<PAGE>
As filed with the Securities and Exchange Commission on December 18, 1996
Registration No. 33-26305
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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. 26 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 28 [x]
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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 l00 PNB Building
Wilmington, Delaware l9809 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
24f-2 Notice for the fiscal year ended September 30, 1996 for all investment
portfolios was filed on November 26, 1996.
<PAGE>
Post-Effective Amendment No. 26 to the Registration Statement on Form
N-1A of Compass Capital Fund/sm/ (the "Fund") relates only to the Fund's
BlackRock Non-Dollar Portfolio I and BlackRock Non-Dollar Portfolio II and
does not include the prospectuses or Statements of Additional Information for
Service, Investor A, Investor B, Investor C and Institutional Shares of the
Fund's other Portfolios.
<PAGE>
COMPASS CAPITAL FUNDS/sm/
(Shares of BlackRock Non-Dollar Portfolio I and
BlackRock Non-Dollar Portfolio II)
Cross Reference Sheet
Form N-1A Item Location
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PART A PROSPECTUS
1. Cover page............................... Cover Page
2. Synopsis................................. Summary of Expenses
3. Condensed Financial Information.......... Summary of Expenses
4. General Description of Registrant........ Cover Page; The
Portfolios; Investment
Objective and Policies;
Eligible Investments;
Investment Policies and
Risks, Organization
5. Management of the Fund................... Management of the Fund;
Organization
5A. Management's Discussion of Fund
Performance............................ Inapplicable
6. Capital Stock and Other Securities....... Dividends and
Distributions; Taxes;
Organization;
Shareholder Inquiries
7. Purchase of Securities Being Offered..... Summary of Expenses;
Purchases and
Redemptions; Net Asset
Value; Organization
8. Redemption or Repurchase................. Purchases and
Redemptions
9. Legal Proceedings........................ Inapplicable
<PAGE>
The date of this Prospectus is March __, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
BLACKROCK NON-DOLLAR PORTFOLIO I
BLACKROCK NON-DOLLAR PORTFOLIO II
INSTITUTIONAL INVESTMENT PORTFOLIOS OFFERED
BY COMPASS CAPITAL FUNDS
PROSPECTUS
MARCH __, 1997
PROSPECTUS
<PAGE>
BLACKROCK NON-DOLLAR PORTFOLIO I
BLACKROCK NON-DOLLAR PORTFOLIO II
This Prospectus relates to BlackRock Non-Dollar Portfolio I and BlackRock
Non-Dollar Portfolio II (the "Portfolios"), two separate investment portfolios
offered by Compass Capital Funds (the "Fund") to the separate account clients of
BlackRock Financial Management, Inc. ("BlackRock"). Each Portfolio seeks to
maximize total return through investment in a portfolio of investment grade
fixed income securities of foreign and U.S. issuers denominated in foreign
currencies, baskets of foreign currencies and the U.S. dollar.
This Prospectus describes concisely the information about the Portfolios
that you should consider before investing. Please read and keep it for future
reference. More information about the Portfolios is contained in a Statement of
Additional Information dated March __, 1997 that has been filed with the
Securities and Exchange Commission. The Statement of Additional Information can
be obtained free upon request by calling 1-800-422-6538, and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION, OR ANY OTHER BANK AND SHARES ARE
NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
March __, 1997
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SUMMARY OF EXPENSES
Below is a summary of the annual operating expenses expected to be incurred by
the Portfolios after fee waivers for the current fiscal year ending September
30, 1997 as a percentage of average daily net assets. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
BLACKROCK NON-DOLLAR BLACKROCK NON-DOLLAR
PORTFOLIO I PORTFOLIO II
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<S> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers) .00% .00%
Other operating expenses .26% .26%
--- ---
Administrative fees (after .10% .10%
fee waivers)/(1)/
Other expenses .16% .16%
--- ---
Total Portfolio operating
expenses (after fee
waivers)/(1)/ .26% .26%
=== ===
</TABLE>
(1) Without waivers, advisory fees would be .20% and administration fees would
be .23% for each Portfolio. 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. "Other operating
expenses" in the Table are based on estimated amounts for the current
fiscal year. Without waivers, "Other operating expenses" would be .39% and
.39%, respectively, and "Total Portfolio operating expenses" would be .59%
and .59%, respectively.
EXAMPLE
Based on the foregoing Table, an investor in the Portfolios 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:
ONE YEAR THREE YEARS
BlackRock Non-Dollar Portfolio I $3 $8
BlackRock Non-Dollar Portfolio II 3 8
The foregoing Table and Example are intended to assist investors in
understanding the costs and expenses that an investor in the Portfolios will
bear either directly or indirectly. They do not reflect any
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charges that may be imposed by BlackRock directly on its customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. THE PORTFOLIOS ARE NEW AND
ACTUAL INVESTMENT RETURN AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN. INFORMATION ABOUT THE ACTUAL PERFORMANCE OF THE PORTFOLIOS WILL BE
CONTAINED IN THE PORTFOLIOS' FUTURE ANNUAL REPORTS TO SHAREHOLDERS, WHICH MAY BE
OBTAINED WITHOUT CHARGE WHEN THEY BECOME AVAILABLE.
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<PAGE>
THE PORTFOLIOS
BlackRock Non-Dollar Portfolio I and BlackRock Non-Dollar Portfolio II (the
"Portfolios") are non-diversified portfolios within the Compass Capital Fund
group designed for the separate account clients of BlackRock Financial
Management, Inc. ("BlackRock"), the Portfolios' investment adviser (the
"Adviser").
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio seeks to maximize total return through investment in a portfolio
of investment grade fixed income securities of foreign and U.S. issuers
denominated in foreign currencies, baskets of foreign currencies and the U.S.
dollar. Under normal market conditions, each Portfolio expects to invest a
significant portion of its assets in securities denominated in foreign
currencies or baskets of foreign currencies. U.S. dollar investments will be
utilized primarily for hedging purposes, to conform to U.S. tax diversification
regulations, or for temporary and defensive purposes.
BlackRock Non-Dollar Portfolio I will generally maintain a U.S. dollar-weighted
average duration between 0 and 8 years and will invest in securities across the
entire maturity spectrum. BlackRock Non-Dollar Portfolio II will generally
maintain a U.S. dollar-weighted average duration between 0 and 6 years and may
invest in securities across the entire maturity spectrum, though it will tend to
emphasize securities that on average have shorter durations than those utilized
in BlackRock Non-Dollar Portfolio I.
Under normal conditions, each Portfolio intends to hedge its exposure to foreign
currencies such that no more than 25% of the Portfolio's net assets are exposed
to currencies other than the U.S. dollar.
No assurance can be provided that a Portfolio will achieve its investment
objective. A Portfolio's investment objective and the policies stated in this
Prospectus may be changed by the Fund's Board of Trustees without shareholder
approval. The Portfolios have, however, also adopted certain fundamental
investment limitations that are set forth in the Statement of Additional
Information and 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).
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ELIGIBLE INVESTMENTS
The Portfolios may invest in the following types of securities, which may be
issued by domestic or foreign entities and denominated in U.S. dollars or
foreign currencies: securities issued or guaranteed by the U.S. Government and
its agencies or instrumentalities ("U.S. Government Obligations"); obligations
issued or guaranteed by a foreign government, or any of its political
subdivisions, authorities, agencies or instrumentalities; obligations of
international agencies or supranational organizations; Brady bonds; bank
obligations, including certificates of deposit, fixed time deposits, notes and
bankers' acceptances; corporate debt securities, including convertible
securities and corporate commercial paper; preferred stock; structured notes and
loan participations; repurchase and reverse repurchase agreements; mortgage-
backed and asset-backed securities; and obligations issued or guaranteed by a
state or local government. These securities may be publicly or privately
offered and may have fixed, variable or floating rates of interest.
The Portfolios may buy or sell interest rate futures contracts, options on
interest rate futures contracts, interest rate caps and floors, and options on
fixed income securities, and may enter into interest rate swap transactions.
The Portfolios may also engage in foreign currency exchange transactions by
means of buying or selling foreign currencies on a spot basis, entering into
foreign currency forward contracts and swaps, and buying or selling foreign
currency options, foreign currency futures, and options on foreign currency
futures.
The debt securities and counterparties of each of the Portfolios will, at the
time of investment, be rated investment grade by at least one nationally
recognized statistical rating organization ("NRSRO") or, if unrated by those
rating organizations, will be determined by the Adviser to be of comparable
credit quality at the time of investment or will be U.S. Government Obligations.
In the case of short-term investments, the Portfolios' assets will be rated in
the highest rating category by at least one NRSRO or, if unrated by any NRSRO,
will be determined by the Adviser to be of comparable credit quality at the time
of investment or will be U.S. Government Obligations. Securities rated BBB or
Baa are generally considered to be investment grade although they have
speculative characteristics. If a security's ratings are reduced by all rating
services below the minimum rating that is permitted for a Portfolio, the Adviser
will consider whether the Portfolio should continue to hold the security. See
Appendix A to the Statement of Additional Information for a description of the
securities ratings mentioned above.
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<PAGE>
PORTFOLIO TECHNIQUES, INSTRUMENTS AND RISKS
A brief description of the portfolio techniques, instruments and risks
applicable to the Portfolios is provided below. Further information is set
forth in the Statement of Additional Information.
PORTFOLIO SECURITIES GENERALLY. Investment by the Portfolios in securities of
foreign issuers involves considerations not typically associated with investing
in securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay interest in foreign
currencies, the value of a Portfolio that invests in foreign securities will be
affected favorably or unfavorably by changes in currency exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In
addition, changes in government administrations or economic or monetary policies
in the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions in
foreign securities markets has increased in recent years, it remains appreciably
below that of the U.S. securities markets. Accordingly, a Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in U.S. securities. In addition, there is generally less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
The Portfolios intend to invest primarily in obligations of issuers based in
developed countries. Each Portfolio may, however, invest up to a maximum of 20%
of its total assets in obligations of issuers based in emerging market countries
subject to the same credit quality restrictions as other investments.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic
Community; (c) debt obligations of foreign
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<PAGE>
banks and bank holding companies; (d) debt obligations of domestic banks and
corporations issued in foreign currencies; (e) debt obligations denominated in
baskets of foreign currencies, such as the European Currency Unit (ECU); and (f)
foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities, preferred
stock, Brady bonds and zero-coupon securities.
