio until June 2, 1996.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and by
BlackRock from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $20,165 in advisory fees to
-69-
<PAGE>
BlackRock. For the period from March 1, 1995 through December 31, 1995 and for
the fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to
the New Jersey Tax-Free Income Portfolio paid $496,305, $607,485 and $159,582,
respectively, in investment advisory fees to Midlantic Bank pursuant to its
prior investment advisory contract. In addition, during the period from March 1,
1995 through December 31, 1995 and during the fiscal years ended February 28,
1995 and 1994, Midlantic Bank waived $0, $2,451 and $318,099, respectively, in
investment advisory fees. During the period from January 13, 1996 through
January 31, 1996, the New Jersey Tax-Free Income Portfolio paid PAMG $12,779 in
investment advisory fees, and PAMG waived $8,520 in investment advisory fees.
During the period from January 13, 1996 through January 31, 1996, PAMG paid
BlackRock $8,945 in sub-advisory fees with respect to the New Jersey Tax-Free
Income Portfolio and BlackRock waived $5,964 in sub-advisory fees.
The predecessor portfolio to the International Bond Portfolio was advised
by Midlantic Bank from July 1, 1991 through December 31, 1995, and by PAMG from
January 1, 1996 through February 12, 1996. For the period from February 1, 1996
through February 12, 1996, the predecessor portfolio to the International Bond
Portfolio paid $_______ in advisory fees to PAMG, and PAMG waived advisory fees
and reimbursed expenses totalling $______ and $______, respectively. For the
period from February 1, 1996 through February 12, 1996, PAMG paid Morgan
Grenfell $______ in sub-advisory fees with respect to the predecessor portfolio
to the International Bond Portfolio, and Morgan Grenfell waived sub-advisory
fees totalling $_______. For the period from January 1, 1996 through January
31, 1996, the predecessor portfolio to the International Bond Portfolio paid
$24,832 in advisory fees to PAMG. For the period from January 1, 1996 through
January 31, 1996, PAMG paid Morgan Grenfell $20,176 in sub-advisory fees with
respect to the predecessor portfolio to the International Bond Portfolio. For
the period from March 1, 1995 through December 31, 1995 and for the fiscal years
ended February 28, 1995 and 1994, the predecessor portfolio to the International
Bond Portfolio paid $305,176, $361,620 and $346,865, respectively, in investment
advisory fees to Midlantic Bank pursuant to its prior investment advisory
contract.
The predecessor portfolio to the New Jersey Municipal Money Market
Portfolio was advised by Midlantic Bank from July 1, 1991 through December 31,
1995, and by PIMC from January 1, 1996 through January 12, 1996. For the period
from January 1, 1996 through January 12, 1996, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $8,000 in advisory fees to
PIMC. For the period from March 1, 1995 through December 31, 1995 and for the
fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $155,696, $158,240 and
$158,536,
-70-
<PAGE>
respectively, in investment advisory fees to Midlantic Bank pursuant to its
prior investment advisory contract. During the period from January 13, 1996
through January 31, 1996, the New Jersey Municipal Money Market Portfolio paid
PIMC $2,128 in investment advisory fees, and PIMC waived $13,826 in investment
advisory fees. During the period from January 13, 1996 through January 31, 1996,
PNC Bank waived all of the sub-advisory fees (in the amount of $1,125) with
respect to the New Jersey Municipal Money Market Portfolio.
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Core Bond Portfolio paid BlackRock $53,125 in
investment advisory fees and BlackRock waived $21,255 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Core
Bond Portfolio in the amounts of $56,894 and $34,010, respectively, and
reimbursed expenses amounting to $137,364 and $137,179, respectively. During the
period from January 13, 1996 through March 31, 1996, the Core Bond Portfolio
paid PAMG $182,709 in investment advisory fees, and PAMG waived $121,806 in
investment advisory fees. During the period from January 13, 1996 through March
31, 1996, PAMG paid BlackRock $127,896 in sub-advisory fees with respect to the
Core Bond Portfolio, and BlackRock waived $85,264 in sub-advisory fees.
The predecessor portfolio to the Low Duration Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Low Duration Bond Portfolio paid BlackRock $56,481
in investment advisory fees and BlackRock waived $11,186 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Low
Duration Bond Portfolio in the amounts of $102,707 and $110,232, respectively,
and reimbursed expenses amounting to $61,195 and $55,582, respectively. During
the period from January 13, 1996 through March 31, 1996, the Low Duration Bond
Portfolio paid PAMG $149,488 in investment advisory fees, and PAMG waived
$99,659 in investment advisory fees. During the period from January 13, 1996
through March 31, 1996, PAMG paid BlackRock $104,642 in sub-advisory fees with
respect to the Low Duration Bond Portfolio, and BlackRock waived $69,761 in sub-
advisory fees.
ADMINISTRATION AGREEMENTS. CCG, PFPC and CDI serve as the Fund's co-
administrators pursuant to administration agreements (collectively, the
"Administration Agreement"). PFPC and CDI have agreed to maintain office
facilities for the Fund, furnish the Fund with statistical and research data,
clerical,
-71-
<PAGE>
accounting, and bookkeeping services, and certain other services required by the
Fund.
CCG serves as an Administrator to the Fund pursuant to a Co-Administration
Agreement. Under the Co-Administration Agreement, CCG 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 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 Administration Agreement provides that CCG, PFPC and CDI 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 the Trust's custodians and
dividend and disbursing agents. For its services, PFPC is entitled to
compensation from the Index Master Portfolio at the annual rate of .015% of the
Index Master Portfolio's average daily net assets. In addition, PFPC charges
each investor in the Index Master Portfolio a monthly fee of $2,600.
From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators to the Fund. CCG became
an Administrator to the Fund on December ____, 1995. For the period from
October 1, 1995 through January 13, 1996, the Fund paid CCG, PFPC and PDI
combined administration fees (after waivers), and CCG, PFPC and PDI waived
combined administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE
PORTFOLIOS WAIVERS) WAIVERS -MENTS
- ---------- --------- ------- ---------
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
</TABLE>
-72-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE
PORTFOLIOS WAIVERS) WAIVERS -MENTS
- ---------- --------- ------- ---------
<S> <C> <C> <C>
Pennsylvania Municipal
Money Market
North Carolina Municipal
Money Market
Virginia Municipal Money
Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government
Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free
Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging
Markets
Balanced
</TABLE>
For the period form January 14, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996, the Fund paid the Administrators combined administration
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ------- ------------
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
</TABLE>
-73-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ------- ------------
<S> <C> <C> <C>
Pennsylvania Municipal
Money Market
North Carolina Municipal
Money Market
Virginia Municipal Money
Market
New Jersey Municipal Money
Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government
Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free
Income
Intermediate Bond
New Jersey Tax-Free Income
International Bond
Core Bond
Low Duration Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging
Markets
Balanced
</TABLE>
For the year or periods 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 REIMBURSE-
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ------- ------------
<S> <C> <C> <C>
Money Market $1,686,008 $200,348 $ 0
Municipal Money Market 208,246 162,303 0
</TABLE>
-74-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
U.S. Treasury Money Market 631,041 281,107 0
Ohio Municipal Money Market 43,263 55,100 0
Pennsylvania Municipal
Money Market 322,632 200,313 0
North Carolina Municipal
Money Market 24,058 114,630 1,666
Managed Income 751,452 267,310
Tax-Free Income 0 19,868 2,132
Intermediate Government 244,417 135,117
Bond
Ohio Tax-Free Income 0 16,817 8,950
Pennsylvania Tax-Free
Income 68,050 51,546 0
Intermediate Bond 139,960 131,323 0
Value Equity 1,083,967 187,474 0
Growth Equity 360,966 72,170 0
Small Cap Growth Equity 238,595 36,310 0
Select Equity 288,666 57,058 0
Index Equity 96,814 316,163 0
Small Cap Value Equity 359,637 97,592 0
International Equity 689,601 107,601 0
Balanced 216,630 104,752 0
Virginia Municipal Money
Market 0 28,354 11,986
International Emerging
Markets 41,383 8,350 0
Government Income/1/ 0 14,903 15,973
</TABLE>
/1/ Commenced operations October 3, 1994.
For the year or periods ended September 30, 1994, 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 $ 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
</TABLE>
-75-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
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
Bond
Ohio Tax-Free Income 0 14,284 14,199
Pennsylvania Tax-Free
Income 19,858 90,020 3,858
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
Select 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
Markets/2/ 1,259 2,537 0
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
The predecessor portfolios to the New Jersey Municipal Money Market,
International Bond and New Jersey Tax-Free Income Portfolios received
administrative services from SEI Financial Management Corporation ("SEI").
During the period from March 1, 1995 through January 12, 1996 and during the
fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $73,663, $44,863 and
$43,497,respectively in administration fees to SEI pursuant to the prior
administration agreement, and SEI waived $0, $26,345 and $27,844, respectively,
in administration fees. During the period from January 13, 1996 through January
31, 1996, the New Jersey Municipal Money Market Portfolio paid the
Administrators $3,050 in administration fees, and the Administrators waived
$3,691 in administration fees. During the period from March 1, 1995 through
January 12, 1996 and during the fiscal years ended February 28, 1995 and 1994,
the predecessor portfolio to the New Jersey Tax-Free Income Portfolio paid
$154,232, $105,029 and $79,454, respectively, in administrative fees to SEI
pursuant to the prior administration agreement, and SEI waived $4, $77,951 and
$63,850, respectively, in administrative fees. During the period from January
13, 1996 through January 31, 1996, the New Jersey Tax-Free Income Portfolio paid
the Administrators $4,443 in administration fees, and the Administrators waived
$5,347 in administration fees. During the
-76-
<PAGE>
period from March 1, 1995 through January 12, 1996 and during the fiscal years
ended February 28, 1995 and 1994, the predecessor portfolio to the International
Bond Portfolio paid $77,924, $81,364 and $78,033, respectively, in
administrative fees to SEI pursuant to the prior administration agreement.
During the period from January 13, 1996 through January 31, 1996, the
predecessor portfolio to the International Bond Portfolio paid the
Administrators $2,141 in administrative fees. During the period from February 1,
1996 through February 12, 1996, the predecessor portfolio to the International
Bond Portfolio paid the Administrators $_______ in administrative fees, and the
Administrators waived fees and reimbursed expenses totalling $_______ and
$______, respectively.
The predecessor portfolios to the Low Duration Bond and Core Bond
Portfolios received administrative services from State Street Bank and Trust
Company ("State Street"). During the period from July 1, 1995 through January
12, 1996 and during the fiscal years ended June 30, 1995 and 1994, the
predecessor portfolio to the Core Bond Portfolio paid $29,752, 73,257 and
$40,261, respectively, in administrative fees to State Street pursuant to the
prior administration agreement, and State Street waived $0, $0 and $32,500,
respectively, in administrative fees. During the period from January 13, 1996
through March 31, 1996, the Core Bond Portfolio paid the Administrators $79,269
in administration fees, and the Administrators waived $60,808 in administration
fees. During the period from July 1, 1995 through January 12, 1996 and during
the fiscal years ended June 30, 1995 and 1994, the predecessor portfolio to the
Low Duration Bond Portfolio paid $31,578, $69,234 and $79,160, respectively, in
administrative fees to State Street pursuant to the prior administration
agreement. During the period from January 13, 1996 through March 31, 1996, the
Low Duration Bond Portfolio paid the Administrators $74,552 in administration
fees, and the Administrators waived $40,055 in administration fees.
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
-77-
<PAGE>
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, Barclays Bank PLC and Citibank, N.A. serve as the
international sub-custodians for various Portfolios of the Fund.
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 has undertaken to waive its custody fees with
respect to the Index Equity Portfolio, which invests substantially all of its
assets in the Index Master 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 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 bears its
pro rata portion of the Index
-78-
<PAGE>
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 CCG 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 CCG fees for the provision of personal services to shareholders and
the processing and administration of shareholder accounts. CCG, in turn,
determines the amount of the service fee and shareholder processing fee to be
paid to brokers, dealers, financial institutions and industry professionals
(collectively, "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 who are not "interested persons" of the Fund
shall be committed to the discretion of the Fund's 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.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to
-79-
<PAGE>
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. The distribution fees payable
under the Plan (at a maximum 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. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor C Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, as well as
to cover ongoing commission payments to the broker/dealers. The contingent
deferred sales charge is calculated to charge the investor with any shortfall
that would occur if Investor C Shares are redeemed within 18 months of purchase.
In addition, the Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of their past profits or other
sources available to them. The Fund is not required or permitted under the Plan
to make distribution payments with respect to Service or Institutional Shares.
Service Organizations may charge their clients additional fees for account-
related services.
The Fund intends to enter into service arrangements with Service
Organizations pursuant to which Service Organizations 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 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 a service fee 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, Service Organizations may provide general
shareholder liaison services, including, but not limited to (i) answering
customer 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 Customers' investments; and (ii) assisting Customers
in designating and changing dividend options, account designations and
addresses. In consideration for payment of a shareholder processing fee of up
to a separate .15% (on an
-80-
<PAGE>
annualized basis) of the average daily net asset value of Service, Investor A,
Investor B and Investor C Shares owned beneficially by their Customers, Service
Organizations may provide one or more of these additional services to such
Customers: (i) providing necessary personnel and facilities to establish and
maintain Customer 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 Customer signatures in connection with
redemption orders and transfers and changes in Customer-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 Customers; (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) providing sub-transfer agency services; and (xiv)
providing such other similar services as the Fund or a Customer may
request.
For the twelve months ended September 30, 1996, the Portfolios' share
classes bore the following distribution, shareholder service and shareholder
processing fees under the Portfolios' current and prior plans:
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<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR A SHARES FEE SERVICE FEE PROCESSING FEE
- ------------------------------ ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond
Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Income
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Free Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
-82-
<PAGE>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR B SHARES FEES SERVICE FEE PROCESSING FEE
- ------------------------------ ------------ ----------- --------------
[S] [C] [C] [C]
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
-83-
<PAGE>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR C SHARES FEES SERVICE FEE PROCESSING FEE
- --------------------------------- ------------ ----------- --------------
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
-84-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - SERVICE SHARES FEES SERVICE FEE PROCESSING FEE
- --------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
-85-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INSTITUTIONAL FEES SERVICE FEE PROCESSING FEE
- -------------------------- ---- ----------- --------------
SHARES
- ------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
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<PAGE>
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, the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
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 the 1940 Act. With respect to the Index Master Portfolio,
commissions paid on such
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<PAGE>
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 the 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).
For the year or period ended September 30, 1996, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Value Equity $
Growth Equity
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
</TABLE>
For the year or period ended September 30, 1995, the following
Portfolios paid brokerage commissions as follows:
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
Value Equity $ 364,680
Growth Equity 356,156
Small Cap Growth Equity 88,691
Select Equity 341,935
Index Equity 73,946
Small Cap Value Equity 251,396
International Equity 2,667,245
Balanced 144,451
International Emerging Markets 356,727
For the year or period ended September 30, 1994, the following Portfolios
paid brokerage commissions as follows:
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
Value Equity $ 431,232
Growth Equity 530,428
Small Cap Growth Equity 62,339
Select Equity 156,700
Index Equity 47,190
Small Cap Value Equity 185,560
International Equity 1,031,631
Balanced 164,460
International Emerging Markets 32,367
-89-
<PAGE>
For the Index Master Portfolio's fiscal years ended November 30, 1994,
1995, and 1996, the Index Master Portfolio paid brokerage commissions totalling
$10,610, $15,289 and $_________, respectively.
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 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.
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 made independently of each other in
light of differing conditions. However, the same investment decision may be
made for two or more such accounts. In such cases,
-90-
<PAGE>
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 PAMG, PIMC, BlackRock, PNC Bank, PCM, PEAC, Morgan
Grenfell, CastleInterna-tional, the Administrators, the 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 PAMG, PIMC, BlackRock, PNC Bank, PCM, PEAC, Morgan Grenfell,
CastleInternational, the Administrators, the 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,
1996, the following Portfolios held the following securities:
<TABLE>
<CAPTION>
PORTFOLIO SECURITY VALUE
- --------- -------- -----
Money Market
- ------------
<S> <C> <C>
Bear, Stearns & Co. Variable Rate Obligation $
Goldman Sachs, LP Variable Rate Obligation
Merrill Lynch & Co. Medium Term Note
Merrill Lynch & Co. Commercial Paper
Merrill Lynch & Co. Variable Rate Obligation
Morgan Stanley & Co. Repurchase Agreement
<CAPTION>
U.S. Treasury Money Market
- --------------------------
Morgan Stanley & Co. Repurchase Agreement
- -------------------- --------------------
Managed Income
- --------------
<S> <C> <C>
Salomon Brothers, Inc. Corporate Bond
Merrill Lynch & Co. Corporate Bond
Morgan Stanley & Co. Corporate Bond
Balanced
- --------
</TABLE>
-91-
<PAGE>
<TABLE>
<S> <C>
Salomon Brothers, Inc. Corporate Bond
Merrill Lynch & Co. Corporate Bond
Index Equity
- ------------
Salomon Brothers, Inc. Common Stock
Merrill Lynch & Co. Common Stock
Short Government Bond
- ---------------------
Salomon Brothers, Inc. Common Stock
PaineWebber Group Inc. Common Stock
International Bond
- ------------------
Salomon Brothers, Inc. Common Stock
PaineWebber Group Inc. Common Stock
Government Income
- -----------------
Merrill Lynch & Co. Common Stock
</TABLE>
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 the respective Non-Money Market
Portfolios, based on the value of such Portfolios' net assets as of September
30, 1996, follows:
TABLE
-----
<TABLE>
<CAPTION>
Value Growth Small Cap Index
Equity Equity Growth Equity Select Equity 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............................................ $ $ $ $ $
======== ========== ========== =========== ==========
- ----------
/*/ 3.00%/3.09% for Index Equity Portfolio.
</TABLE>
-92-
<PAGE>
<TABLE>
<CAPTION>
Small
Cap Value International Managed Tax-Free
Equity Equity Balanced Income Income
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........................................ $ $ $ $ $
========= ========= ========= ========= =========
- ----------
/*/
<CAPTION>
Intermediate Pennsylvania Low
Government Ohio Tax- Tax-Free Duration Intermediate
Bond Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets................................................ $ $ $ $ $
Outstanding
Shares....................................................
========= ========= ========= ========= =========
Net Asset Value
Per Share................................................. $ $ $ $ $
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)/*/....................................... $ $ $ $ $
--------- --------- --------- --------- ---------
Offering to Public........................................ $ $ $ $ $
========= ========= ========= ========= =========
- -------------
</TABLE>
/*/3.00%/3.09% for Low Duration Bond Portfolio; 5.00%/5.26% for International
Equity Portfolio.
<TABLE>
<CAPTION>
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,
4.00% of offering price
(4.17% of net asset
value per share)/*/....................................... $ $ $ $ $
--------- --------- --------- --------- ---------
</TABLE>
-93-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Offering to Public........................................ $ $ $ $ $
========== ============ ============ ============ ==========
- --------------
</TABLE>
/*/4.50%/4.71% for Government Income Portfolio; 5.00%/5.26% for International
Bond and International Emerging Markets Portfolios.
Mid Cap Mid Cap
Value Growth
Equity Equity
<TABLE>
<CAPTION>
Portfolio Portfolio
--------- ---------
<S> <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, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Managed Income $
Tax-Free Income
Intermediate Government Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
Value Equity
Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</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 $ 37,132
</TABLE>
-94-
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Tax-Free Income 8,850
Intermediate Government Bond 42,765
Ohio Tax-Free Income 2,725
Pennsylvania Tax-Free Income 121,089
Intermediate Bond 1,513
Value Equity 68,289
Growth Equity 47,859
Small Cap Growth Equity 77,356
Select Equity 34,761
Index Equity 51,229
Small Cap Value Equity 61,709
International Equity 83,938
Balanced 144,255
International Emerging Markets 24,915
Government Income 69,712
</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:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Managed Income $ 150,150
Tax-Free Income $ 37,504
Intermediate Government Bond 50,694
Ohio Tax-Free Income 64,596
Pennsylvania Tax-Free Income 678,464
Intermediate Bond 2,124
Value Equity 195,675
Growth Equity 81,496
Small Cap Growth Equity 44,054
Select Equity 17,550
Index Equity 38,454
Small Cap Value Equity 230,590
International Equity 303,547
Balanced 1,213,056
International Emerging Markets 130,755
</TABLE>
-95-
<PAGE>
For the period from January 13, 1996 through January 31, 1996, the
total front-end sales charges paid by the shareholders of Investor A Shares of
the New Jersey Tax-Free Income Portfolio were $435. For the period from January
13, 1996 through March 31, 1996, the total front-end sales charges paid by the
shareholders of Investor A Shares of the Short Government Bond and Core Bond
Portfolios were $3,848 and $1,723, respectively.
There is no initial sales charge on purchases of $1,000,000 or more of
Investor A Shares of the Non-Money Market Portfolios. However, a contingent
deferred sales charge of 1.00% will be imposed on the lesser of the net asset
value of the shares on the purchase or redemption date for Investor A Shares
purchased on a no-load basis and subsequently redeemed within 18 months after
purchase.
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.
In addition, Investor C Shares of the Non-Money Market Portfolios are subject to
a contingent deferred sales charge which is payable on redemptions of such
Investor C Shares within 18 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 without
a sales charge.
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, Investor B Shares or Investor C Shares of a Non-
Money Market Portfolio.
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
-96-
<PAGE>
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 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
-97-
<PAGE>
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.
VALUATION OF PORTFOLIO SECURITIES
In determining the 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.
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 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
-98-
<PAGE>
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 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. Net assets value is calculated separately for each
class of shares of each Equity Portfolio 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, cash 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 total number of outstanding shares of the class.
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); 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 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
-99-
<PAGE>
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.
Certain of the securities acquired by the International Equity and
International Emerging Markets Portfolios may be traded on foreign exchanges or
over-the-counter markets on days on which a Portfolio's net asset value is not
calculated. In such cases, the net asset value of the Portfolio's shares may be
significantly affected on days when investors can neither purchase nor redeem
shares of the Portfolio.
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. Net asset value is calculated separately for each class
of Shares of each Bond Portfolio as of the close of regular trading hours on the
NYSE on each Business Day by dividing the value of all securities, cash 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 total number of
outstanding shares of the class.
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
-100-
<PAGE>
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.
Certain of the securities acquired by the International Bond Portfolio may
be traded on foreign exchanges or over-the-counter markets on days on which the
Portfolio's net asset value is not calculated. In such cases, the net asset
value of the Portfolio's shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Portfolio.
PERFORMANCE INFORMATION
A Portfolio may quote performance in various ways. All performance
information supplied by a Portfolio in advertising is historical and is not
intended to indicate future returns.
MONEY MARKET PORTFOLIO YIELD. Each Money Market Portfolio's current
and effective yields for Service, Investor A, Investor 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
----
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
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<PAGE>
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, 1996 before waivers 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
North Carolina Municipal
Money Market
Service Shares
Investor A Shares
Institutional Shares
Virginia Municipal Money
Market
Service Shares
Institutional Shares
New Jersey Municipal Money
Market Portfolio
Service Shares
Investor A Shares
Institutional Shares
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1996,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1996.
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<PAGE>
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1996 after waivers 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
North Carolina Municipal
Money Market
Service Shares
Investor A Shares
Institutional Shares
Virginia Municipal Money
Market
Service Shares
Institutional Shares
New Jersey Municipal Money
Market Portfolio
Service Shares
Investor A Shares
Institutional Shares
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1996,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1996.
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
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<PAGE>
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, sale literature, reports to
shareholders and other materials, 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(R), a widely-recognized independent publication
that monitors the performance of money market funds, the average yields reported
by the Bank Rate Monitor from money market deposit accounts offered by the 50
leading banks and thrift institutions in the top five standard metropolitan
statistical areas, or to the data prepared by Lipper Analytical Services, Inc.,
a widely-recognized independent service that monitors the performance of mutual
funds. Yield may also be compared to yields set forth in the weekly statistical
release H.15(519) or the monthly statistical release designated G.13(415)
published by the Board of Governors of the Federal Reserve system.
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, sales
literature, communications to shareholders and other materials, 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 Portfolio. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according to the
following formula:
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<PAGE>
ERV
T = [(-----) to the 1st power/to the nth power - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
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 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.
Performance information presented for the following Non-Money Market
Portfolios includes performance information for a corresponding predecessor
portfolio which transferred its assets and liabilities to the related Non-Money
Market Portfolio pursuant to a reorganization consummated on January 13, 1996
(February 13, 1996 with respect to the International Bond Portfolio):
-105-
<PAGE>
<TABLE>
<CAPTION>
Commencement of
Non-Money Market Predecessor Operations of
Portfolio Portfolio Predecessor Portfolio
- --------- ----------- ---------------------
<S> <C> <C>
New Jersey Tax-Free Income Compass Capital Group July 1, 1991
Portfolio New Jersey Municipal
Bond Fund
International Bond Portfolio Compass Capital Group July 1, 1991
International Fixed Income
Fund
Core Bond Portfolio BFM Institutional Trust December 9, 1992
Core Fixed Income
Portfolio
Low Duration Bond Portfolio BFM Institutional Trust July 17, 1992
Short Duration Portfolio
</TABLE>
Each Non-Money Market Portfolio presents performance information for each
class thereof since the commencement of operations of that Portfolio (or the
related predecessor portfolio), rather than the date such class was introduced.