Subject to the limitation stated above regarding investments in emerging market
countries, each Portfolio may invest more than 25% of its total assets in the
securities of issuers located in a single country. Investments of 25% or more
of a Portfolio's total assets in a particular 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.
The value of fixed income securities held by the Portfolios can generally 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
securities, and the average maturity of a Portfolio's assets will vary based
upon the Adviser's assessments of economic and market conditions. As stated
above, the Portfolios will seek to maintain a duration within broad, though
specified limits. A Portfolio's duration is a measure of its price sensitivity,
including expected cash flows and prepayments on its securities holdings under a
wide range of interest rate scenarios. In computing the duration of a
Portfolio, the Adviser will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. The Adviser may
use various techniques to lengthen or shorten the duration of a Portfolio,
including the acquisition of debt obligations at a premium or discount, interest
rate swaps and interest rate futures and related options. There can be no
assurance that the Adviser's estimation of a Portfolio's duration will be
accurate or that the duration of a Portfolio will always be within the limits
designated above.
Emerging market countries in which the Portfolios may invest are located in the
Asia-Pacific region, Eastern Europe, Latin and South America and Africa.
Political and economic structures in many of such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries may have in the past failed to recognize
private property rights and have at times
-7-
<PAGE>
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.
NON-DIVERSIFIED STATUS. Each Portfolio is classified as a non-diversified
portfolio under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-
diversified portfolio more than it would a diversified portfolio. In
conformance with applicable tax requirements each Portfolio will not invest in
securities (except U.S. Government securities within the meaning of the Internal
Revenue Code of 1986) 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 invested without regard to this limitation so long as no more than
25% of the Portfolio's total assets are invested in the securities of any one
issuer (except U.S. Government securities as so defined).
CURRENCY HEDGING TRANSACTIONS. Under normal conditions, each Portfolio intends
to hedge its exposure to foreign currencies such that no more than 25% of the
Portfolio's net assets are exposed to currencies other than the U.S. dollar.
For this purpose, assets that are subject to proxy hedging transactions as
described below are considered to be assets that are not exposed to foreign
currencies.
Each Portfolio may enter into spot and forward foreign currency exchange
contracts and currency swaps, and may purchase and sell foreign currency futures
contracts, options on foreign currency futures contracts and exchange traded and
over-the-counter ("OTC") options on currencies to hedge the currency exchange
risk associated with its assets or obligations denominated in foreign currencies
or baskets of foreign currencies. A Portfolio may also engage in proxy hedging
transactions. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's securities are,
or are expected to be, denominated, and to buy U.S. dollars. There is the risk
that the perceived linkage between various currencies may not be present or may
not be present during the particular time that a Portfolio is engaging in proxy
hedging. Each Portfolio may also cross-hedge currencies by entering into
forward contracts to sell one or more currencies that are expected to decline in
value relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure.
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<PAGE>
In addition, subject to the limitation on foreign currency exposure stated
above, each Portfolio may enter into currency transactions to seek to increase
total return when the Advisor believes the transactions are in furtherance of a
Portfolio's investment objective. In connection with their currency
transactions, the Portfolios will segregate cash, U.S. Government securities or
other liquid assets, or will otherwise cover their position in accordance with
the applicable requirements of the SEC.
In general, currency transactions are subject to risks different from those of
other portfolio transactions, and can result in greater losses to a Portfolio
than would otherwise be incurred, even when the currency transactions are used
for hedging purposes.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the Government National
Mortgage Association ("GNMA") are supported by the United States' full faith and
credit; others such as those of the Federal National Mortgage Association
("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 Federal Home Loan Mortgage Corporation ("FHLMC") are
supported only by the credit of the instrumentality. No assurance 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.
CORPORATE AND BANK OBLIGATIONS. The Portfolios may invest in debt obligations
of domestic or foreign corporations and banks. Bank obligations may include
certificates of deposit, notes, bankers' acceptances and fixed time deposits.
These obligations may be general obligations of the parent bank or may be
limited to the issuing branch or subsidiary by the terms of 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.
MUNICIPAL OBLIGATIONS. When deemed advisable by the Adviser, the Portfolios may
invest in obligations issued by a state or local government ("Municipal
Obligations"). Municipal Obligations include general obligation securities that
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest, and revenue securities that 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. Municipal Obligations also include "moral obligation"
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bonds, which are normally issued by special purpose public authorities, and
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Dividends paid by the Portfolios that are derived from
income earned on Municipal Obligations will not be tax-exempt.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios may purchase
securities that are secured or backed by residential or commercial mortgages as
well as other assets (e.g., automobile loans and credit card receivables).
Issuers of these mortgage-related and asset-backed securities include both
governmental and private issuers. Mortgage-related securities include, but are
not limited to, guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other mortgage-
related 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 with different relative payment rights, and
each with a specified fixed or floating interest rate and a final distribution
date.
Non-mortgage asset-backed securities may present certain risks that are not
presented by mortgage-related securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
For example, credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and Federal consumer credit
laws. In addition, the trustee for the holders of the automobile receivables
may not have an effective security interest in all of the obligations backing
such receivables.
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 normally may be prepaid by the
issuer at any time because the underlying assets (i.e., loans) generally may be
prepaid by the borrowers at any time. In periods of falling interest rates, the
rate of prepayments tends to increase, and in periods of rising interest rates,
prepayments tend to slow. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely, and
a change in the rate of expected prepayments may result in a loss to a Portfolio
on its investment.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and
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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 containing loans or mortgages originated by PNC
Bank, National Association ("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
LOAN PARTICIPATIONS AND OTHER STRUCTURED SECURITIES. The Portfolios may
purchase participation interests in debt securities from foreign and domestic
financial institutions. A participation interest gives a Portfolio an undivided
interest in the security in the proportion that the participation interest bears
to the total principal amount of the security. Participation interests may have
fixed, floating or variable rates of interest. The Portfolios intend only to
purchase participations from an entity or syndicate, and do not intend to serve
as co-lenders in any participations. It is possible that a participation
interest might be deemed to be an extension of credit by a Portfolio to the
issuing financial institution that is not a direct interest in the credit of the
obligor of the underlying security and is not directly entitled to the
protection of any collateral security provided by such obligor. In that event,
the ability of the Portfolio to obtain repayment might depend on the issuing
financial institution.
The Portfolios also may purchase other types of structured securities, including
zero coupon bonds, which are normally issued at a significant discount from face
value and do not provide for periodic interest payments, as well as instruments
that have interest rates that reset inversely to changing short-term rates
and/or have imbedded interest rate floors and caps that require the issuer to
pay an adjusted interest rate if market rates fall below or rise above a
specified rate.
In addition, the Portfolios may purchase Treasury receipts and other "stripped"
securities that evidence ownership in either the future interest payments or the
future principal payments on U.S. Government and other obligations. These
securities, 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"). The Portfolios also may purchase
"stripped" securities that evidence ownership in the future interest payments or
principal payments on obligations of foreign governments.
Many of the instruments described above represent relatively recent innovations,
and the trading market for these instruments
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is less developed than the markets for traditional types of securities. It is
uncertain how these instruments will perform under different economic and
interest-rate scenarios. Because certain of these instruments are leveraged,
their market values may be more volatile than other types of instruments and may
present greater potential for capital gain or loss. On the other hand, the
imbedded option features of certain instruments could limit the amount of
appreciation a Portfolio can realize on its investment, could cause a Portfolio
to hold a security it might otherwise sell or could force the sale of a security
at inopportune times or for prices that do not reflect current market value.
The possibility of default by the issuer or the issuer's credit provider may be
greater for these instruments than for other types of instruments. In some
cases it may be difficult to determine the fair value of a derivative instrument
because of a lack of reliable objective information.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The Portfolios may
enter into interest rate swaps and may purchase or sell interest rate caps and
floors. The Portfolios expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of their
holdings, as a duration management technique or to protect against an increase
in the price of securities a Portfolio anticipates purchasing at a later date.
The Portfolios intend to use these transactions as a hedge and not as a
speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entities the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
In order to protect against currency rate fluctuations, the Portfolios also may
enter into currency swaps. Currency swaps involve the exchange of the rights of
a Portfolio and another party to make or receive payments in specified
currencies.
OPTIONS AND FUTURES CONTRACTS. Each Portfolio may write covered call options,
buy put options, buy call options and write secured put options for the purpose
of hedging or cross-hedging, or for the purpose of earning additional income
which may be deemed speculative. These options may relate to particular
securities, financial instruments, foreign currencies, securities indices or the
yield differential between two securities, and may or may not
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be listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. Options trading is a highly specialized activity that
entails greater than ordinary investment risks. In addition, unlisted options
are not subject to the protections afforded purchasers of listed options issued
by the Options Clearing Corporation, which performs the obligations of its
members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts. Futures contracts
obligate a Portfolio, at maturity, to take or make delivery of certain
securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Portfolio may
do so either to hedge the value of its securities portfolio as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, a Portfolio may utilize futures
contracts in anticipation of changes in the composition of its holdings or in
currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures 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
obligated to sell or buy a futures contract if the option is exercised. In
connection with a Portfolio's position in a futures contract or related option,
the Portfolio will segregate 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
instruments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) the
Adviser's inability to predict correctly the direction of securities prices,
interest rates, currency exchange rates and other economic factors. For further
discussion of risks involved with domestic and foreign futures and options, see
Appendix B in the Statement of Additional Information.