Performance information for each class introduced after the commencement of
operations of the related Portfolio (or predecessor portfolio) is therefore
based on the performance history of a predecessor class. Performance information
is restated to reflect the current maximum front-end sales charge (in the case
of Investor A Shares) or the maximum contingent deferred sales charge (in the
case of Investor B Shares) when presented inclusive of sales charges. Additional
performance information is presented which does not reflect the deduction of
sales charges. Historical expenses reflected in performance information are
based upon the distribution, shareholder servicing and processing fees and other
expenses actually incurred during the periods presented and have not been
restated, in cases in which the performance information for a particular class
includes the performance history of a predecessor class, to reflect the ongoing
expenses currently borne by the particular class.
Based on the foregoing, the average annual total returns for each Non-Money
Market Portfolio for periods ended September 30, 1996 were as follows*:
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<PAGE>
/*/Notes
-----
Performance information presented for Investor A, Investor B, Investor
C and Service Shares of a Portfolio prior to their introduction dates
does not reflect shareholder servicing and processing and/or
distribution fees and certain other expenses borne by these share
classes which, if reflected, would reduce the performance quoted.
Performance information presented assumes the reinvestment of
dividends and distributions. Performance information presented for
Investor A, Investor B, Investor C and Service Shares of a Portfolio
prior to their introduction as indicated in the table above is based
upon historical expenses of the predecessor class which do not reflect
the actual expenses that an investor would incur as a holder of shares
of these classes of the Portfolios. The ongoing fees and expenses
borne by Investor B Shares and Investor C Shares are greater than
those borne by Investor A Shares; the ongoing fees and expenses borne
by a Portfolio's Investor A, Investor B and Investor C Shares are
greater than those borne by the Portfolio's Service Shares; and the
ongoing fees and expenses borne by a Portfolio's Investor A, Investor
B, Investor C and Service Shares are greater than those borne by the
Portfolio's Institutional Shares. Performance information presented
for Institutional Shares of the Balanced, Tax-Free Income, New Jersey
Tax-Free Income and International Bond Portfolios prior to their
introduction dates is based upon historical expenses of the
predecessor class which are higher than the actual expenses that an
investor would incur as a holder of Institutional Shares of the above-
mentioned Portfolios. Accordingly, the performance information may be
used in assessing each Portfolio's performance history but does not
reflect how the distinct classes would have performed on a relative
basis prior to the introduction of these classes, which would require
an adjustment to the ongoing expenses.
The original class or classes of shares of each Portfolio were as
follows: Balanced - Investor A Shares; Index Equity - Institutional
Shares; Select Equity - Institutional Shares; Growth Equity -
Institutional Shares; Value Equity - Institutional Shares; Small Cap
Value Equity - Institutional Shares; Small Cap Growth Equity -
Institutional Shares; International Equity - Institutional Shares;
International Emerging Markets - Investor A, Institutional and
Service Shares; Low Duration Bond -Institutional Shares; Intermediate
Government Bond -
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<PAGE>
Institutional Shares; Intermediate Bond - Institutional Shares; Core
Bond - Institutional Shares; Managed Income - Institutional Shares;
Tax-Free Income -Investor A Shares; New Jersey Tax-Free Income -
Service Shares; Pennsylvania Tax-Free Income - Investor A and
Institutional Shares; Ohio Tax-Free Income - Investor A, and
Institutional Shares; Government Income -Investor A Shares; and
International Bond - Service Shares.
The performance quoted reflects fee waivers that subsidize and reduce
the total operating expenses of each Portfolio. The Portfolios'
returns would have been lower if there were not such waivers. PAMG
and the Portfolio's 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 each Portfolio's total
operating expenses during the remainder of the current fiscal year at
the levels set forth in the applicable prospectus.
Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials 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 may not, for these purposes, deduct from
the initial value invested or the ending value any amount representing front-end
and deferred sales charges charged to purchasers of Investor A, Investor B or
Investor C Shares. The Investor A, Investor B and Investor C classes of the
Portfolio will, however, disclose, if appropriate, the maximum applicable sales
charges and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
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<PAGE>
In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
NON-MONEY MARKET PORTFOLIO YIELD. The Balanced, Managed Income, Tax-Free
Income, Intermediate Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, Low Duration Bond, Intermediate Bond,
Government Income, Core Bond and International Bond Portfolios may advertise
their yields on their Service, Investor A, Investor B, 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:
a-b
YIELD = 2[(----- +1) to the 6th power - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = 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
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<PAGE>
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 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
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<PAGE>
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 as much as 5.00% of the per share offering price.
Each of the Tax-Free Income, Ohio Tax-Free Income, New Jersey Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios may advertise the tax-
equivalent yield for shares of a specified class. Under the rules of the SEC, 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,
1996 for the Portfolios referenced below was as follows:
<TABLE>
<CAPTION>
BEFORE
AFTER WAIVERS
------------------------ --------------------------
YIELD YIELD
PORTFOLIO YIELD (ASSUMES A YIELD (ASSUMES A
----- FEDERAL INCOME ----- FEDERAL INCOME
TAX RATE OF TAX RATE OF
28%) 28%)
<S> <C> <C> <C> <C>
Managed Income
Service Shares
Investor A Shares
Institutional Shares
Tax-Free Income
Service Shares
Investor A Shares
Institutional Shares
Intermediate Government
Bond
Service Shares
Investor A Shares
Institutional Shares
Tax-Free Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
</TABLE>
-115-
<PAGE>
<TABLE>
<CAPTION>
TAX-EQUIVALENT TAX-EQUIVALENT
PORTOFOLIO YIELD (ASSUMES A YIELD (ASSUMES A
- ---------- ----- FEDERAL INCOME ----- FEDERAL INCOME
TAX RATE OF TAX RATE OF
28%) 28%)
---- ----
<S> <C> <C> <C> <C>
Pennsylvania Tax-Free
Income
Service Shares
Investor A Shares
Institutional Shares
Intermediate Bond
Service Shares
Investor A Shares
Institutional Shares
Government Income
Investor A Shares
Investor B Shares
New Jersey Tax-Free Income
Portfolio
Service Shares
Investor A Shares
International Bond
Portfolio
Short Government Bond
Service Shares
Investor A Shares
Institutional Shares
Core Bond
Service Shares
Investor A Shares
Investor B Shares
Institutional Shares
</TABLE>
The Investor C Class had not commenced operations as of September 30, 1995.
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 dividends in a dividend reinvestment plan or the impact
of tax-free investing. As illustrated below, the Fund may demonstrate, using
certain
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<PAGE>
specified hypothetical data, the compounding effect of dividend reinvestment on
investments in a Non-Money Market Portfolio.
-117-
<PAGE>
The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising, sales literature, communications to shareholders and other
materials 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 and New Jersey Tax-Free Income Portfolios, 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.
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<PAGE>
TABLE 1 - FEDERAL ONLY
- ------- ------------
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1997 Taxable Marginal
Income Bracket Tax Rate/*/ 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $24,000 $ 0 - $40,100 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$24,001 - $58,150 $40,101 - $96,900 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$58,151 -$121,300 $96,901 -$147,700 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$121,301-$263,750 $147,701-$263,750 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $263,750 Over$263,750 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 1997, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $117,950 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 $117,950 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 1997 is estimated to be from $117,950 to $240,451 and for married
taxpayers filing a joint return from $176,950 to $299,451. 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 1997.
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<PAGE>
TABLE 2 - FEDERAL AND PENNSYLVANIA
- ------- ------------------------
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1997 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 - $ 24,000 $ 0 - $40,100 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$24,001 - $ 58,150 $ 40,101 - $96,900 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$58,151 - $121,300 $ 96,901 -$147,700 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$121,301- $263,750 $147,701 -$263,750 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $263,750 Over $263,750 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 1997, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $117,950 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 $117,950 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 1997 is
estimated to be from $117,950 to $240,451 and for married taxpayers filing a
joint return from $176,950 to $299,451. 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 1997.
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<PAGE>
TABLE 3 - FEDERAL AND OHIO
- ------- ----------------
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3 3.5 4 4.5 5 5.5 6
1997 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE SINGLE RETURN
$ 0 - 24,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
24,001 - 40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001 - 58,150 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
58,151 - 80,000 31% 5.201% 34.59% 4.59% 5.35% 6.12% 6.88% 7.64% 8.41% 9.17%
80,001 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 121,300 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
121,301 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
<TABLE>
<CAPTION>
1996 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 40,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40,001 - 40,100 15% 5.201% 19.42% 3.72% 4.34% 4.96% 5.58% 6.20% 6.82% 7.45%
40,101- 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001 - 96,900 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
96,901 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 147,700 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
147,701 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</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. 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
1997, taxpayers with adjusted gross income in excess of a $117,950 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 $117,950 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 1997 is from $117,950 to $240,450 and for married taxpayers filing a
joint return the range is from $176,950 to $299,450. 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 1997.
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<PAGE>
TABLE 4 - FEDERAL AND NORTH CAROLINA
- ------- --------------------------
<TABLE>
<CAPTION>
Combined
Federal
1997 Taxable North and North
Income Bracket Federal Carolina Carolina Tax-Exempt Yield
Joint Marginal Marginal Marginal
Single Return 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 - 24,000 21,251 - 40,100 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
24,001 - 58,150 40,101 - 96,900 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
58,151 - 60,000 96,901 - 100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 121,300 100,001 - 147,700 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
121,301 - 263,750 147,701 - 263,750 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 263,750 Over 263,750 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
1997, taxpayers with adjusted gross income in excess of $117,950 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 $117,950 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 1997 is from $117,950 to $240,451, and
for married taxpayers filing a joint return the range is from $176,950 to
$299,451. 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 1997.
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<PAGE>
TABLE 5 - FEDERAL AND VIRGINIA
- ------- --------------------
<TABLE>
<CAPTION>
Combined
1997 Taxable Federal Tax-Exempt Yield
Income Bracket Federal Virginia and Virginia
Joint Marginal Marginal Marginal
Single Return 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%
12,751 - 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.
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<PAGE>
TABLE 6 - FEDERAL AND NEW JERSEY
- --------------------------------
<TABLE> Approximate
<CAPTION> Combined
Federal
Federal NJ and NJ Tax-Exempt Yield
1997 Taxable Marginal Marginal Marginal
Income Bracket* Tax Rate Tax Rate Tax Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- --------------- -------- -------- ---------- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Taxable Yield - Single Return
- -------------
$ 0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 24,000 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
24,001 - 35,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
35,001 - 40,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
40,001 - 58,150 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
58,151 - 75,000 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
75,001 - 121,300 31.0% 6.370% 35.395% 4.643% 5.418% 6.191% 6.965% 7.739% 8.513% 9.287% 10.061 10.835%
121,301 - 263,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 263,750 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
Joint Return Taxable Yield - Joint Return
- ----------------
$ 0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 40,100 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
40,101 - 50,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
50,001 - 70,000 28.0% 2.450% *29.764% 4.271% 4.983% 5.695% 6.407% 7.189% 7.831% 8.543% 9.255% 9.966%
70,001 - 80,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
80,001 - 96,900 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
96,901 - 147,700 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9 10.738%
.971%
147,701 - 150,000 36.0% 5.525% *39.536% 4.961% 5.789% 6.616% 7.442% 8.269% 9.096% 9.923% 10.750 11.577%
150,001 - 263,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 263,750 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
</TABLE>
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<PAGE>
* 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 1997, taxpayers with adjusted gross income in
excess of $117,950 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 $117,950 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 1997 is from $117,950 to
$240,451, and for married taxpayers filing a joint return the range is
from $176,950 to $299,451. 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 1997.
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<PAGE>
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 Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses and whether there are any
special account charges which may reduce the effective yield. The fees which
may be imposed by Service Organizations and other institutions on their
customers are not reflected in the calculations of total returns or yields for
the Portfolios.
When comparing a Portfolio's performance to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility.
Likewise, money market funds may offer greater stability of principal, but
generally do not offer the higher potential returns from stock mutual funds.
From time to time, a Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Portfolios to one another in appropriate categories over specific periods of
time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
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<PAGE>
compilations or indices that may be developed and made available in the future.
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,
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives)
investment management techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, 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, sales
literature, communications to shareholders or other materials 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, sales
literature, communications to shareholders or other materials, 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, advertisements,
shareholder communications or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in a Portfolio
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and investment alternative to certificates of deposit and other
financial instruments. Such advertisements or communicators may include
symbols, headlines or other material which highlight or summarize the
information discussed in more
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<PAGE>
detail therein. Materials may include lists of representative clients of the
Portfolios' investment advisers. Materials may refer to the CUSIP numbers of
the various classes of the Portfolios and may illustrate how to find the
listings of the Portfolios in newspapers and periodicals. Materials may also
include discussions of other Portfolios, products, and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
A Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate a Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the
Portfolio's percentage change in price movements over that period.
A Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. A Portfolio may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
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<PAGE>
A Portfolio may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.
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 is 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 intends 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
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<PAGE>
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 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
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<PAGE>
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) 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) or 28% 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. 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.
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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.
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 dealer in intangibles tax,
provided that, with respect to the Ohio corporation franchise tax and the Ohio
dealer in intangibles tax, the Fund timely files the annual report required by
Section 5733.09 of the Ohio Revised Code. Distributions with respect to shares
of 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, nor included in the net income base of the Ohio corporation
franchise tax.
Distributions of exempt-interest dividends, to the extent attributable to
interest on North Carolina Municipal Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax.
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 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
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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 the 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 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 the 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.
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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 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.
The Internal Revenue Service has issued a private letter ruling with
respect to certain other investment companies to the
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following effect: gains realized from a futures contract to purchase or to sell
will be treated for purposes of the Short-Short Gain Test 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 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
Short-Short Gain 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
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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 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
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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 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 Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund when required to do so
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.
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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.
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. 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, LLP, 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 ________, 1996 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: [ADD INFO]
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On _________, 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 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,
CastleInternational, PNC Bank and other institutions that are banks or bank
affiliates are subject to such banking laws and regulations.
PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational 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 normally be subject
to shareholder approval. It is not anticipated that any change in the Fund's
method of operations as a result of these occurrences would affect its net asset
value per share or result in a financial loss to any shareholder.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the
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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 audited financial statements and notes thereto in the Fund's
Annual Report to Shareholders for the fiscal year ended September 30, 1996 (the
"1996 Annual Report") are incorporated in this Statement of Additional
Information by reference. No other parts of the 1996 Annual Report are
incorporated by reference herein. The financial statements included in the 1996
Annual Report have been audited by the Fund's independent accountants,
________________________, whose reports thereon are incorporated herein by
reference. Such financial statements have been incorporated herein in reliance
upon such reports given upon their authority as experts in accounting and
auditing. Additional copies of the 1996 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.
The financial statements included in the 1996 Report for each of the
two years in the period ended June 30, 1995, and for the period from July 17,
1992 through June 30, 1993 for the Low Duration Bond Portfolio and the period
from December 9, 1992 through June 30, 1993 for the Core Bond Portfolio, have
been audited by the former independent accountants of the Predecessor BFM
Portfolios, ___________________________, whose report thereon is also
incorporated herein by reference. Such financial statements have been
incorporated herein by reference in reliance on the reports of
________________________ and Deloitte & Touche, L.L.P. given upon their
authority as experts in accounting and auditing.
INDEX MASTER PORTFOLIO. The audited financial statements for the U.S.
Large Company Series of The DFA Investment Trust Company (the "Trust") contained
in its Report to Shareholders dated November 30, 1995 (the "1995 Index Master
Report"), and the unaudited financial statements for the Trust's U.S. Large
Company Series contained in its Semi-Annual Report to Shareholders dated May 31,
1996 (the "1996 Index Master Report"), are incorporated by reference into this
Statement of Additional Information. No other parts of the 1995 Index Master
Report or 1996 Master Report are incorporated by reference herein. The
financial statements included in the
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1995 Index Master Report have been audited by the Trust's independent
accountants, _________________________, whose reports thereon are incorporated
herein by reference. Such financial statements have been incorporated herein by
reference in reliance upon such reports given upon their authority as experts in
accounting and auditing. Additional copies of the 1995 Index Master Report and
1996 Index Master Report may be obtained at no charge by telephoning the Trust
at (310) 395-8005.
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APPENDIX A
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COMMERCIAL PAPER RATINGS
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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 in
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.
A-1
<PAGE>
"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
A-2
<PAGE>
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 generally 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
A-3
<PAGE>
year or less which are 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 which posses a particularly strong credit feature
are 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.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
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<PAGE>
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 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.
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<PAGE>
"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 that 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 absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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 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
A-7
<PAGE>
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.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
A-8
<PAGE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
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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<PAGE>
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.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" 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, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"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.
A-10
<PAGE>
"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
other 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" 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
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<PAGE>
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.
"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.
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<PAGE>
"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.
A-13
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(FORMERLY, THE PNC(R) FUND)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A of the Registration Statement are the
following tables:
(i) Audited Financial Highlights for 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, Value Equity, Growth Equity,
Small Cap Value Equity, Small Cap Growth Equity,
International Equity, International Emerging Markets,
Select Equity, Index Equity, Balanced, Intermediate
Government Bond, Intermediate Bond, Managed Income,
Tax-Free Income, Pennsylvania Tax-Free Income,
Government Income and Ohio Tax-Free Income Portfolios
for the fiscal years ended September 30, 1996,
September 30, 1995, September 30, 1994, September 30,
1993, September 30, 1992, September 30, 1991 and
September 30, 1990.
(ii) Audited Financial Highlights for the International
Bond, New Jersey Tax-Free Income and New Jersey
Municipal Money Market Portfolios for the periods ended
September 30, 1996 and January 31, 1996, and for the
fiscal years ended February 28, 1995, February 28,
1994, February 28, 1993 and February 29, 1992.
(iii) Audited Financial Highlights for the Low Duration Bond
and Core Bond Portfolios for the periods ended
September 30, 1996 and March 31, 1996, and for the
fiscal years ended June 30, 1995, June 30, 1994 and
June 30, 1993.
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<PAGE>
(iv) Audited Financial Highlights for the Multi-Sector
Mortgage Securities Portfolio III for the periods ended
September 30, 1996 and March 31, 1996, and for the
period ended June 30, 1995.
(2) Incorporated by reference into Part B of the Registration
Statement are the following audited financial statements:
(i) With respect 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 and Virginia Municipal
Money Market Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1996;
Statements of Net Assets -September 30, 1996;
Statements of Operations for the year ended
September 30, 1996;
Statements of Changes in Net Assets for the year
ended September 30, 1996;
Notes to Financial Statements.
(ii) With respect to the Value Equity, Growth Equity, Small
Cap Growth Equity, Select Equity, Index Equity, Small
Cap Value Equity, International Equity, International
Emerging Markets and Balanced Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1996;
Schedules of Investments with respect to the
International Equity Portfolio - September 30,
1996;
Statements of Assets and Liabilities - September
30, 1996;
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<PAGE>
Statements of Net Assets -
September 30, 1996;
Statements of Operations for the year ended
September 30, 1996;
Statements of Changes in Net Assets for the year
ended September 30, 1996;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Intermediate Bond and
Government Income Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1996;
Statements of Net Assets -September 30, 1996;
Statements of Operations for the year ended
September 30, 1996;
Statements of Changes in Net Assets for the year
ended September 30, 1996;
Notes to Financial Statements.
(iv) With respect to the International Bond, New Jersey Tax-
Free Income and New Jersey Municipal Money Market
Portfolios:
Reports of Independent Accountants for the period
ended September 30, 1996;
Statements of Net Assets for the period ended
September 30, 1996 (New Jersey Tax-Free Income and
New Jersey Municipal Money Market Portfolios);
Schedule of Investments - September 30, 1996
(International Bond Portfolio);
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<PAGE>
Statement of Assets and Liabilities - September
30, 1996 (International Bond Portfolio);
Statements of Operations for the period ended
September 30, 1996;
Statements of Changes in Net Assets for the period
ended September 30, 1996;
Notes to Financial Statements.
(v) With respect to the Low Duration Bond and Core Bond
Portfolios:
Report of Independent Accountants for the period
ended September 30, 1996;
Schedules of Investments - September 30, 1996;
Statements of Assets and Liabilities - September
30, 1996;
Statements of Operations for the period ended
September 30, 1996;
Statements of Changes in Net Assets for the period
ended September 30, 1996;
Notes to Financial Statements.
(vi) With respect to the Multi-Sector Mortgage Securities
Portfolio III:
Report of Independent Auditors for the period
ended September 30, 1996;
Portfolio of Investments - September 30, 1996;
Statement of Assets and Liabilities - September
30, 1996;
Statement of Operations for the period ended
September 30, 1996;
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<PAGE>
Statement of Changes in Net Assets for the period
ended September 30, 1996;
Notes to Financial Statements.
(vii) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Report of Independent Accountants for the fiscal
year ended November 30, 1995;
Statement of Net Assets - November 30, 1995;
Statement of Operations for the year ended
November 30, 1995;
Statement of Changes in Net Assets for the year
ended November 30, 1995;
Notes to Financial Statements.
(viii) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Statement of Net Assets - May 31, 1996
(unaudited);
Statement of Operations for the six months ended
May 31, 1996 (unaudited);
Statement of Changes in Net Assets for the six
months ended May 31, 1996 (unaudited);
Notes to Financial Statements (unaudited).
(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.
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<PAGE>
(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.
(d) Amendment No. 3 to the Declaration of Trust dated
January 5, 1996.
(2) Registrant's Code of Regulations is incorporated herein
by reference to Exhibit (2) of Registrant's
Registration Statement on Form N-1A, filed on December
23, 1988.
(3) None.
(4) Sections V, VIII and IX of Registrant's Declaration of
Trust 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;
Article II of Registrant's Code of Regulations is
incorporated herein by reference to Exhibit (2) of
Registrant's Registration Statement on Form N-1A filed
on December 23, 1988.
(5) (a) 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)(a) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(b) Investment Advisory Agreement between Registrant and
BlackRock Financial Management, Inc. with respect to
the
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<PAGE>
Multi-Sector Mortgage Securities Portfolio III is
incorporated herein by reference to Exhibit (5)(b) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(c) Form of Amendment No. 1 to Investment Advisory
Agreement between Registrant and PNC Asset Management
Group, Inc. with respect to the Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios.
(d) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and BlackRock Financial Management, Inc.
with respect to the Managed Income, Tax-Free Income,
Intermediate Government Bond, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Low Duration Bond,
Intermediate Bond, Government Income, New Jersey Tax-
Free Income and Core Bond Portfolios is incorporated
herein by reference to Exhibit (5)(c) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(e) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and Provident Capital Management, Inc. with
respect to the Value Equity, Small Cap Value Equity and
Select Equity Portfolios is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(f) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with
respect to the Growth Equity and Small Cap Growth
Equity Portfolios is incorporated herein by reference
to Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(g) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Institutional Management
Corporation
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<PAGE>
with respect to the Money Market, U.S. Treasury Money
Market, 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 is incorporated herein by reference to
Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(h) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and Morgan Grenfell Investment Services
Limited with respect to the International Bond
Portfolio is incorporated herein by reference to
Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(i) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and CastleInternational Asset Management
Limited with respect to the International Equity and
International Emerging Markets Portfolios is
incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(j) Sub-Advisory Agreement among PNC Asset Management
Group, Inc., Provident Capital Management, Inc. and
BlackRock Financial Management, Inc. with respect to
the Balanced Portfolio is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(k) Form of Amendment No. 1 to Sub-Advisory Agreement
between PNC Asset Management Group, Inc. and Provident
Capital Management, Inc. with respect to the Mid-Cap
Value Equity Portfolio.
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<PAGE>
(l) Form of Amendment No. 1 to Sub-Advisory Agreement
between PNC Asset Management Group, Inc. and PNC Equity
Advisors Company with respect to the Mid-Cap Growth
Equity Portfolio.
(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) Appendix A to the Distribution Agreement between
Registrant and Compass Distributors, Inc. is
incorporated herein by reference to Exhibit (6)(b) of
Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A filed on July 29,
1996.
(c) Form of Appendix A to the Distribution Agreement
between Registrant and Compass Distributors, Inc.
(d) 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.
(e) Amendment No. 3 to the Distribution Agreement between
Registrant and Provident Distributors, Inc. is
incorporated herein by reference to Exhibit (6)(d) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(7) None.
(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
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<PAGE>
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, 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) 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. 22 to Registrant's
Registration Statement on Form N-1A filed on July 29,
1996.
(e) Form of Appendix B to Custodian Agreement dated October
4, 1989 between Registrant and PNC Bank, National
Association.
(f) 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.
(g) 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
C-10
<PAGE>
Amendment No. 14 to Registrant's Registration Statement
on Form N-1A filed on January 18, 1995.
(h) 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 Registration Statement on Form N-1A filed
on January 18, 1995.
(i) Amendment No. 1 to Custodian Agreement between State
Street Bank and Trust Company and PNC Bank, National
Association 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.
(j) 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.
(k) 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.