The Portfolios intend to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC") exempting the
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Portfolios from registration as a "commodity pool operator." Consistent with
those regulations, the value of a Portfolio's contracts may equal or exceed 100%
of its total assets; however, 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.
CONVERTIBLE SECURITIES AND PREFERRED STOCK. The Portfolios may, from time to
time, invest in convertible securities. Convertible securities acquired by the
Portfolios may include convertible bonds and convertible preferred stock, and
will be subject to the same rating requirements as a Portfolio's investments in
other fixed income securities. The Portfolios ordinarily will sell units of
common stock received upon conversion. The Portfolios may also purchase non-
convertible preferred stock when deemed to be in furtherance of a Portfolio's
investment objective.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will
require that the loans be secured by collateral in cash, U.S. Government
securities or irrevocable bank letters of credit maintained on a current basis
equal in value to at least the market value of the loaned securities. A
Portfolio may not make such loans in excess of 33 1/3% of the value of its total
assets. Securities loans involve risks of delay in receiving additional
collateral or in recovering the loaned securities, or possibly loss of rights in
the collateral if the borrower of the securities becomes insolvent.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase such
securities 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
authorized 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 decline in value suffered by the Portfolio's securities. Borrowings
may be made through reverse repurchase agreements under which a Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolios
may use proceeds of reverse repurchase agreements to purchase other securities
either maturing, or under an agreement to
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resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. The 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 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 segregate 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 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 may borrow up to an additional 5% of its total assets for
temporary purposes.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio may enter into
dollar roll transactions. A dollar roll transaction involves a sale by the
Portfolio of a mortgage-backed or other security concurrently with an agreement
by the Portfolio to repurchase a similar security at a later date at an agreed-
upon price. The securities that are repurchased will bear the same interest
rate and stated maturity as those sold, but pools of mortgages collateralizing
those securities may have different prepayment histories than those sold.
During the period between the sale and repurchase, a Portfolio will not be
entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in additional instruments for the
Portfolio, and the income from these investments will generate income for the
Portfolio. If such income does not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of the
dollar roll, the use of this technique will diminish the investment performance
of a Portfolio compared with what the performance would have been without the
use of dollar rolls. At the time a Portfolio enters into a dollar roll
transaction, it will segregate with its custodian cash, U.S. Government
securities or other liquid debt 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. A 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.
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Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar rolls
may depend upon the Adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully
employed.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that 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. Instruments that
cannot be disposed of within seven days, and repurchase agreements and time
deposits that do not provide for payment within seven days after notice, without
taking a reduced price, are subject to this 15% limit. Each Portfolio may
purchase securities which are not registered under the Securities Act of 1933
(the "1933 Act") but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. These securities will not be
considered illiquid so long as it is determined by the Adviser that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security 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 may exceed 25% of
the value of its total assets.
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SHORT SALES. The Portfolios may make short sales of securities. 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 offset potential
declines in long positions in similar securities and in order to maintain
portfolio flexibility. During the period of a short sale, a Portfolio will
segregate on a daily basis cash or U.S. Government securities at such a level
that (a) the segregated amount will equal the current value of the security sold
short and (b) the segregated amount will not be less than the market value of
the security at the time it was sold short.
PORTFOLIO TURNOVER RATES. A Portfolio's annual portfolio turnover rate will not
be a factor preventing a sale or purchase when the 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. The Adviser
expects to allocate a portion of its separate account clients' portfolios to the
Portfolios when it believes that the securities in which the Portfolios invest
present favorable risk-reward characteristics. During other periods,
investments by the separate accounts in the Portfolios may be redeemed. This
activity may produce higher than normal portfolio turnover which may result in
increased transaction costs to the Portfolios and gains from the sale of
securities deemed to have been held for less than three months. Such gains must
not exceed 30% of a Portfolio's gross income in a taxable year in order for the
Portfolio to qualify as a regulated investment company under the Internal
Revenue Code of 1986. As of the date of this Prospectus, under normal market
conditions the annual portfolio turnover rate of each Portfolio is not expected
to exceed 400%.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The business and affairs of the Fund are managed under the
direction of its Board of Trustees. The following individuals serve as trustees
of the Funds:
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 Officer of USX
Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, University of
Pennsylvania.
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David R. Wilmerding, Jr.--President of Gates, Wilmerding, Carper &
Rawlings, Inc.
ADVISER. The Portfolios' investment adviser is BlackRock Financial Management,
Inc. ("BlackRock") (the "Adviser"). Since 1995, BlackRock has been a wholly-
owned indirect subsidiary of PNC Bank, N.A., the [12th] largest bank in total
assets in the United States. BlackRock provides asset management services with
respect to U.S. and foreign high quality fixed income instruments. Investment
decisions are made by BlackRock's Investment Strategy Committee and no one
person is primarily responsible for making recommendations to that committee.
BlackRock currently serves as investment adviser to institutional and individual
investors in the United States and overseas through several funds and separately
managed accounts with total assets in excess of $41 billion. For its investment
advisory services to the Portfolios, the Adviser is entitled to a fee, computed
daily for each Portfolio and payable monthly, at the annual rate of .20% of each
Portfolio's average daily net assets. From time to time, the Adviser may waive
some or all of its advisory fee from a Portfolio.
ADMINISTRATORS. Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve as the
Portfolios' co-administrators. CCG and PFPC are indirect wholly-owned
subsidiaries of PNC Bank Corp. CDI is a wholly-owned subsidiary of Provident
Distributors, Inc. ("PDI"). The outstanding stock of PDI is owned by its
officers.
The Administrators generally assist the Portfolios in all aspects of their
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 Portfolio's average daily net assets
and .15% of each Portfolio's average daily net assets in excess of $2 billion.
From time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN. PNC Bank serves as the
Portfolios' custodian and PFPC serves as their transfer agent and dividend
disbursing agent.
EXPENSES. Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. Expenses
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include, but are not limited to, fees paid to BlackRock and the Administrators,
transfer agency and custodian fees, trustee fees, taxes, interest, professional
fees, fees and expenses in registering the Portfolios and their shares for
distribution under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information to existing
shareholders, expenses relating to shareholder reports, shareholder meetings and
proxy solicitations, insurance premiums, the expense of independent pricing
services, and other expenses which are not expressly assumed by the Adviser or
the Portfolios' service providers under their agreements for the Portfolios.
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.
The expense ratios of the 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, including higher
investment research costs, higher foreign custody costs, higher commission costs
and additional costs arising from delays in settlements of transactions
involving foreign securities.
PURCHASES AND REDEMPTIONS
DISTRIBUTOR. CDI serves as distributor of the Portfolios' shares (the
"Distributor"). CDI maintains its principal offices at 259 Radnor-Chester Road,
Suite 120, Radnor, Pennsylvania 19087.
PURCHASE OF SHARES. Shares of the Portfolios are offered to the separate
account clients of the Adviser.
Shares are sold at their net asset value per share next computed after an order
is received by PFPC. Orders received by PFPC by 3:00 p.m. (Eastern Time) on a
Business Day are priced the same day. A "Business Day" is any weekday that the
New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of
Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders
received by PFPC after 3:00 p.m. (Eastern Time) are priced on the following
Business Day.
There is no minimum initial or subsequent investment requirement. Payment for
shares must normally be made in Federal funds or other funds immediately
available to the Portfolios' custodian. Payment may also, in the discretion of
the Portfolios, be made in the form of securities that are permissible
investments for the
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respective Portfolios. For further information, see the Statement of Additional
Information.
The Portfolios may in their discretion reject any order for shares.
REDEMPTION OF SHARES. Redemption orders for shares may be placed 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 Portfolios,
the Administrators and the Distributor will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. The Portfolios
and their 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 3:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming shareholder on the next Business Day, provided that
the Portfolios' custodian is also open for business. Payment for redemption
orders received after 3:00 p.m. (Eastern Time) or on a day when the Portfolios'
custodian is closed is normally wired in Federal funds on the next Business Day
following redemption on which the Portfolios' custodian is open for business.
The Portfolios reserve the right to wire redemption proceeds within seven days
after receiving a redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect a Portfolio. No charge for wiring
redemption payments is imposed by the Portfolios.
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 Portfolios may also suspend the right of redemption or postpone the date of
payment upon redemption for such periods as are permitted under the 1940 Act,
and may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Portfolios'
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
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NET ASSET VALUE
The net asset value for each Portfolio is determined as of 3:00 p.m. (Eastern
Time) by dividing the total value of the Portfolio's investments and other
assets, less any liabilities, by the number of total outstanding shares of that
Portfolio.
Each Portfolio will compute its net asset value once daily on days that the New
York Stock Exchange is open for trading, except on days on which no orders to
purchase or redeem have been received. Notwithstanding whether any orders to
purchase or redeem have been received or whether the New York Stock Exchange is
open for business, the net asset value will be calculated on the last day of
each month.
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 traded primarily on foreign securities
exchanges are normally valued at the preceding closing values of such securities
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 the Adviser under the supervision of the Board
of Trustees determines such method does not represent fair value.
DIVIDENDS AND DISTRIBUTIONS
Dividends for each Portfolio will be declared daily on shares held of record at
3:00 p.m. (Eastern Time). Over the course of a year, substantially all of a
Portfolio's 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 not later than 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.
All dividends and distributions will be reinvested automatically at net asset
value in additional shares of the same Portfolio, unless cash payment is
requested.
TAXES
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except
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distributions that are treated as a return of capital), regardless of whether
the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a
specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares on or just before the record date for a
capital gains distribution should be aware that the amount of the forthcoming
distribution 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.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Portfolios. Dividends paid by each Portfolio may be taxable to investors under
state or local law as dividend income even though all or a portion of the
dividends may be derived from interest on obligations which, if realized
directly, would be exempt from such income taxes. In addition, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Portfolio. Shareholders who are non-
resident alien individuals, foreign trusts or estates, foreign corporations or
foreign partnerships may be subject to different U.S. Federal income tax
treatment.