(l) 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,
C-11
<PAGE>
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 among Registrant, Compass
Distributors, Inc. and PFPC Inc. is incorporated herein
by reference to Exhibit (9)(a) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(b) Forms of Appendix A and Appendix B to Administration
Agreement among Registrant, Compass Distributors, Inc.
and PFPC Inc.
(c) Co-Administration Agreement between Registrant and
Compass Capital Group, Inc. is incorporated herein by
reference to Exhibit (9)(b) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(d) Form of Appendix A to Co-Administration Agreement
between Registrant and Compass Capital Group, Inc.
(e) 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.
(f) Amendment No. 1 to Transfer Agency Agreement dated
October 4, 1989 between 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.
C-12
<PAGE>
(g) 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.
(h) 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.
(i) 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.
(j) 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.
C-13
<PAGE>
(k) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc.
(l) 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) 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 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.
- ------------------
1. Filed on November 14, 1995, February 12, 1996, March 28, 1996, April 25,
1996 and May 28, 1996 under Rule 24f-2 as part of Registrant's Rule 24f-2
Notices.
C-14
<PAGE>
(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.
(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
C-15
<PAGE>
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) Purchase Agreement between Registrant and Provident
Distributors, Inc. relating to shares of Class AA-1,
Class AA-2, Class AA-3, Class AA-4 and Class AA-5;
Class BB-1, Class BB-2, Class
BB-3, Class BB-4 and Class BB-5; Class CC-3; Class A-5,
Class B-4, Class B-5, Class C-4, Class C-5, Class I-4,
Class I-5, Class J-4, Class J-5, Class Q-4, Class Q-5,
Class V-4, Class V-5, Class Z-4 and Class Z-5; Class X-
1 and Class X-3; and Class D-5, E-5, F-5, G-5, H-5, K-
5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-
5 and Y-5.
(j) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to shares of Class
DD-1, Class DD-2, Class DD-3, Class DD-4 and DD-5; and
Class EE-1, Class EE-2, Class EE-3, Class EE-4 and
Class EE-5.
(14) None.
(15) (a) Amended and Restated Distribution and Service Plan for
Service, Series A Investor, Series B Investor, Series C
Investor and Institutional Shares is incorporated
herein by reference to Exhibit (15) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(b) Form of Appendix A to Amended and Restated Distribution
and Service Plan.
C-16
<PAGE>
(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. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(24) (a) Registrant's Annual Report dated September 30, 1996 is
incorporated herein by reference to Registrant's
filing including such Annual Report and filed on
November ___, 1996 (Accession No.
______________________).
(b) Annual Report for The DFA Investment Trust Company
("DFA") (File No. 811-7436) dated November 30, 1995
with respect to the U.S. Large Company Series is
incorporated herein by reference to DFA's filing
including such Annual Report and filed on January 26,
1996 (Accession No. 0000950116-96-000032).
(c) Semi-Annual Report for The DFA Investment Trust Company
("DFA") (File No. 811-7436) dated May 31, 1996 with
respect to the U.S. Lange Company Series is
incorporated herein by reference to DFA's filing
including such Semi-Annual Report and filed on July
___, 1996 (Accession No. _____________________).
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
Compass Distributors, Inc. has provided the initial capitalization for
and holds all of the outstanding shares of beneficial interest of the following
classes as of _______, 1996: A-5, B-4, B-5, C-4, C-5, D-5, E-5, F-4, F-5, G-5,
H-4, H-5, I-4, I-5, J-4, J-5, K-4, K-5, L-5, M-5, N-5, O-5, P-5, Q-4, Q-5, R-4,
C-17
<PAGE>
R-5, S-4, S-5, T-5, U-5, V-3, V-4, V-5, W-2, W-5, X-1, X-2, X-5, Y-5, Z-4, Z-5,
AA-2, AA-4, AA-5 and BB-5.
C-18
<PAGE>
With regard to the other classes of shares, the following information
is as of ________, 1996:
Title of Class Number of Record Holders
-------------- ------------------------
Class A-1
Class B-1
Class C-1
Class D-1
Class E-1
Class F-1
Class G-1
Class H-1
Class I-1
Class J-1
Class K-1
Class L-1
Class M-1
Class N-1
Class O-1
Class P-1
Class Q-1
Class R-1
Class S-1
Class T-1
Class U-1
Class V-1
Class W-1
Class Y-1
Class Z-1
Class AA-1
Class BB-1
Class A-2
Class B-2
Class C-2
Class D-2
Class E-2
Class F-2
Class G-2
Class H-2
Class I-2
Class J-2
Class K-2
Class L-2
Class M-2
Class N-2
Class O-2
Class P-2
Class Q-2
Class R-2
Class S-2
C-19
<PAGE>
Class T-2
Class U-2
Class V-2
Class Y-2
Class Z-2
Class BB-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
Class P-3
Class Q-3
Class R-3
Class S-3
Class T-3
Class U-3
Class W-3
Class X-3
Class Y-3
Class Z-3
Class AA-3
Class BB-3
Class CC-3
Class A-4
Class D-4
Class E-4
Class G-4
Class L-4
Class M-4
Class N-4
Class O-4
Class P-4
Class T-4
Class U-4
Class W-4
Class X-4
Class Y-4
Class BB-4
C-20
<PAGE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit (6)(a). Indemnification of PFPC Inc. and Compass
Distributors, Inc. in their capacity as co-administrators is provided for in
Section 7 of the Administration Agreement incorporated by reference herein as
Exhibit 9(a). Indemnification of Registrant's Custodian and Transfer Agent is
provided for, respectively, in Section 22 of the Custodian Agreement
incorporated by reference herein as Exhibit 8(a) and Section 17 of the Transfer
Agency Agreement incorporated by reference herein as Exhibit 9(e).
Indemnification of Compass Capital Group, Inc. in its capacity as co-
administrator as provided for in Section 7 of the Co-Administration Agreement
incorporated by reference herein as Exhibit 9(c). 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 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
C-21
<PAGE>
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
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.
C-22
<PAGE>
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 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 other
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
C-23
<PAGE>
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 other 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 other 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, 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).
(g) CastleInternational Asset Management Limited
("CastleInternational") is an indirect wholly-owned subsidiary of PNC Bank Corp.
The list required by this Item 28 of officers and directors of
CastleInternational, together with information as to any other business,
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 CastleInternational pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-51087).
C-24
<PAGE>
PNC ASSET MANAGEMENT GROUP
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- -------------- ------------------ --------------- --------
<S> <C> <C> <C>
Chairman, Richard C. Caldwell Executive Vice President Banking
Director and PNC Bank, National Association(1)
CEO
Director Banking
PNC National Bank(2)
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Investment
Provident Capital Management Advisory
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
PNC Institutional Management
Corp.
Director
Compass Capital Group, Inc.
Director
Blackrock Financial Management,
Inc.
Director
PNC Equity Advisors Co.
Director
PNC Bank, New England
Vice-President Laurence D. Fink Chairman and CEO
and Director BlackRock Financial
Management, Inc.
Director
PNC Institutional Management Corp.
</TABLE>
C-25
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Secretary Pamela Fraser Wilford Chief Counsel, Asset Management Banking
& Trust
PNC Bank, National Association(1)
Treasurer Brian Lilly None.
and CFO
Assistant Thomas R. Moore Secretary Financial
Secretary PNC International Investment Related
Corporation Services
Vice President and Secretary
Pinaco, Inc.
Vice President and Secretary
PNC Mortgage Bank, N.A.
Secretary and Treasurer
PNC Brokerage Corp.
Vice President Real Estate
Provcor Properties, Inc.
Vice President
Provident Realty Management, Inc.
Director Vincent J. Ciavardini President, CFO and Financial
Director Related
PFPC Inc.(3) Services
Senior Vice President
PNC Institutional Management
Corp.
Director Financial
PFPC International Ltd. Related
Services
Director Financial
PFPC International (Cayman) Ltd. Related
Services
Director J. Richard Carnall 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 Activities
of New York(11)
</TABLE>
C-26
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- -------------- ------------------ --------------- --------
<S> <C> <C> <C>
Director Equipment
Hayden Bolts, Inc.*
Real Estate
Director
Parkway Real Estate Company*
Director Investment
Provident Capital Management Advisory
Inc.(5)
Chairman and Director
PNC Institutional Management
Corp.
Director Financial
PFPC International Ltd. Related
Services
Director Financial
PFPC International (Cayman) Ltd. Related
Services
Director Investment
Advanced Investment Management Advisory
Chairman Mutual Fund
International Dollar Reserve
Fund, Ltd.
Chief Equity Young D. Chin Chairman, President, CEO, Investment
Officer & Chief Investment Officer & Advisory
Director Director
Provident Capital Management
Inc.(5)
Chairman
PNC Equity Advisors Company
Director
CastleRock Capital Management
Director Ralph L. Schlosstein President
BlackRock Financial Management, Inc.
</TABLE>
C-27
<PAGE>
<TABLE>
<CAPTION>
PNC INSTITUTIONAL MANAGEMENT CORPORATION
DIRECTORS AND OFFICERS
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Chairman and J. Richard Carnall Executive Vice President Banking
Director 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 Activities
of New York(11)
Director Equipment
Hayden Bolts, Inc.*
Director Real Estate
Parkway Real Estate Company*
Director Invest-
Provident Capital Management ment
Inc.(5) Advisory
Director
PNC Asset Management Group, Inc.
Director Financial
PFPC International Ltd. Related
Services
Director Financial
PFPC International (Cayman) Ltd. Related
Services
Director Investment
Advanced Investment Management Advisory
Chairman
International Dollar Reserve
Fund, Ltd.
Director Richard C. Caldwell Executive Vice President Banking
PNC Bank, National Association(1)
Director Banking
PNC National Bank(2)
Director Fiduciary
PNC Trust Company Activities
of New York(11)
</TABLE>
C-28
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Director Investment
Provident Capital Management Advisory
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
Chairman, Director & CEO
PNC Asset Management Group, Inc.
Director Mutual Fund
Compass Capital Group, Inc.
Director Investment
Blackrock Financial Advisory
Management, Inc.
Director Investment
PNC Equity Advisors Co. Advisory
Director Banking
PNC Bank, New England
Director Laurence D. Fink Chairman and Chief Executive
Officer
BlackRock Financial Management, Inc.
Director and Vice President
PNC Asset Management Group, Inc.
Director Richard L. Smoot President, and Chief Banking
Executive Officer
PNC Bank, National Association (Phila.)(1)
Senior Vice President Bank Holding
PNC Bank Corp.(14) Company
Director Financial-
PFPC Inc.(3) Related
Services
Director Fiduciary
PNC Trust Company of NY(11) Activities
Director, Chairman and President Banking
PNC Bank, New Jersey,
National Association(16)
Director, Chairman, and CEO Banking
PNC National Bank(2)
</TABLE>
C-29
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Chairman & Director Leasing
PNC Credit Corp (13)
Director and Nicholas M. Marsini,Jr. Senior Vice President Banking
Chief Financial PNC Bank, National Association(1)
Officer
Director Financial
PFPC Inc.(3) Related
Services
Senior Vice President Banking
and Chief Financial Officer
PNC Bank, Delaware(20)
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 New York(11) Activities
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
President and Thomas H. Nevin None.
Chief Investment
Officer
Vice President Michelle L. Petrilli Chief Counsel Banking
and Secretary PNC Bank, DE(20)
Secretary Financial-
PFPC Inc.(3) Related
Services
Executive Vice Charles B. Landreth Vice President Banking
President PNC Bank, National Association(1)
</TABLE>
C-30
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------- -------------- --------
<S> <C> <C> <C>
Senior Vice Vincent J. Ciavardini President, Chief Financial-
President Financial Officer and Director Related
PFPC Inc.(3) Services
Director
PNC Asset Management Group, Inc.
Director & President Financial-
PFPC International Ltd. Related
Services
Director Financial-
PFPC International (Cayman) Ltd. Related
Services
Director
International Dollar Reserve
Fund, Ltd.
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
Vice President, Stephen M. Wynne Executive Vice President and Financial-
Chief Chief Accounting Officer Related
Accounting PFPC Inc.(3) Services
Officer, and
Assistant Secretary
Director Financial-
PFPC Trustee & Custodial Related
Services, Ltd. Services
Director Financial-
PFPC International (Cayman) Ltd. Related
Services
Executive Vice President Financial-
PFPC International Ltd. Related
Services
Controller Pauline M. Heintz Vice President Financial
PFPC Related
Inc.(3) Services
</TABLE>
C-31
<PAGE>
<TABLE>
<S> <C> <C>
Vice President Katherine T. Allen None.
Vice President John R. Antczak None.
Vice President John P. Bye None.
Vice President Jeffrey W. Carson None.
Vice President Katherine A. Chuppe None.