ORGANIZATION
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment
company. On January 12, 1996, the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more classes
of shares. Pursuant to this authority, the Trustees have
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authorized the issuance of an unlimited number of shares in thirty-three
investment portfolios, some of which offer multiple classes of shares to
investors. This prospectus relates only to the two Portfolios described herein,
each of which offers a single class of 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 investment portfolio or 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
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.
PERFORMANCE
Performance information for 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 shares of a Portfolio over the measuring period. Total return may
also be calculated on an aggregate total return basis. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return assume that dividend and capital gain
distributions made by a Portfolio with respect to its shares are reinvested in
shares.
A Portfolio's yield is computed by dividing the Portfolio's net income per share
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and analyzing the result on a semi-annual basis.
Performance quotations represent past performance and should not be considered
representative of future results. The investment return and principal value of
an investment in a Portfolio will fluctuate so that an investor's shares, when
redeemed, may be
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worth more or less than their original cost. Any fees charged directly to the
customer accounts of the Adviser in connection with investments in a Portfolio
will not be included in the Portfolio's performance calculations.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be directed to BlackRock at 212-754-5560.
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BLACKROCK NON-DOLLAR PORTFOLIO I
BLACKROCK NON-DOLLAR PORTFOLIO II
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ---------------------------------------------
<S> <C>
Summary of Expenses.......................... 2
The Portfolios............................... 4
Investment Objective and Policies............ 4
Eligible Investments......................... 5
Portfolio Techniques, Instruments and Risks.. 6
Management of the Fund....................... 17
Purchases and Redemptions.................... 19
Net Asset Value.............................. 21
Dividends and Distributions.................. 21
Taxes........................................ 21
Organization................................. 22
Performance.................................. 23
Shareholder Inquiries........................ 24
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
Prospectus
March __, 1997
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THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS
MARCH __, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OF SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
BLACKROCK NON-DOLLAR PORTFOLIO I
BLACKROCK NON-DOLLAR PORTFOLIO II
This Statement of Additional Information provides supplementary information
pertaining to shares ("Shares") representing interests in BlackRock Non-Dollar
Portfolio I and BlackRock Non-Dollar Portfolio II (the "Portfolios") of Compass
Capital Funds/SM/ (the "Fund"). This Statement of Additional Information is not
a prospectus, and should be read only in conjunction with the Prospectus of the
Fund relating to the Portfolios dated March __, 1997, as amended from time to
time (the "Prospectus"). The Prospectus may be obtained from the Fund's
distributor by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated March __, 1997. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Prospectus.
CONTENTS
Page
----
THE FUND........................................................ 2
INVESTMENT OBJECTIVE AND POLICIES............................... 2
INVESTMENT RESTRICTIONS......................................... 15
TRUSTEES AND OFFICERS........................................... 18
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS........................ 24
PORTFOLIO TRANSACTIONS.......................................... 26
PURCHASE AND REDEMPTION INFORMATION............................. 29
VALUATION OF PORTFOLIO SECURITIES............................... 30
PERFORMANCE INFORMATION......................................... 31
TAXES........................................................... 35
ADDITIONAL INFORMATION CONCERNING SHARES........................ 41
MISCELLANEOUS................................................... 42
APPENDIX A (Description of Securities Ratings).................. A-1
APPENDIX B (Description of Futures)............................. B-1
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES 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.
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts
business trust.
The Fund also offers other investment portfolios which are described
in separate Prospectuses and separate Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
For a description of the objective and policies of the Portfolios, see
"Investment Objective and Policies" in the Prospectus. The following
information is provided for those investors desiring information in addition to
that contained in the Prospectus.
CURRENCY TRANSACTIONS. As discussed in the Prospectus, the Portfolios
may engage in currency transactions with counterparties in order to hedge the
value of portfolio holdings denominated in particular currencies against
fluctuations in relative value or to enhance potential gain. Currency
transactions include spot and forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation
to purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract.
Currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. 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
may enter into over-the-counter currency transactions with counterparties which
have received, combined with any credit enhancements, a long-term debt rating of
"A" by S&P or Moody's, respectively, or that have an equivalent rating from a
nationally recognized statistical rating organization ("NRSRO") or (except for
OTC
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currency options) whose obligations are determined to be of equivalent credit
quality by the Adviser.
A Portfolio may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value in relation to other currencies to which the Portfolio has or
in which the Portfolio expects to have exposure. For example, a Portfolio may
hold both French government bonds and German government bonds, and the Adviser
may believe that French francs will deteriorate against German marks. The
Portfolio would sell French francs to reduce its exposure to that currency and
buy German marks. This strategy would be a hedge against a decline in the value
of French francs, although it would expose the Portfolio to declines in the
value of the German mark relative to the U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Portfolios may also engage
in proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which certain of the Portfolio's securities are or are expected to
be denominated, and to buy U.S. dollars. Proxy hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Portfolio if the currency
being hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. Whenever a
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements of the SEC.
Currency transactions are subject to risks different from those of
other portfolio transactions. Because currency control is of great importance
to the issuing governments and influences economic planning and policy,
purchases and sales of currency and related instruments can be negatively
affected by government exchange controls, blockages, and manipulations or
exchange restrictions imposed by governments. These can result in losses to the
Portfolio if it is unable to deliver or receive currency or funds in settlement
of obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks
that apply to the use of futures generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at an
institution based in the issuing nation. Trading options on currency futures is
relatively new,
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and the ability to establish and close out positions on such options is subject
to the maintenance of a liquid market which may not always be available.
Currency exchange rates may fluctuate based on factors extrinsic to that
country's economy.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may invest in reverse
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by a Portfolio pursuant to a Portfolio's agreement to repurchase
the securities at an agreed upon price, date and interest rate. Such agreements
are considered to be borrowing under the Investment Company Act of 1940 (the
"1940 Act"). While reverse repurchase transactions are outstanding, a Portfolio
will segregate cash, U.S. Government securities or other 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 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.
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.
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
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Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make 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 Portfolios may invest in multiple class pass-through securities,
including collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S.
Government agencies or instrumentalities, including FNMA and FHLMC, or by trusts
formed by private originators of, or investors in, mortgage loans. In general,
CMOs and REMICs are debt obligations of a legal entity that are collateralized
by, and multiple class pass-through securities represent direct ownership
interests in, a pool of residential or commercial mortgage loans or mortgage
pass-through securities (the "Mortgage Assets"), the payments on which are used
to make payments on the CMOs or multiple pass-through securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Portfolios do not intend to purchase residual
interests.
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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 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
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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 Pcs. Pcs represent undivided interests in
specified level payment, residential mortgages or participation 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."
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.
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
----
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity. The relationship between prepayments and interest
rates may give some high-yielding asset-backed securities less potential for
growth in value than conventional bonds with comparable maturities.
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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.
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.
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
charted to promote economic development.
MUNICIPAL OBLIGATIONS. When deemed advisable by the Adviser, the
Portfolios may invest in obligations issued by a state or local government
("Municipal Obligations"). The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved. Municipal Obligations may also include "moral obligation" bonds,
which are normally issued by special purpose public authorities. If the issuer
of moral obligation bonds is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
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The Portfolios may hold participation certificates in a lease, an
installment purchase contract, or a conditional sales contract ("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.
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 the 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, a Portfolio may 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 the Portfolio.
When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and the Portfolio would not have the right to take
possession of the assets. 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 Portfolios may purchase commercial paper rated
in one of the highest rating categories of an NRSRO. These ratings symbols are
described in Appendix A.
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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 Portfolios 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 Prospectus 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 Adviser. The
Adviser will continue to monitor creditworthiness of the seller under a
repurchase agreement, and will require the seller to maintain during the term of
the agreement the value of the securities subject to the agreement at not less
than the repurchase price (including accrued interest). In addition, the
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 amortization of the
difference between the purchase price and the repurchase price specified in the
repurchase agreement. The Adviser will mark-to-market daily the value of the
securities. Securities subject to repurchase agreements will be held by the
Portfolios' 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.
INVESTMENT GRADE DEBT OBLIGATIONS. The Portfolios 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. See Appendix A to
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this Statement of Additional Information for a description of applicable
securities ratings.
BRADY BONDS. Each of the Portfolios may invest in Brady Bonds. Brady
Bonds are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructuring under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (but primarily the U.S.
dollar), and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government Obligations. There can be
no assurance that Brady Bonds acquired by a Portfolio will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.
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 a when-
issued or forward commitment 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 account in order to ensure that the value of
the account remains equal to the amount of the Portfolio commitments. It may be
expected that the market value of the Portfolios' net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. 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.
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 and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
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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.
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 are segregated 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 Portfolio segregates liquid assets in the
amount of the difference.
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 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
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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 (or currencies) 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 Portfolio may invest in
futures contracts and options thereon. These instruments are described in
Appendix B to this Statement of Additional Information.
SECURITIES LENDING. A Portfolio would continue to accrue interest on
loaned securities and would also earn income on investment collateral for such
loans. Any cash collateral received by a Portfolio in connection with such
loans would be invested in 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; (3) 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 Adviser; (g)
shares issued by unaffiliated money market funds; and (h) other high-yielding
short-term investments which the 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
-13-
<PAGE>
instruments, including repurchase agreements, that mature on or before the
maturity date of the applicable lending transaction.
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. The adviser or sub-adviser will consider such an event in
determining whether the Portfolio should continue to hold the security.
INTEREST RATE TRANSACTIONS. The 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.
A Portfolio will usually enter into interest rate swaps on a net
basis, i.e., the two payments streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate swap on a
daily basis and will deliver an amount of 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 receive. A Portfolio
may enter into transactions with counterparties which have received, combined
with any credit enhancements, a long-term debt rating of "A" by S&P or Moody's,
respectively, or that have an equivalent rating
-14-
<PAGE>
from an NRSRO or whose obligations are determined to be of equivalent credit
quality by the Adviser.
A Portfolio will enter into interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by the 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 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.
INVESTMENT RESTRICTIONS
Each Portfolio is subject to the investment limitations enumerated in
this subsection which may be changed only by a vote of the holders of a majority
of the Portfolio's outstanding shares (as defined below under "Miscellaneous").
Each Portfolio may not:
(1) 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 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
-15-
<PAGE>
services; for example, gas, gas transmission, electric and gas,
electric and telephone will each be considered a separate
industry.
(2) Issue senior securities (including borrowed money, including on
margin if margin securities are owned) in excess of 33 1/3% of
its total assets (including the amount of senior securities
issued but excluding any liabilities and indebtedness not
constituting senior securities) except that the Portfolio may
borrow up to an additional 5% of its total assets for temporary
purposes; or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short
sales, when-issued and forward commitment transactions, dollar
rolls, option and futures transactions, currency transactions and
similar investment strategies. A Portfolio's obligations under
interest rate and currency swaps are not treated as senior
securities.
(3) Makes 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.
(4) 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.
(5) 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.
(6) Purchase or sell commodities except that each Portfolio may, to
the extent appropriate to its investment policies, purchase
securities of companies engaging in whole or in part in such
activities, may engage in currency transactions and may enter
into futures contracts and related options.
[End of Page]
-16-
<PAGE>
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:
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
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: 53 from January 1991 -
February 1995, Bell
Atlantic Corporation (a
diversified telecommuni-
cations company);
Chairman, President and
Chief Executive Officer
from August 1989 -
January 1991, Bell
Atlantic Enterprises
International, Inc.;
Director, Group Iusacell,
S.A. de C.V. since June
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: 61 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
- ---------
1. This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-17-
<PAGE>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
Trustee, United Way-Greater
Mercer County since 1995.
Robert M. Hernandez Trustee Director since 1991, Vice
USX Corporation Chairman and Chief
600 Grant Street Financial Officer
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: 52 Chief Financial Officer
from 1991 to 1994, Senior
Vice President - Finance
and Treasurer from 1990
to 1991, USX Corporation
(a diversified company
principally engaged in
energy and steel
businesses); Director,
ACE Limited; Trustee,
Allegheny General
Hospital and Allegheny
Accounting & Finance and
Health, Education and
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: 50 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
-18-
<PAGE>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
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
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: 61 (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
-19-
<PAGE>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
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: 57
The Fund pays trustees who are not affiliated with BlackRock or Compass
Distributors, Inc. ("CDI" or "Distributor") $10,000 annually and $275 per
investment portfolio of the Fund for each full meeting of the Board that they
attend. The Fund pays the Chairman and Vice Chairman an additional $10,000 and
$5,000, respectively, for their services in such capacities. Trustees who are
not affiliated with BlackRock 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 BlackRock, any of the Fund's other
advisers or sub-advisers, PFPC Inc. ("PFPC"), Compass Capital Group, Inc.
("CCG"), Compass Distributors, Inc. ("CDI" and, 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 investment portfolio of the Fund.
-20-
<PAGE>
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 REGISTRANT
AGGREGATE BENEFITS ESTIMATED AND FUND
COMPENSATION ACCRUED AS ANNUAL COMPLEX/1/
FROM PART OF FUND BENEFITS UPON PAID TO
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT TRUSTEES
- ------------------------ ------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Philip E. Coldwell,* $ 1,875 N/A N/A (4)/2/ $41,325
Trustee
Robert R. Fortune,* $ 1,875 N/A N/A (6)/2/ $61,325
Trustee
Rodney D. Johnson,* $ 1,875 N/A N/A (6)/2/ $53,325
Trustee
G. Willing Pepper,* $ 3,125 N/A N/A (7)/2/ $92,575
Former Chairman of
the Board
Anthony M. $38,025 N/A N/A (6)/2/ $58,500
Santomero, Trustee
David R. Wilmerding, $43,025 N/A N/A (7)/2/ $64,750
Jr., Trustee
William O. $31,150 N/A N/A (1)/2/ $31,150
Albertini, Trustee**
Raymond J. Clark, $31,150 N/A N/A (1)/2/ $31,150
Trustee**
Robert M. Hernandez, $31,150 N/A N/A (1)/2/ $31,150
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.
- ----------
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 trustees served on within the
Fund Complex.
-21-
<PAGE>
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law, shareholders
of a business trust may, under certain circumstances, be held personally liable
as partners for the obligations of the trust. However, the Fund's Declaration
of Trust provides that shareholders shall not be subject to any personal
liability in connection with the assets of the Fund for the acts or obligations
of the Fund, and that every note, bond, contract, order or other undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not personally liable thereunder. The Declaration of Trust provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason. The Declaration of Trust
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund, and shall
satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved or
with which he may be threatened by reason of his being or having been a trustee,
and that the Fund will indemnify officers, representatives and employees of the
Fund to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENT. The advisory services provided by BlackRock and the
fees received by it for such services are described in the Prospectus. As
stated in the Prospectus, BlackRock may from time to time voluntarily waive its
advisory fees with respect to the Portfolio and may voluntarily reimburse the
Portfolio for expenses.
BlackRock renders advisory services to the Portfolios pursuant to an
Investment Advisory Agreement (the "Advisory Contract"). Under the Advisory
Contract, BlackRock is not liable
-22-
<PAGE>
for any error of judgment or mistake of law or for any loss suffered by the Fund
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of BlackRock in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract is
terminable as to a Portfolio by vote of the Board of Trustees or by the holders
of a majority of the outstanding voting securities of the Portfolio involved, at
any time without penalty, on 60 days' written notice to BlackRock. BlackRock
may also terminate its advisory relationship with respect to either Portfolio,
on 60 days' written notice to the Fund. The Advisory Contract terminates
automatically in the event of its assignment.
ADMINISTRATION AGREEMENTS. The Fund has entered into a Co-Administration
Agreement with CCG and a separate Administration Agreement with PFPC and CDI
(the "Administration Agreements"). PFPC and CDI have agreed to maintain office
facilities for the Fund, furnish the Fund with statistical and research data,
clerical, accounting, and bookkeeping services, and certain other services
required by the Fund.
Under its 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 Agreements provide that the Administrators will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or the Portfolios in connection with the performance of the
Administration Agreements, 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.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank, National Association
("PNC Bank") is custodian of the Fund's assets pursuant to a custodian agreement
(the "Custodian Agreement"). Under the Custodian Agreement, PNC Bank or a sub-
custodian (i) maintains a separate account or accounts in the name of each
Portfolio, (ii) holds and transfers portfolio securities on account of each
Portfolio, (iii) accepts receipts and makes disbursements of money on behalf of
each Portfolio, (iv) collects and receives all income and other payments and
distributions on account of each Portfolio's securities and (v) makes periodic
reports to the Board of Trustees concerning
-23-
<PAGE>
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 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.
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 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 Portfolios under the Transfer Agency
Agreement, PFPC is entitled to receive fees at the annual rate of .02% of the
average net asset value of outstanding shares in the Portfolio, plus per account
fees and disbursements.
DISTRIBUTOR. The Fund has entered into a distribution agreement with the
Distributor under which the Distributor, as agent, offers shares of the
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.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for the
Portfolios, the selection of brokers and dealers to effect the transactions and
the negotiation of prices and any brokerage commissions. The securities in
which the Portfolios invest are traded principally in the over-the-counter
market. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for
-24-
<PAGE>
their own accounts without a stated commission, although the price of the
security usually includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the manager(s), underwriter(s) and dealer(s). The Portfolios
may also purchase certain money market instruments directly from an issuer, in
which case no commissions or discounts are paid. Purchases and sales of debt
securities on a stock exchange are effected through brokers who charge a
commission for their services.
The Adviser's primary considerations in selecting the manner of executing
securities transactions for the Portfolios will be prompt execution of orders,
the size and breadth of the market for the security, the reliability, integrity
and financial condition and execution capability of the firm, the size of and
difficulty in executing the order, and the best net price. There are many
instances when, in the judgment of the Adviser, more than one firm can offer
comparable execution services. In selecting among such firms, consideration is
given to those firms which supply research and other services in addition to
execution services. However, it is not the policy of the Adviser, absent
special circumstances, to pay higher commissions to a firm because it has
supplied such services.
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Portfolios without receiving such information from
brokers; however, it considers access to such information to be an important
element of financial management. Although such information is considered
useful, its value is not determinable, as it must be reviewed and assimilated by
the Adviser, and does not reduce the Adviser's normal research activities in
rendering investment advice under the Advisory Contract. It is possible that
the Adviser's expenses could be materially increased if it attempted to purchase
this type of information or generate it through its own staff.
One or more of the other accounts which the Adviser manages may own from
time to time the same investments as the Portfolios. Investment decisions for
the Portfolios are made independently from those of such other accounts;
however, from time to time, the same investment decision may be made for more
than one company or account. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or sold
will be allocated among the companies and accounts on a good faith equitable
basis by the Adviser in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the Portfolios. In other cases,
however, the ability of the Portfolios to participate in volume transactions may
produce better execution for the Portfolios.
-25-
<PAGE>
It is expected that under normal market conditions the annual portfolio
turnover rate of the Portfolios will not exceed 400%, excluding securities
having a maturity of one year or less. Because it is difficult to predict
accurately portfolio turnover rate, actual turnover may be higher or lower.
Higher portfolio turnover results in increased Portfolio expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on reinvestment in other securities. The Adviser will monitor
the tax status of the Portfolios under the Internal Revenue Code during periods
in which the annual turnover rate of a Portfolio exceeds 100%. To the extent
that increased portfolio turnover results in sales at a profit of securities
held less than three months, the Portfolios' ability to qualify as a "regulated
investment company" under the Internal Revenue Code may be affected. See
"Taxes" below.