Vice President Mary J. Coldren None.
Vice President Michele C. Dillon None.
Vice President Patrick J. Ford None.
Vice President Clay T. Henry None.
Vice President Richard Hoerner None.
Vice President Michael S. Hutchinson None.
Vice President Michael J. Milligan None.
Vice President G. Keith Robertshaw None.
Vice President W. Don Simmons None.
Vice President Charles Allen Stiteler None.
Vice President William F. Walsh None.
Vice President Karen J. Walters None.
</TABLE>
____________________
*Information regarding these corporations can be obtained from the office of the
Secretary.
C-32
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT CAPITAL MANAGEMENT, INC.
DIRECTORS AND OFFICERS
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)
Young D. Chin Director, President and See PAMG List.
Chief Executive Officer
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-33
<PAGE>
<TABLE>
<CAPTION>
BLACKROCK FINANCIAL MANAGEMENT, INC.
DIRECTORS AND OFFICERS
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 Treasurer of 25 BlackRock
and Managing Director closed 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-34
<PAGE>
<TABLE>
<CAPTION>
PNC EQUITY ADVISORS COMPANY
DIRECTORS AND OFFICERS
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, See Provident Capital
President Management List
& CEO
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 Senior Counsel, PNC Bank,
Counsel National Association (1)
Thomas H. O'Brien CEO, PNC Bank Corp.
</TABLE>
C-35
<PAGE>
(1) PNC Bank, National Association, 120 S. 17th Street, Philadelphia, PA
19103; Broad & Chestnut Streets, Philadelphia, PA 19101; 17th and Chestnut
Streets, Philadelphia, PA 19103.
(2) PNC National Bank, 103 Bellevue Parkway, Wilmington, DE 19809.
(3) PFPC Inc., 103 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., 222 Delaware Avenue, 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) PNC Bank, Delaware, 300 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.
C-36
<PAGE>
Item 29. Principal Underwriter
(a) Not applicable.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Compass Distributors, Inc. is incorporated by
reference to Schedule A of FORM BD filed by Compass 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) Compass 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).
(7) PNC Equity Advisors Company, 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
C-37
<PAGE>
(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) CastleInternational Asset Management Limited, 7 Castle
Street, Edinburgh, Scotland, EH3 3AM (records relating to
its functions as investment sub-adviser).
(15) Citibank, N.A. 111 Wall Street, 23rd Floor, Zone 6, New
York, NY 10043 (records relating to its functions as sub-
custodian).
(16) 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
(a) 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>
(b) Registrant undertakes to file a Post-Effective Amendment with respect
to the Mid-Cap Value Equity and Mid-Cap Growth Equity Portfolios using
financial statements which need not be certified within four to six
months from the effective date of this Post-Effective Amendment No.
23.
C-39
<PAGE>
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. 23 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and the State of New York on the 18th day of October, 1996.
COMPASS CAPITAL FUNDS
Registrant
By *Raymond J. Clark
-----------------------------
Raymond J. Clark,
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 23 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
*Raymond J. Clark Trustee, President and October 18, 1996
- ---------------------------- Treasurer
(Raymond J. Clark)
*David R. Wilmerding, Jr. Chairman of the Board October 18, 1996
- ----------------------------
(David R. Wilmerding, Jr.)
*Anthony M. Santomero Vice-Chairman of October 18, 1996
- ---------------------------- the Board
(Anthony M. Santomero)
*William O. Albertini Trustee October 18, 1996
- ----------------------------
(William O. Albertini)
*Robert M. Hernandez Trustee October 18, 1996
- ----------------------------
(Robert M. Hernandez)
*By:/s/ Karen H. Sabath
----------------------------------
Karen H. Sabath, Attorney-in-fact
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
David R. Wilmerding, Jr., whose signature appears below, hereby constitutes
and appoints David R. Wilmerding, Jr., Raymond J. Clark and Karen H. Sabath, and
each 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 any of them, may
deem necessary or advisable or which may be required to enable Compass Capital
Funds (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 any of them, shall do or cause to be done by virtue
hereof.
/s/David R. Wilmerding, Jr.
---------------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Raymond J. Clark, 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 Compass Capital Funds (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/Raymond J. Clark
-------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Robert M. Hernandez, 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 Compass Capital Funds (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 M. Hernandez
----------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
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 Compass Capital Funds (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 M. Santomero
-----------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
William O. Albertini, 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 Compass Capital Funds (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/William O. Albertini
-----------------------
Date: March 5, 1996
<PAGE>
COMPASS CAPITAL FUNDS
SECRETARY'S CERTIFICATE
The undersigned, Morgan R. Jones, Secretary of Compass Capital Funds (the
"Fund") hereby certifies that set forth below is a copy of the resolutions duly
adopted by the Board of Trustees of the Fund on August 6, 1996:
RESOLVED, that the officers of the Fund be, and each of them hereby
is, authorized in the name and on behalf of the Fund to execute and cause
to be filed with the SEC Post-Effective Amendments to the Fund's
Registration Statement on Form N-1A under the 1940 Act and the Securities
Act of 1933, as amended (the "1933 Act"), in such forms as the officer or
officers executing the same may approve as necessary or desirable and
proper, such approval to be conclusively evidenced by his or their
execution thereof;
FURTHER RESOLVED, that Morgan R. Jones be, and hereby is, designated
to act on behalf of the Fund as its agent for service of process for
matters relating to said Registration Statement with the powers enumerated
in Rule 478 of the Rules and Regulations of the SEC under the 1933 Act, as
amended; and
FURTHER RESOLVED, that the trustees and officers of the Fund who may
be required to execute any amendments to the Fund's Registration Statement
be, and each of them hereby is, authorized to execute a power of attorney
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath, and
any of them, their true and lawful attorney or attorneys, to execute in
their name, place and stead, in their capacity as trustee or officer, or
both, of the Fund any and all amendments to the Registration Statement, and
all instruments necessary or incidental in connection therewith, and to
file the same with the SEC; and any of said attorneys shall have the power
to act thereunder with or without the other of said attorneys and shall
have full power of substitution and resubstitution; and any of said
attorneys shall have full power and authority to do in the name and on
behalf of said trustees and officers, or any or all of them, in any and all
capacities, every act whatsoever requisite or necessary to be done on the
premises, as fully and to all intents and purposes as each of said trustees
or officers, or any or all of them, might or could do in person, said acts
of said attorneys, or either of them, being hereby ratified and approved.
<PAGE>
IN WITNESS THEREOF, I have hereunto signed my name and affixed the seal of
the Fund on October 15, 1996.
/s/ Morgan R. Jones
-------------------
Morgan R. Jones
Secretary
<PAGE>
SIGNATURES
As it relates to the Index Equity Portfolio only, The DFA Investment
Trust Company consents to the filing of this Amendment to the Registration
Statement of Compass Capital Funds which is signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica and the
State of California on this 18th day of October, 1996.
THE DFA INVESTMENT TRUST COMPANY
* David G. Booth
----------------------------
David G. Booth
President and Chairman-Chief
Executive Officer
The undersigned Trustees and Principal Officers of The DFA Investment
Trust Company consent to the filing of this Amendment to the Registration
Statement of Compass Capital Funds as it relates to the Index Equity Portfolio
only, on the dates indicated.
Signature Title Date
- -------------- ----- ----
* David G. Booth President, Chairman - October 18, 1996
- ------------------------- Chief Executive Officer
David G. Booth and Trustee
* Rex A. Sinquefield Chairman - Chief October 18, 1996
- ---------------------------- Investment Officer
Rex A. Sinquefield and Trustee
* George M. Constantinides Trustee October 18, 1996
- ----------------------------
George M. Constantinides
* John P. Gould Trustee October 18, 1996
- ----------------------------
John P. Gould
* Roger G. Ibbotson Trustee October 18, 1996
- ----------------------------
Roger G. Ibbotson
* Merton H. Miller Trustee October 18, 1996
- ----------------------------
Merton H. Miller
* Myron S. Scholes Trustee October 18, 1996
- ----------------------------
Myron S. Scholes
* Michael T. Scardina Vice President, Chief October 18, 1996
- ---------------------------- Financial Officer,
Michael T. Scardina Controller and Treasurer
*By: /s/ Irene R. Diamant
---------------------
Irene R. Diamant
Attorney-in-fact
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
POWER OF ATTORNEY
-----------------
The undersigned officers and trustees of THE DFA INVESTMENT TRUST
COMPANY (the "Fund") hereby appoint DAVID G. BOOTH, REX A. SINQUEFIELD, MICHAEL
T. SCARDINA, IRENE R. DIAMANT AND STEPHEN W. KLINE, ESQUIRE (with full power to
any of them to act) as attorney-in-fact and agent, in all capacities, to
execute, and to file any of the documents referred to below relating to a
Registration Statement under the Securities Act of 1933 and/or the Investment
Company Act of 1940, including any and all amendments thereto, covering the
registration of any registered investment company for which any Series of the
Fund serves as a master fund in a master fund-feeder fund structure, including
all exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes, as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and agents
may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 20th day of December, 1995.
/s/ David G. Booth /s/Rex A. Sinqufield
- ----------------------------- -----------------------------
David G. Booth, Rex A. Sinqufield,
Chairman-Chairman-Chief Executive Chief Investment Officer and
Officer, President and Trustee Trustee
/s/George M. Constantinides /s/John P. Gould
- ----------------------------- -----------------------------
George M. Constantinides, John P. Gould, Trustee
Trustee
/s/Roger G. Ibbotson /s/Merton H. Mill
- ----------------------------- ------------------------------
Roger G. Ibbotson, Trustee Merton H. Miller, Trustee
/s/Myron S. Scholes /s/Michael T. Scardina
- ----------------------------- ------------------------------
Myron S. Scholes, Trustee Michael T. Scardina, Chief
Financial Officer, Treasurer
and Vice President
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ----------- ----------- --------
(1)(d) Amendment No. 3 to the Declaration of Trust dated
January 5, 1996.
(5)(c) Form of Addendum No. 1 to Investment Advisory Agreement
between Registrant and PNC Asset Management Group, Inc.
with respect to the Mid-Cap Value Equity and Mid-Cap
Growth Equity Portfolios.
(5)(k) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and Provident Capital Management, Inc. with respect
to the Mid-Cap Value Equity Portfolio.
(5)(l) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with respect to the
Mid-Cap Growth Equity Portfolio.
(6)(c) Form of Appendix A to the Distribution Agreement between
Registrant and Compass Distributors, Inc.
(8)(e) Form of Appendix B to Custodian Agreement dated October 4,
1989 between Registrant and PNC Bank, National Association.
(9)(b) Forms of Appendix A and Appendix B to Administration
Agreement among Registrant, Compass Distributors, Inc. and
PFPC Inc.
(9)(d) Form of Appendix A to Co-Administration Agreement between
Registrant and Compass Capital Group, Inc.
(9)(k) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc.
(11) Consent of Drinker Biddle & Reath.
<PAGE>
(13)(i) Purchase Agreement between Registrant and Provident
Distributors, Inc. relating to shares of Class AA-1,
Class AA-2, Class AA-3, Class AA-4 and Class AA-5; Class
BB-1, Class BB-2, Class BB-3, Class BB-4 and Class BB-5;
Class CC-3; Class A-5, Class B-4, Class B-5, Class C-4,
Class C-5, Class I-4, Class I-5, Class J-4, Class J-5,
Class Q-4, Class Q-5, Class V-4, Class V-5, Class Z-4 and
Class Z-5; Class X-1 and Class X-3; and Class D-5, E-5,
F-5, G-5, H-5, K-5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5,
U-5, W-5, X-5 and Y-5.
(13)(j) Form of Purchase Agreement between Registrant and Compass
Distributors, Inc. relating to shares of Class DD-1, Class
DD-2, Class DD-3, Class DD-4 and DD-5; and Class EE-1, Class
EE-2, Class EE-3, Class EE-4 and Class EE-5.
(15)(b) Form of Appendix A to Amended and Restated Distribution and
Service Plan.
<PAGE>
Exhibit (1)(d)
AMENDMENT NO. 3 TO DECLARATION OF TRUST
DATED DECEMBER 22, 1988
The undersigned, Secretary of The PNC(R) Fund (the "Fund"), does hereby
certify that by written consent of the Board of Trustees dated December 21,
1995, the following resolutions were approved by the trustees of the Fund and
that said resolutions continue in full force and effect as of the date hereof:
Amendment to Declaration of Trust.