A Portfolio will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which BlackRock,
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 BlackRock, 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 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:
-26-
<PAGE>
PORTFOLIO SECURITY VALUE
- --------- -------- -----
Money Market
- ------------
Goldman Sachs, LP Variable Rate Obligation $ 47,000,000
Lehman Brothers Variable Rate Obligation 50,000,000
Merrill Lynch & Co. Medium Term Note 49,997,964
Merrill Lynch & Co. Commercial Paper 49,663,333
Morgan Stanley & Co. Commercial Paper 114,310,431
U.S. Treasury Money Market
- ----------------------------
Goldman Sachs, LP Repurchase Agreement 24,000,000
Morgan Stanley & Co. Repurchase Agreement 280,300,000
Nikko Securities Co. Repurchase Agreement 55,000,000
Managed Income
- --------------
Salomon Brothers, Inc. Corporate Bond
Merrill Lynch & Co. Corporate Bond
Morgan Stanley & Co. Corporate Bond 5,106,250
Paine Webber, Inc. Corporate Bond 4,919,063
Balanced
- --------
Salomon Brothers, Inc. Corporate Bond 315,480
Merrill Lynch & Co. Corporate Bond 1,448,661
Index Equity
- ------------
Morgan Stanley & Co. Common Stock 582,075
Merrill Lynch & Co. Common Stock 859,688
Low Duration Bond
- -----------------
Lehman Brothers Corporate Bonds 3,685,520
Merrill Lynch & Co. Corporate Bonds 71,118
Morgan Stanley & Co. Corporate Bonds 413,409
Core Bond
- ---------
Goldman Sachs, LP Corporate Bonds 2,827,706
Merrill Lynch Corporate Bonds 374,118
Intermediate Bond
- -----------------
Goldman Sachs, LP Corporate Bonds 1,884,978
Merrill Lynch & Co. Corporate Bonds 1,196,431
PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolio are sold at the net asset value per share next
determined after a purchase order is received.
The Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or
-27-
<PAGE>
repurchase of the Portfolios' 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 the Portfolios' net asset values. 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 each 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 the Portfolio.
Under the 1940 Act, the Portfolios 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. (The Portfolios
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 Prospectus, the Fund
may redeem shares involuntarily to reimburse the Portfolios for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder as provided in the
Prospectus from time to time.
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VALUATION OF PORTFOLIO SECURITIES
Valuation of securities held by each 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 3:00 p.m. (Eastern
Time) (if a security is traded on more than one exchange, the latest sale price
on the exchange where the stock is primarily traded is used); foreign securities
traded on a recognized stock exchange for which there were no sales on that day
are valued at the mean of the bid and asked prices; other securities are valued
on the basis of valuations provided by a pricing service approved by the Board
of Trustees, provided that if the 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 based on quotations or
the equivalent thereof received from dealers; an option or futures contract is
valued at the last sales price prior to 3:00 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 3:00 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 Portfolios may be traded on
foreign exchanges or over-the-counter markets on days on which the Portfolios'
net asset values are not calculated. In such cases, the net asset value of a
Portfolio's shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Portfolios.
In determining the approximate market value of portfolio investments,
pricing services used by the Fund 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
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cash, receivables and current payables are carried on the Fund's books at their
face value.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance
of shares of the 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. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according to the
following formula:
ERV
T = [(-----) to the 1st power divided by n - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
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.
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The Portfolio may also from time to time include in advertisements, sales
literature and 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 Portfolio's shares with
other performance measures. For example, in comparing the total return of a
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 Salomon Broad Investment Grade Index, as
appropriate, the Portfolio may calculate the aggregate total return for its
shares for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in the 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.
In addition to average annual total returns, a 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. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph or similar illustration.
YIELD. Each Portfolio may advertise the yield on its Shares. Under the
rules of the SEC, a Portfolio 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).
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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 each Portfolio is recognized by accruing 1/360th of the stated dividend rate
of the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by a 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.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend,
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but is reasonably expected to be and is declared and paid as a dividend shortly
thereafter.
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to providing
performance information that demonstrates the total return or yield of Shares of
a Portfolio over a specified period of time, the Fund may provide certain other
information demonstrating hypothetical investment returns. Such information may
include, but is not limited to, illustrating the compounding effects of a
dividend in a dividend reinvestment plan.
MISCELLANEOUS. Performance information for the Portfolios assumes the
reinvestment of dividends and distributions. Performance information may
reflect fee waivers that subsidize and reduce the total operating expenses of a
Portfolio. In these cases, the Portfolios' returns would be lower if there were
not such waivers.
Yield on shares of a Portfolio will fluctuate daily and does not provide a
basis for determining future yield. Because yield will fluctuate, it cannot be
compared with yields on savings account or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time. In
comparing the yield of one fund to another, consideration should be given to
each fund's investment policies, including the types of investments made,
lengths of maturities of the portfolio securities, and whether there are any
special account charges which may reduce the effective yield. The fees which
may be imposed by the Adviser or Institutions on their customer accounts are not
reflected in the calculations of total returns or yields for the Portfolios.
As stated above, 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 an investment in
a Portfolio are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of the Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of a Portfolio, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Portfolio), as well as the
views of BlackRock as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and
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related matters believed to be of relevance to a Portfolio. The Fund may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of a
Portfolio. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio. Such advertisements or communications may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and its shareholders that are not described
in the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or its 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.
The Portfolios will elect to be taxed as a regulated investment company
under Part I of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, each Portfolio generally is
exempt from Federal income tax on its net investment income and realized capital
gains that it distributes to shareholders, provided that it distributes an
amount equal to at least the sum of (a) 90% of its investment company taxable
income (net investment income and the excess of net short-term capital gain over
net long-term capital loss, if any, for the year) and (b) 90% of its net tax-
exempt interest income, if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
Distributions of investment company taxable income and net tax-exempt interest
income made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year will satisfy the Distribution
Requirement.
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investment in such stock,
securities, or currencies (the "Income Requirement") and derive less than 30% of
its gross income from
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the sale or other disposition of stock, securities and certain other investments
(including securities and forward foreign currency exchange contracts, but only
to the extent that such contracts are not directly related to the Portfolios'
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 the Portfolios'
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 the Portfolios 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 the
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the 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.
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any taxable
distribution from the Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date.
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.
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It is expected that distributions from the Portfolio will generally not
qualify for the "dividends received" deduction for corporate shareholders. In
addition, it is expected that dividends and certain interest income earned by
the Portfolios from foreign securities will be subject to foreign withholding
taxes or other taxes. If more than 50% of the value of a Portfolio's total
assets at the close of the taxable year in question consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including
generally any withholding taxes and other foreign income taxes, as paid by its
shareholders. If this election were made, the amount of such foreign taxes paid
by a Portfolio would be included in its shareholders' income pro rata (in
addition to taxable distributions actually received by them), and each
shareholder generally will be entitled either (a) to credit a proportionate
amount of such taxes against U.S. Federal income tax liabilities, or (b) if a
shareholder itemizes deductions, to deduct such proportionate amounts from U.S.
income. It is uncertain whether either Portfolio will meet the test stated
above necessary to make this tax election.
Ordinary income of individuals will be taxable at a maximum marginal rate
of 39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate of
tax for some taxpayers may be higher. 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.
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 the Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized by
the 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
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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 Portfolio'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, each
Portfolio would be allowed (in lieu of the foregoing) to elect either (1) to
offset gains or losses from portions which are part of a mixed straddle by
separately identifying each mixed straddle to which such treatment applies, or
(2) to establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40-60 rule will apply to the net gain or loss attributable to the
futures contracts, but in the case of a mixed straddle account election, not
more than 50% of any net gain may be treated as long-term and no more than 40%
of any net loss may be treated as short-term. Options on futures contracts
generally receive Federal tax treatment similar to that described above.
Under the Federal income tax provisions applicable to regulated investment
companies, less than 30% of a company's gross income for a taxable year must be
derived from gains realized on the sale or other disposition of securities held
for less than three months. The Internal Revenue Service has issued a private
letter ruling with respect to certain other investment companies to the
following effect: gains realized from a futures contract to purchase or to sell
will be treated as being derived from a security held for three months or more
regardless of the actual period for which the contract is held if the gain
arises as a result of a constructive sale of the contract at the end of the
taxable year as described above, and will be treated as being derived from a
security held for less than three months only if the contract is terminated (or
transferred) during the taxable year (other than by reason of mark-to-market)
and less than three months elapses between the date the contract is acquired and
the termination date. Although private letter rulings are not
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binding on the Internal Revenue Service with respect to the Portfolios, the Fund
believes that the Internal Revenue Service would take a comparable position with
respect to the Portfolios. In determining whether the 30% test is met for a
taxable year, increases and decreases in the value of a Portfolio's futures
contracts and securities that qualify as part of a "designated hedge," as
defined in the Code, may be netted.
Special rules govern the Federal income tax treatment of the portfolio
transactions of the Portfolios that are denominated in terms of a currency other
than the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S. dollar. The types of transactions covered by the
special rules include the following: (i) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, certain preferred stock); (ii) the accruing of
certain trade receivables and payables; (iii) the entering into or acquisition
of any forward contract or similar financial instruments; and (iv) the entering
into or acquisition of any futures contract, option or similar financial
instrument, if such instrument is not marked-to-market. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer also is treated as a
transaction subject to the special currency rules. With respect to such
transactions, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts that are
capital assets in the hands of the taxpayer and which are not part of a straddle
("Capital Asset Election"). In accordance with Treasury regulations, certain
transactions with respect to which the taxpayer has not made the Capital Asset
Election and that are part of a "Section 988 hedging transaction" (as defined in
the Code and the Treasury regulations) are integrated and treated as a single
transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" (as identified by such Treasury regulations)
are not subject to the mark-to-market or loss deferral rules under the Code.
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 the foreign currency contracts the Portfolios may enter into will
[generally] be subject to the special currency rules described above. Any 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 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 its taxable year will be subject
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to "mark-to-market" treatment. If a Portfolio 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 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 a 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 will be taxable as ordinary dividends to the extent of a
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The Portfolios intend to make sufficient distributions or deemed
distributions of their ordinary taxable income and any capital gain net income
prior to the end of the each calendar year to avoid liability for this excise
tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolio each year.
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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, the
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
Portfolio or class) may elect all of the trustees. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees will continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund will be called by the trustees upon the
written request of shareholders owning at least 10% of the outstanding shares
entitled to vote.
The Fund's 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
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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.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
SHAREHOLDER OWNERSHIP. On November 30, 1996, PNC Bank held of record
approximately 70% 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. BlackRock, CCG, PFPC, PNC Bank and other
Institutions are subject to such banking laws and regulations.
BlackRock, CCG, PFPC 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
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have been no cases deciding whether bank and non-bank subsidiaries of a
registered bank holding company may perform services comparable to those that
are to be performed by these companies, and future changes in either Federal or
state statutes and regulations relating to permissible activities of banks and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent these companies from continuing to perform such services for the
Fund. If such were to occur, it is expected that the Board of Trustees would
recommend that the Fund enter into new agreements or would consider the possible
termination of the Fund. Any new advisory or sub-advisory agreement would be
subject to shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" means, with
respect to the approval of a Portfolio's investment advisory agreement or a
change in a fundamental investment policy, the lesser of (1) 67% of the Shares
of that Portfolio represented at a meeting at which the holders of more than 50%
of the outstanding Shares of the Portfolio are present in person or by proxy, or
(2) more than 50% of the outstanding Shares of that Portfolio.
-42-
<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the highest rating category 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+."
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 highest rating
category 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.
The highest rating category of Duff & Phelps for commercial paper and
short-term debt is "D-1". Duff & Phelps employs three designations, "D-1+," "D-
1" and "D-1-," within the highest rating category. The following summarizes the
highest 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.
A-1
<PAGE>
"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.
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 highest rating category 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+."
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 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 highest rating 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.
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
highest rating category used by IBCA for short-term debt ratings:
"A1+" - Obligations possess a particularly strong credit feature and
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the "investment grade" ratings used by
Standard & Poor's for corporate and municipal debt:
A-2
<PAGE>
"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.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "BBB" 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 "investment grade" 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 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
A-3
<PAGE>
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.
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.
Note: Those bonds in the Aa, A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1 and Baa1.
The following summarizes the "investment grade" 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-4
<PAGE>
"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.
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 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.
A-5
<PAGE>
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
"investment grade" 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.
"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.
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 "investment grade" 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-6
<PAGE>
"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.
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 highest rating 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.
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 highest rating 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.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-7
<PAGE>
APPENDIX B
As stated in the Prospectus, the Portfolios may enter into certain
futures transactions. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, as an example, a Portfolio may use
interest rate futures contracts as a defense, or hedge, against anticipated
interest rate changes and not for speculation. As described below, this would
include the use of futures contract sales to protect against expected increases
in interest rates and futures contract purchases to offset the impact of
interest rate declines.
A Portfolio could accomplish a similar result to that which it hopes
to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
B-1
<PAGE>
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Portfolio
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges --principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Portfolios may trade in any interest rate futures contracts for
which there exists a public market, including, without limitation, the foregoing
instruments.
With regard to each Portfolio, the Adviser also anticipates engaging
in transactions, from time to time, in foreign index futures such as the ALL-
ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. Index Futures Contracts
-----------------------
General. A securities index assigns relative values to the securities
-------
included in the index, which fluctuates with changes in the market values of the
securities included. Some index futures contracts are based on broad market
indexes, while other futures contracts are based on narrower market indexes
segment. A Portfolio may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Portfolio may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of
B-2
<PAGE>
securities, in the value of the securities to be sold. Conversely, a Portfolio
may purchase index futures contracts in anticipation of purchases of securities.
A long futures position may be terminated without a corresponding purchase of
securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings.
III. Futures Contracts on Foreign Currencies
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars (or another currency). Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange rates between
different currencies arising from multinational transactions, as well as for
other purposes as described in the Prospectus.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or segregate
with a custodian an amount of liquid assets known as initial margin, based on
the value of the contract. The nature of initial margin in futures transactions
is different from that of margin in security transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Portfolio upon termination of the futures contract assuming all contractual
obligations have been satisfied. Subsequent payments, called variation margin,
to and from the broker, will be made on a daily basis as the price of the
underlying instruments fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as marking-to-the-
market. For example, when a particular Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Portfolio has purchased
a futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Portfolio would be required to make a variation margin payment to the
broker. Prior to expiration of the futures contract, the Adviser may elect to
close the position by taking an opposite
B-3
<PAGE>
position, subject to the availability of a secondary market, which will operate
to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of a hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the
instruments which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the instruments being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the instruments being hedged has moved
in a favorable direction, this advantage will be partially offset by the loss on
the futures. If the price of the futures moves more than the price of the
hedged instruments, the Portfolio involved will experience either a loss or gain
on the futures which will not be completely offset by movements in the price of
the instruments which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of instruments being hedged and
movements in the price of futures contracts, a Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of instruments being
hedged if the volatility over a particular time period of the prices of such
instruments has been greater than the volatility over such time period of the
futures, or if otherwise deemed to be appropriate by the Adviser. Conversely, a
Portfolio may buy or sell fewer futures contracts if the volatility over a
particular time period of the prices of the instruments being hedged is less
than the volatility over such time period of the futures contract being used, or
if otherwise deemed to be appropriate by the Adviser. It is also possible that,
where a Portfolio has sold futures to hedge its portfolio against a decline in
the market, the market may advance and the value of instruments held in the
Portfolio may decline. If this occurred, the Portfolio would lose money on the
futures and also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss
B-4
<PAGE>
on the futures contract that is not offset by a reduction in the price of the
instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures
B-5
<PAGE>
contract price during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures positions. 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
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Successful use of futures by a Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a particular 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
offsetting losses in its futures positions. In addition, in such situations, if
the 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.
VI. Options on Futures Contracts
----------------------------
A Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the
B-6
<PAGE>
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing an option of the
same series, at which time the person entering into the closing transaction will
realize a gain or loss. A Portfolio will be required to deposit initial margin
and variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities or
currencies being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities or currencies. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Portfolio because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar
to those risks relating to the sale of futures contracts.
VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-7
<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 (as filed in Post-Effective Amendment No.
24):
(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, New Jersey 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 or period
ended September 30, 1996;
Statements of Changes in Net Assets for the year
or period 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;
Statements of Net Assets (all Portfolios except
International Equity and International Emerging
Markets Portfolios) - September 30, 1996;
C-2
<PAGE>
Schedules of Investments with respect to the
International Equity and International Emerging
Markets Portfolios - 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,
Government Income, Low Duration Bond, Core Bond, New
Jersey Tax-Free Income and International Bond
Portfolios:
Report of Independent Accountants (Coopers &
Lybrand L.L.P.) for the fiscal year ended
September 30, 1996;
Schedules of Investments and Statements of Assets
and Liabilities (all Portfolios except
Pennsylvania Tax-Free Income and Ohio Tax-Free
Income Portfolios) -September 30, 1996;
Statements of Net Assets with respect to the
Pennsylvania Tax-Free Income and Ohio Tax-Free
Income Portfolios - September 30, 1996;
Statements of Operations for the year or periods
ended September 30, 1996;
Statements of Changes in Net Assets for the year
or periods ended September 30, 1996 and 1995 and
for the period ended March 31, 1996 for the Low
Duration Bond (formerly the Short Government Bond)
Portfolio and Core Bond Portfolio;
C-3
<PAGE>
Financial highlights for all periods presented
except for the periods ended June 30, 1995 and
prior periods for the Short Government Bond and
Core Bond Portfolios;
Notes to Financial Statements.
(iv) With respect to the Low Duration Bond Portfolio
(formerly the Short Government Bond Portfolio) and Core
Bond Portfolio:
Report of Independent Accountants (Deloitte &
Touche L.L.P.) for the fiscal year ended June 30,
1995 as it relates to the Statement of Changes in
Net Assets for the year ended June 30, 1995 and
the Financial Highlights for the years or period
ended June 30, 1995, 1994 and 1993.
(v) With respect to The Multi-Sector Mortgage Securities
Portfolio III:
Report of Independent Accountants (Coopers &
Lybrand L.L.P.) for the fiscal year ended
September 30, 1996 as it relates to:
The Schedule of Investments --September 30, 1996;
Statement of Assets and Liabilities -- September
30, 1996;
Statement of Operations for the period ended
September 30, 1996;
Statement of Changes in Net Assets and Financial
Highlights for the period ended September 30,
1996.
Reports of Independent Accountants (Deloitte &
Touche L.L.P.) for the fiscal year ended June 30,
1995 and the period ended March 31, 1996 as it
relates to:
Statement of Operations for the period ended March
31, 1996;
C-4
<PAGE>
Statement of Changes in Net Assets and Financial
Highlights for the periods ended March 31, 1996
and June 30, 1995.
(vi) 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.
(vii) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Statement of Net Assets - September 30, 1996
(unaudited);
Statement of Operations for the ten months ended
September 30, 1996 (unaudited);
Statement of Changes in Net Assets for the ten
months ended September 30, 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.
C-5
<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 is incorporated by reference to Exhibit
1(d) of Post-Effective Amendment No. 23 to Registrant's
Registration Statement on Form N-1A (No. 33-26305)
filed on October 18, 1996 ("Post-Effective Amendment
No. 23").