---------------------------------
WHEREAS, Article X, Section 10.9(C) of the Fund's Declaration of
Trust dated as of December 22, 1988, as amended (the "Declaration of
Trust"), provides that the Trustees may amend the Declaration of Trust
without a vote of shareholders to change the name of the Fund;
RESOLVED, that pursuant to the authorization described above, the
Declaration of Trust shall be amended in the following respect:
Article I of the Declaration of
Trust is amended to change the name
of the Trust from "The PNC Fund" to
"Compass Capital Funds," and all
other appropriate references in the
Declaration of Trust are amended to
reflect the fact that the name of
the Trust is "Compass Capital
Funds";
FURTHER RESOLVED, that any trustee or officer of the Fund be, and
each of them hereby is, authorized to execute, seal and deliver any
and all documents, instruments, certificates, papers and writings; to
file the same with any public official including, without limitation,
the Secretary of the Commonwealth of Massachusetts and the Boston City
Clerk; and to do any and all other acts, in the name of the Fund and
on its behalf, as may be required or desirable in connection with or
in furtherance of the foregoing resolution; and
FURTHER RESOLVED, that the foregoing amendment to the Declaration
of Trust shall be effective upon the filing of an instrument
containing the same with the Secretary of the Commonwealth of
Massachusetts and the
<PAGE>
Boston City Clerk or at such other date as specified in such
instrument.
WITNESS my hand and seal this 5th day of January, 1996.
/s/ Morgan R. Jones
---------------------
Morgan R. Jones
COMMONWEALTH OF PENNSYLVANIA )
) ss.
CITY OF PHILADELPHIA )
Then personally appeared Morgan R. Jones, Secretary of The PNC Fund, and
acknowledged this instrument to be his free act and deed this 5th day of
January, 1996
/s/
----------------------
Notary Public
My commission expires:
<PAGE>
Exhibit (5)(c)
COMPASS CAPITAL FUNDS/SM/
Addendum No. 1 to the Investment Advisory Agreement
This Addendum dated as of the ____ day of ___________, 1996 is entered
into by and between COMPASS CAPITAL FUNDS, a Massachusetts business trust (the
"Fund"), and PNC ASSET MANAGEMENT GROUP, INC., a Delaware corporation (the
"Adviser").
WHEREAS, the Fund and the Adviser have entered into an Investment
Advisory Agreement dated as of January 4, 1996 (the "Advisory Agreement")
pursuant to which the Fund appointed the Adviser to act as investment adviser to
certain investment portfolios of the Fund;
WHEREAS, Section 1(b) of the Advisory Agreement provides that in the
event the Fund establishes one or more additional investment portfolios with
respect to which it desires to retain the Adviser to act as investment adviser
under the Advisory Agreement, the Fund shall so notify the Adviser in writing
and if the Adviser is willing to render such services it shall so notify the
Fund in writing; and
WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the Fund
has notified the Adviser that it is establishing the Mid-Cap Value Equity and
Mid-Cap Growth Equity Portfolios (the "Portfolios"), and that it desires to
retain the Adviser to act as the investment adviser therefor, and the Adviser
has notified the Fund that it is willing to serve as investment adviser to the
Portfolios;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints the Adviser to act as
-----------
investment adviser to the Portfolios for the period and on the
terms set forth in the Advisory Agreement. The Adviser hereby
accepts such appointment and agrees to render the services set
forth in the Advisory Agreement with respect to the Portfolios
for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
------------
pursuant to the Advisory Agreement, the Fund will pay the
Adviser, and the Adviser will accept as full compensation
therefor from the Fund, a fee at the following annual rates with
respect to each of the Mid-Cap Value Equity and Mid-Cap Growth
Equity Portfolios (considered separately on a Portfolio-by-
Portfolio basis):
1
<PAGE>
.55% of the first $1 billion of each Portfolio's average daily
net assets, .50% of the next $1 billion of each Portfolio's
average daily net assets, .475% of the next $1 billion of each
Portfolio's average daily net assets and .45% of the average
daily net assets of each Portfolio in excess of $3 billion. Such
fee as is attributable to each respective Portfolio shall be a
separate charge to such Portfolio and shall be the several (an
neither joint nor joint and several) obligation of such
Portfolio.
3. Capitalized Terms. From and after the date hereof, the term
-----------------
"Portfolios") as used in the Advisory Agreement shall be deemed
to include the Mid-Cap Value Equity and Mid-Cap Growth Equity
Portfolios.
4. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Advisory Agreement shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as
supplemented hereby. Without limiting the generality of the
foregoing, it is understood that the Adviser may employ one or
more sub-advisers for the Portfolios pursuant to Section 2 of the
Advisory Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum No. 1
to the Advisory Agreement to be executed by their officers designated below as
of the day and year first above written.
Attest: COMPASS CAPITAL FUNDS
[SEAL] By:________________________
its:
PNC ASSET MANAGEMENT
GROUP, INC.
[SEAL] By:________________________
its:
2
<PAGE>
Exhibit (5)(k)
SUB-ADVISORY AGREEMENT
(Mid-Cap Value Equity Portfolio)
AGREEMENT dated as of ____________, 1996, between PNC Asset Management
Group, Inc., a Delaware corporation ("Adviser"), and Provident Capital
Management, Inc., a Delaware corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
Mid-Cap Value Equity Portfolio (the "Portfolio") of Compass Capital Funds (the
"Fund"), an open-end, management investment company registered under the
Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Adviser and the Fund dated January
4, 1996 (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolio is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolio to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolio as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of the Portfolio and perform the following services: (i) provide
investment research and credit analysis concerning the Portfolio's investments,
(ii) conduct a continual program of investment of
<PAGE>
the Portfolio's assets, (iii) determine what portion of the Portfolio's assets
will be invested in cash, cash equivalents and money market instruments, (iv)
place orders for all purchases and sales of the investments made for the
Portfolio, and (v) maintain the books and records as are required to support
Fund operations (in conjunction with record-keeping and accounting functions
performed by Adviser). In addition, Sub-Adviser will keep the Fund and Adviser
informed of developments materially affecting the Fund and shall, on its own
initiative, furnish to the Fund from time to time whatever information Sub-
Adviser believes appropriate for this purpose. Sub-Adviser will communicate to
Adviser on each day that a purchase or sale of an instrument is effected for the
Portfolio (i) the name of the issuer, (ii) the amount of the purchase or sale,
(iii) the name of the broker or dealer, if any, through which the purchase or
sale will be effected, (iv) the CUSIP number of the instrument, if any, and (v)
such other information as Adviser may reasonably require for purposes of
fulfilling its obligations to the Fund under the Advisory Agreement. Sub-
Adviser will provide the services rendered by it under this Agreement in
accordance with the Portfolio's investment objectives, policies and restrictions
as stated in the Portfolio's Prospectuses and Statements of Additional
Information (as currently in effect and as they may be amended or supplemented
from time to time), and the resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the Securities
and Exchange Commission (the "SEC") and will in addition conduct its activities
under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any broker or
dealer. Subject to the other provisions of this paragraph, in placing orders
with brokers and dealers, Sub-Adviser will attempt to obtain the best price and
the most favorable execution of its orders. In placing orders, Sub-Adviser will
consider the experience and skill of the firm's securities traders as well as
the firm's financial responsibility and administrative efficiency. Consistent
with this obligation, Sub-Adviser may, subject to the approval of the Fund's
Board of Trustees, select brokers on the basis of the research, statistical and
pricing services they provide to the Portfolio and other clients of Adviser or
Sub-Adviser. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by Sub-
Adviser hereunder. 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 Sub-Adviser determines in good faith that such
commission is
-2-
<PAGE>
reasonable in terms either of the transaction or the overall responsibility of
Adviser and Sub-Adviser to the Portfolio and their other clients and that the
total commissions paid by the Portfolio will be reasonable in relation to the
benefits to the Portfolio over the long-term. In addition, Sub-Adviser is
authorized to take into account the sale of shares of the Fund in allocating
purchase and sale orders for portfolio securities to brokers or dealers
(including brokers and dealers that are affiliated with Adviser, Sub-Adviser or
the Fund's distributor), provided that Sub-Adviser believes that the quality of
the transaction and the commission are comparable to what they would be with
other qualified firms. In no instance, however, will the Portfolio's securities
be purchased from or sold to the Adviser, Sub-Adviser, the Fund's distributor or
any affiliated person thereof, except to the extent permitted by the SEC or by
applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolio's securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for the
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the Fund
all records and other information relative to the Fund, the Portfolio's and the
Fund's prior, current or potential shareholders, and will not use such records
and information for any purpose other than performance of its responsibilities
and duties hereunder, except after prior notification to and approval in writing
by the Fund, which approval shall not be unreasonably withheld and may not be
withheld where Sub-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
-3-
<PAGE>
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolio are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolio.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the annual rate of .40% of the first $1 billion of
the Portfolio's average daily net assets, .35% of the next $1 billion of its
average daily net assets, .325% of the next $1 billion of its average daily net
assets and .30% of the average daily net assets of the Portfolio in excess of $3
billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to the Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to the
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the Advisory Agreement with respect to the Portfolio. Adviser
shall inform Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any error
-----------------------
of judgment or mistake of law or for any loss suffered by Adviser or by the
Portfolio in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as of
------------------------
the date hereof and, unless sooner terminated with respect to the Portfolio as
provided herein, shall continue in effect with respect to the Portfolio until
March 31, 1998. Thereafter, if not terminated, this Agreement
-4-
<PAGE>
shall continue in effect with respect to the Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement 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. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by the
------------
parties hereto, each of which shall constitute an original counterpart, and all
of which, together, shall constitute one Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PNC ASSET MANAGEMENT GROUP, INC.
By:______________________________
PROVIDENT CAPITAL MANAGEMENT, INC.
By:______________________________
-6-
<PAGE>
Exhibit (5)(l)
SUB-ADVISORY AGREEMENT
(Mid-Cap Growth Equity Portfolio)
AGREEMENT dated as of ____________, 1996, between PNC Asset Management
Group, Inc., a Delaware corporation ("Adviser"), and PNC Equity Advisors
Company, a Delaware corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
Mid-Cap Growth Equity Portfolio (the "Portfolio") of Compass Capital Funds (the
"Fund"), an open-end, management investment company registered under the
Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Adviser and the Fund dated January
4, 1996 (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolio is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolio to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolio as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of the Portfolio and perform the following services: (i) provide
investment research and credit analysis concerning the Portfolio's investments,
(ii) conduct a continual program of investment of
<PAGE>
the Portfolio's assets, (iii) determine what portion of the Portfolio's assets
will be invested in cash, cash equivalents and money market instruments, (iv)
place orders for all purchases and sales of the investments made for the
Portfolio, and (v) maintain the books and records as are required to support
Fund operations (in conjunction with record-keeping and accounting functions
performed by Adviser). In addition, Sub-Adviser will keep the Fund and Adviser
informed of developments materially affecting the Fund and shall, on its own
initiative, furnish to the Fund from time to time whatever information Sub-
Adviser believes appropriate for this purpose. Sub-Adviser will communicate to
Adviser on each day that a purchase or sale of an instrument is effected for the
Portfolio (i) the name of the issuer, (ii) the amount of the purchase or sale,
(iii) the name of the broker or dealer, if any, through which the purchase or
sale will be effected, (iv) the CUSIP number of the instrument, if any, and (v)
such other information as Adviser may reasonably require for purposes of
fulfilling its obligations to the Fund under the Advisory Agreement. Sub-
Adviser will provide the services rendered by it under this Agreement in
accordance with the Portfolio's investment objectives, policies and restrictions
as stated in the Portfolio's Prospectuses and Statements of Additional
Information (as currently in effect and as they may be amended or supplemented
from time to time), and the resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the Securities
and Exchange Commission (the "SEC") and will in addition conduct its activities
under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any broker or
dealer. Subject to the other provisions of this paragraph, in placing orders
with brokers and dealers, Sub-Adviser will attempt to obtain the best price and
the most favorable execution of its orders. In placing orders, Sub-Adviser will
consider the experience and skill of the firm's securities traders as well as
the firm's financial responsibility and administrative efficiency. Consistent
with this obligation, Sub-Adviser may, subject to the approval of the Fund's
Board of Trustees, select brokers on the basis of the research, statistical and
pricing services they provide to the Portfolio and other clients of Adviser or
Sub-Adviser. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by Sub-
Adviser hereunder. 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 Sub-Adviser determines in good faith that such
commission is
-2-
<PAGE>
reasonable in terms either of the transaction or the overall responsibility of
Adviser and Sub-Adviser to the Portfolio and their other clients and that the
total commissions paid by the Portfolio will be reasonable in relation to the
benefits to the Portfolio over the long-term. In addition, Sub-Adviser is
authorized to take into account the sale of shares of the Fund in allocating
purchase and sale orders for portfolio securities to brokers or dealers
(including brokers and dealers that are affiliated with Adviser, Sub-Adviser or
the Fund's distributor), provided that Sub-Adviser believes that the quality of
the transaction and the commission are comparable to what they would be with
other qualified firms. In no instance, however, will the Portfolio's securities
be purchased from or sold to the Adviser, Sub-Adviser, the Fund's distributor or
any affiliated person thereof, except to the extent permitted by the SEC or by
applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolio's securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for the
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the Fund
all records and other information relative to the Fund, the Portfolio's and the
Fund's prior, current or potential shareholders, and will not use such records
and information for any purpose other than performance of its responsibilities
and duties hereunder, except after prior notification to and approval in writing
by the Fund, which approval shall not be unreasonably withheld and may not be
withheld where Sub-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
-3-
<PAGE>
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolio are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolio.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the annual rate of .40% of the first $1 billion of
the Portfolio's average daily net assets, .35% of the next $1 billion of its
average daily net assets, .325% of the next $1 billion of its average daily net
assets and .30% of the average daily net assets of the Portfolio in excess of $3
billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to the Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to the
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the Advisory Agreement with respect to the Portfolio. Adviser
shall inform Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any error
-----------------------
of judgment or mistake of law or for any loss suffered by Adviser or by the
Portfolio in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as of
------------------------
the date hereof and, unless sooner terminated with respect to the Portfolio as
provided herein, shall continue in effect with respect to the Portfolio until
March 31, 1998. Thereafter, if not terminated, this Agreement
-4-
<PAGE>
shall continue in effect with respect to the Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement 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. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by the
------------
parties hereto, each of which shall constitute an original counterpart, and all
of which, together, shall constitute one Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PNC ASSET MANAGEMENT GROUP, INC.
By:______________________________
PNC EQUITY ADVISORS COMPANY
By:______________________________
-6-
<PAGE>
Exhibit (6)(c)
APPENDIX A
to the
DISTRIBUTION AGREEMENT
BETWEEN
Compass Capital Funds(R)
(previously The PNC(R) Fund)
and
Compass Distributors, Inc.
________________________________________________________________________________
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series Investor C Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C
Investor Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Bond Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Low Duration Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Value Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Growth Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
-2-
<PAGE>
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Agreed to and accepted as of ____________, 1996.
COMPASS CAPITAL FUNDS
By: _____________________
COMPASS DISTRIBUTORS, INC.
By: _____________________
-3-
<PAGE>
Exhibit (8)(e)
Compass Capital Funds(R)
(previously named The PNC(R) Fund)
Appendix B to Custodian
Agreement dated as of October 4, 1989
The Fund hereby appoints Bank to act as custodian of the securities,
cash and other property belonging to the additional Portfolios listed below
("Additional Portfolios") for the period and on the terms set forth in this
Agreement. Bank accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant provisions of the 1940
Act and applicable rules and regulations thereunder.
The additional Portfolios are as follows:
. Government Income Portfolio
. International Emerging Markets Portfolio
. International Bond Portfolio
. Virginia Municipal Money Market Portfolio
. New Jersey Municipal Money Market Portfolio
. New Jersey Tax-Free Income Portfolio
. Core Bond Portfolio
. Multi-Sector Mortgage Securities Portfolio III
. Mid-Cap Value Equity Portfolio
. Mid-Cap Growth Equity Portfolio
Agreed to and accepted as of
___________________, 1996
Compass Capital Funds
By:_____________________
PNC Bank, National Association
By:_____________________
<PAGE>
Exhibit (9)(b)
APPENDIX A
to the
ADMINISTRATION AGREEMENT
between
Compass Capital Funds(R)
(previously The PNC(R) Fund)
and
PFPC Inc.
and
Compass Distributors, Inc.
_______________________________________________________________________________
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Services Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Bond Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Low Duration Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Value Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Growth Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Agreed to and accepted as of ________________, 1996
COMPASS CAPITAL FUNDS
By:___________________________
PFPC INC.
By:___________________________
COMPASS DISTRIBUTORS, INC.
By:___________________________
<PAGE>
APPENDIX B
----------
Administration Fees Payable
With Respect to Compass Capital Funds
Portfolios Administration Fees
---------- -------------------
Managed Income, Core Bond, Administrators are entitled to
Intermediate Government Bond, receive a combined fee, computed
Tax-Free Income, New Jersey Tax-Free daily and payable monthly, at an
Income, Ohio Tax-Free Income, annual rate of .20% of the first $500
Pennsylvania Tax-Free Income, Low million of each Portfolio's average
Duration Bond, Intermediate Bond, daily net assets; .18% of the next
International Bond, Multi-Sector $500 million of each Portfolio's
Mortgage Securities Portfolio III average daily net assets; .16% of the
and Government Income Portfolios. 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.
Money Market, Municipal Money Market, Administrators are entitled to
U.S. Treasury Money Market, Ohio receive a combined fee, computed
Municipal Money Market, New Jersey daily and payable monthly, at an
Municipal Money Market, Pennsylvania annual rate of .15% of the first $500
Municipal Money Market, North million of each Portfolio's average
Carolina Municipal Money Market and daily net assets; .13% of the next
Virginia Municipal Money Market $500 million of each Portfolio's
Portfolios. 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.
Value Equity, Growth Equity, Small Administrators are entitled to
Cap Value Equity, International receive a combined fee, computed
Equity, Index Equity, Balanced, daily and payable monthly, at an
Small Cap Growth Equity, Select annual rate of .20% of the first $500
Equity, Mid-Cap Value Equity, million of each Portfolio's average
Mid-Cap Growth Equity daily net assets; .18% of the next
and International Emerging Markets $500 million of each Portfolio's
Portfolios. 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.
Agreed to and accepted as of _____________,1996:
COMPASS CAPITAL FUNDS
By: _________________________
PFPC INC.
By: _________________________
COMPASS DISTRIBUTORS, INC.
By: _________________________
<PAGE>
Exhibit (9)(d)
APPENDIX A
to the
Co-Administration Agreement
between Compass Capital Funds/SM/
and Compass Capital Group, Inc.
Class of
Name of Portfolio Shares
- ----------------- --------
Small Cap Value Equity
Portfolio........... Institutional
Service
Investor A
Investor B
Investor C
Small Cap Growth Equity
Portfolio.......... Institutional
Service
Investor A
Investor B
Investor C
Growth Equity Portfolio..... Institutional
Service
Investor A
Investor B
Investor C
Value Equity Portfolio..... Institutional
Service
Investor A
Investor B
Investor C
Select Equity Portfolio..... Institutional
Service
Investor A
Investor B
Investor C
Index Equity Portfolio..... Institutional
Service
Investor A
Investor B
Investor C
-1-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
International Equity Institutional
Portfolio................ Service
Investor A
Investor B
Investor C
International Emerging
Markets Portfolio........ Institutional
Service
Investor A
Investor B
Investor C
Balanced Portfolio........ Institutional
Service
Investor A
Investor B
Investor C
Low Duration Bond
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
Intermediate Bond
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
Intermediate Government
Bond Portfolio.......... Institutional
Service
Investor A
Investor B
Investor C
Government Income
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
-2-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Core Bond Portfolio...... Institutional
Service
Investor A
Investor B
Investor C
Managed Income Portfolio.. Institutional
Service
Investor A
Investor B
Investor C
International Bond
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
Tax-Free Income
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
Pennsylvania Tax-Free
Income Portfolio........ Institutional
Service
Investor A
Investor B
Investor C
New Jersey Tax-Free
Income Portfolio........ Institutional
Service
Investor A
Investor B
Investor C
Ohio Tax-Free Income
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
-3-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Money Market Portfolio... Institutional
Service
Investor A
Investor B
Investor C
Municipal Money Market
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
U.S. Treasury Money
Market Portfolio........ Institutional
Service
Investor A
Investor B
Investor C
Ohio Municipal Money
Market Portfolio........ Institutional
Service
Investor A
Investor B
Investor C
Pennsylvania Municipal
Money Market Portfolio.. Institutional
Service
Investor A
Investor B
Investor C
North Carolina Municipal
Money Market Portfolio... Institutional
Service
Investor A
Investor B
Investor C
New Jersey Municipal Money
Market Portfolio......... Institutional
Service
Investor A
Investor B
Investor C
-4-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Virginia Municipal Money
Market Portfolio......... Institutional
Service
Investor A
Investor B
Investor C
Multi-Sector Mortgage
Securities Portfolio III Institutional
Mid-Cap Growth Equity
Portfolio............... Institutional
Service
Investor A
Investor B
Investor C
Mid-Cap Value Equity
Portfolio.............. Institutional
Service
Investor A
Investor B
Investor C
Agreed to and accepted as of _______________, 1996:
COMPASS CAPITAL FUNDS/SM/
By:____________________________
COMPASS CAPITAL GROUP, INC.
By:____________________________
-5-
<PAGE>
Exhibit (9)(k)
Compass Capital Funds(R)
(previously named The PNC(R) Fund)
Appendix C to the
Transfer Agency Agreement dated
as of October 4, 1989
The Fund desires to retain the Transfer Agent to serve as the Fund's
transfer agent, registrar and dividend disbursing agent with respect to Shares,
par value $.001 per Share, of the additional Portfolios listed below
("Additional Portfolios") and the Transfer Agent is willing to furnish such
services.
The Additional Portfolios are as follows:
. Government Income Portfolio
. International Emerging Markets Portfolio
. International Bond Portfolio
. Virginia Municipal Money Market Portfolio
. New Jersey Municipal Money Market Portfolio
. New Jersey Tax-Free Income Portfolio
. Core Bond Portfolio
. Multi-Sector Mortgage Securities Portfolio III
. Mid-Cap Value Equity Portfolio
. Mid-Cap Growth Equity Portfolio
Agreed to and accepted as of _______________, 1996:
Compass Capital Funds
By:__________________________________
PFPC Inc.
By:__________________________________
<PAGE>
Exhibit (11)
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. 23 to the Registration Statement (File No. 33-
26305) on Form N-1A of Compass Capital Funds(R) (formerly, 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
October 18, 1996
<PAGE>
Exhibit (13)(i)
PURCHASE AGREEMENT
------------------
The PNC(R) Fund (the "Fund"), a Massachusetts business trust, and Provident
Distributors, Inc. ("PDI"), a Delaware corporation, hereby agree as follows:
1. The Fund hereby offers PDI and PDI hereby purchases (a) one share of
each series of Shares of the Fund's New Jersey Tax-Free Income Portfolio, Core
Bond Portfolio, Multi-Sector Mortgage Portfolio III and International Bond
Portfolio, (b) one Series C Investor Share of each of the Fund's other twenty-
five portfolios, (c) one Institutional Share and one Service Share of the Fund's
Government Income Portfolio, and (d) one Series B Investor Share of each of the
Government Money Market, Municipal Money Market, New Jersey Municipal Money
Market, North Carolina Municipal Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market and Virginia Municipal Money Market
Portfolios for $10 per non-money market portfolio Share and $1 per money market
portfolio Share. The Fund hereby acknowledges receipt from PDI of funds in full
payment for the foregoing Shares.
2. PDI represents and warrants to the Fund that the foregoing Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of January 10, 1996.
THE PNC(R) FUND
By: /s/ Edward J. Roach
______________________
its: Vice President and Treasurer
PROVIDENT DISTRIBUTORS, INC.
By: /s/ Robert H. Clement
__________________________
its: Chief Operating Officer
<PAGE>
Exhibit (13)(j)
PURCHASE AGREEMENT
------------------
Compass Capital Fund/SM/ (the "Fund"), a Massachusetts business trust, and
Compass Distributors, Inc. ("CDI"), a Delaware corporation, hereby agree as
follows:
1. The Fund hereby offers CDI and CDI hereby purchases one share of each
series of shares of the Fund's Mid-Cap Value Equity Portfolio and Mid-Cap Growth
Equity Portfolio (collectively, the "Shares") for $10 per Share. The Fund
hereby acknowledges receipt from CDI of funds in full payment for the foregoing
Shares.
2. CDI represents and warrants to the Fund that the foregoing Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of ____________________, 1996.
COMPASS CAPITAL FUNDS/SM/
By:______________________
COMPASS DISTRIBUTORS, INC.
By:__________________________
<PAGE>
Exhibit (15)(b)
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%
Select 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 0% 0% 0%
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%
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>
<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%
Low Duration Institutional 0% 0% 0%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Bond Portfolio 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 Bond 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%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Bond Institutional 0% 0% 0%
Portfolio 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%
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%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-2
<PAGE>
<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%
Portfolio 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 Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Tax- Institutional 0% 0% 0%
Free Income Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Tax-Free Institutional 0% 0% 0%
Income Portfolio 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>
<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
Securities
Portfolio III
Mid-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%
Mid-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%
</TABLE>
Agreed to and accepted as of ______________, 1996.
COMPASS CAPITAL FUNDS
By:________________________
A-4