(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
C-6
<PAGE>
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 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 is incorporated by
reference to Exhibit 5(c) of Post-Effective Amendment
No. 23.
(d) Form of Amendment No. 1 to Investment Advisory
Agreement between Registrant and BlackRock Financial
Management, Inc. with respect to BlackRock Non-Dollar
Portfolio I and BlackRock Non-Dollar Portfolio II.
(e) 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.
(f) 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
C-7
<PAGE>
Registration Statement on Form N-1A filed on May 30,
1996.
(g) 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.
(h) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Institutional Management
Corporation 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.
(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.
C-8
<PAGE>
(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 is incorporated by reference to
Exhibit 5(k) of Post-Effective Amendment No. 23.
(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 is
incorporated by reference to Exhibit 5(l) of Post-
Effective Amendment No. 23.
(m) Form of Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and BlackRock Financial
Management, Inc. with respect to the International Bond
Portfolio is incorporated by reference to Exhibit 5(l)
of Post-Effective Amendment No. 24.
(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. is
incorporated by reference to Exhibit 6(c) of Post-
Effective Amendment No. 23.
(d) Form of Appendix A to Distribution Agreement between
Registrant and Compass Distributors, Inc.
(e) Amendment No. 2 to the Distribution Agreement between
Registrant and
C-9
<PAGE>
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.
(f) 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 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
C-10
<PAGE>
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 is incorporated by reference to Exhibit
8(e) of Post-Effective Amendment No. 23.
(f) Form of Appendix B to Custodian Agreement between
Registrant and PNC Bank, National Association.
(g) 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.
(h) Global Sub-Custody Agreement between Barclays Bank PLC
and PNC Bank, National Association dated October 28,
1992 is incorporated herein by reference to Exhibit
(8)(e) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(i) 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.
(j) 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.
C-11
<PAGE>
(k) 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.
(l) 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.
(m) Letter Agreement dated March 1, 1993 between Registrant
and PNC Bank, National Association relating to
custodian services with respect to the North Carolina
Municipal Money Market, Short-Term Bond, Intermediate-
Term Bond, Small Cap Growth Equity and Core Equity
Portfolios is incorporated herein by reference to
Exhibit (8)(h) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A filed
on November 10, 1993.
(9) (a) Administration Agreement 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. is incorporated by reference to Exhibit
9(b) of Post-Effective Amendment No. 23.
C-12
<PAGE>
(c) Forms of Appendix A and Appendix B to Administration
Agreement between Registrant, Compass Distributors,
Inc. and PFPC Inc.
(d) 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.
(e) Form of Appendix A to Co-Administration Agreement
between Registrant and Compass Capital Group, Inc. is
incorporated by reference to Exhibit 9(d) of Post-
Effective Amendment No. 23.
(f) Form of Appendix A to Co-Administration Agreement
between Registrant and Compass Capital Group, Inc.
(g) 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.
(h) 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.
(i) 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
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<PAGE>
Registrant's Registration Statement on Form N-1A filed
on December 13, 1991.
(j) 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.
(k) 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.
(l) 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.
(m) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is incorporated by reference
to Exhibit 9(k) of Post-Effective Amendment No. 23.
(n) Form of Appendix C to Transfer Agreement between
Registrant and PFPC Inc.
C-14
<PAGE>
(o) Trademark License Agreement between Registrant and PNC
Bank Corp. is incorporated herein by reference to
Exhibit 9(h) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed
on December 29, 1989.
(10) Opinion and Consent of Counsel./1/
(11) (a) Consent of Drinker Biddle & Reath.
(b) Consent of Coopers & Lybrand, L.L.P.
(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 26, 1996 under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
C-15
<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
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<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 is
incorporated by reference to Exhibit 13(i) of Post-
Effective Amendment No. 23.
(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 is incorporated by reference to Exhibit
13(j) of Post-Effective Amendment No. 23.
(k) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to shares of Class
FF-I and GG-I.
(14) None.
C-17
<PAGE>
(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 is incorporated by reference to
Exhibit 15(b) of Post-Effective Amendment No. 23.
(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
December 4, 1996 (Accession Nos. 0000935069-96-000160,
0000935069-96-000163 and 0000935069-96-000157).
(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-18
<PAGE>
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 November 30, 1996: B-4, B-5, C-4, C-5, D-5, E-5, F-4, F-5, G-5,
H-5, I-4, I-5, J-4, J-5, L-5, M-5, P-5, Q-4, Q-5, R-5, S-4, S-5, V-2, V-4, V-5,
X-1, X-3, X-5, Y-5, Z-4, Z-5, AA-3, AA-5, BB-5, DD-1, DD-2, DD-3, DD-4, DD-5,
EE-1, EE-2, EE-3, EE-4 and EE-5.
C-19
<PAGE>
With regard to the other classes of shares, the following information
is as of November 30, 1996:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A-1 605
Class B-1 187
Class C-1 57
Class D-1 528
Class E-1 105
Class F-1 7
Class G-1 468
Class H-1 94
Class I-1 2
Class J-1 28
Class K-1 2
Class L-1 2
Class M-1 82
Class N-1 3,271
Class O-1 1
Class P-1 9
Class Q-1 4
Class R-1 680
Class S-1 1
Class T-1 354
Class U-1 7
Class V-1 2
Class W-1 112
Class Y-1 9
Class Z-1 91
Class AA-1 126
Class BB-1 866
Class A-2 654
Class B-2 71
Class C-2 6
Class D-2 451
Class E-2 1,796
Class F-2 248
Class G-2 631
Class H-2 149
Class I-2 3
Class J-2 53
Class K-2 115
Class L-2 31
Class M-2 404
Class N-2 578
Class O-2 331
Class P-2 629
Class Q-2 3
Class R-2 31
Class S-2 32
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class T-2 748
Class U-2 86
Class W-2 11
Class X-2 39
Class Y-2 109
Class Z-2 20
Class AA-2 10
Class BB-2 12
Class A-3 16
Class B-3 3
Class C-3 2
Class D-3 19
Class E-3 9
Class F-3 23
Class G-3 22
Class H-3 4
Class I-3 7
Class J-3 2
Class K-3 8
Class L-3 4
Class M-3 1
Class N-3 38
Class O-3 8
Class P-3 38
Class Q-3 14
Class R-3 39
Class S-3 10
Class T-3 73
Class U-3 21
Class V-3 10
Class W-3 2
Class Y-3 10
Class Z-3 1
Class BB-3 101
Class CC-3 2
Class A-4 2
Class D-4 389
Class E-4 844
Class G-4 543
Class H-4 6
Class K-4 2
Class L-4 9
Class M-4 265
Class N-4 482
Class O-4 362
Class P-4 406
Class R-4 1
Class T-4 1,263
Class U-4 189
Class W-4 10
</TABLE>
C-21
<PAGE>
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class X-4 621
Class Y-4 91
Class BB-4 115
Class A-5 1
Class N-5 2
Class 0-5 77
Class P-5 2
Class T-5 48
Class U-5 3
Class W-5 6
</TABLE>
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
C-22
<PAGE>
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of bad faith had been adjudicated,
it would in the opinion of such counsel have been adjudicated in favor of
such person. The rights accruing to any person under these provisions shall
not exclude any other right to which he may be lawfully entitled, provided
--------
that no person may satisfy any right of indemnity or reimbursement hereunder
except out of the property of the Trust. The Trustees may make advance
payments in connection with the indemnification under this Section 9.3,
provided that the indemnified person shall have given a written undertaking
--------
to reimburse the Trust in the event it is subsequently determined that he is
not entitled to such indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
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
C-23
<PAGE>
or for some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of
Shares with the same alphabetical designation as that of the Shares owned by
such Shareholder to be held harmless from and indemnified against all loss
and expense arising from such liability. The Trust shall, upon request by
the Shareholder, assume the defense of any claim made against any
Shareholder for any act or obligations of the Trust and satisfy any judgment
thereon from such assets.
Item 28. Business and Other Connections of Investment Advisers
(a) PNC Asset Management Group, Inc. ("PAMG") is an indirect wholly-
owned subsidiary for PNC Bank Corp. PAMG was organized in 1994 for the purpose
of providing advisory services to investment companies. The list required by
this Item 28 of officers and directors of PAMG, 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 PAMG
pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-47710).
(b) PNC Institutional Management Corporation ("PIMC") is an indirect
wholly-owned subsidiary of PNC Bank Corp. The list required by this Item 28 of
officers and directors of PIMC, 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 PIMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-13304).
(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. The list required by this Item 28 of
officers and directors of PMC, 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 PMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-1438).
(d) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
wholly-owned subsidiary of PNC Bank Corp. BlackRock currently offers investment
advisory services to
C-24
<PAGE>
institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. The list required by this Item 28 of officers
and directors of BlackRock, 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 BlackRock pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-48433).
(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. The list required by this Item 28 of officers
and directors of PEAC, 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 PEAC pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-47711).
(f) 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).
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 (File No. 8-48775).
(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).
C-25
<PAGE>
(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 adviser and sub-adviser).
(7) PNC Equity Advisors Company, 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
(8) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its
functions as co-administrator, transfer agent and dividend
disbursing agent).
(9) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas,
New York, New York 10019 (records relating to its function
as sub-custodian).
(10) State Street Bank and Trust Company, P.O. Box 1631, Boston,
Massachusetts (records relating to its function as sub-
custodian).
(11) Barclays Bank PLC, 75 Wall Street, New York, New York 10265
(records relating to its function as sub-custodian).
C-26
<PAGE>
(12) Compass Capital Group, Inc., 345 Park Avenue, New York, New
York 10154 (records relating to its functions as co-
administrator).
(13) CastleInternational Asset Management Limited, 7 Castle
Street, Edinburgh, Scotland, EH2 3AH (records relating to
its functions as investment sub-adviser).
(14) Citibank, N.A. 111 Wall Street, 23rd Floor, Zone 6, New
York, NY 10043 (records relating to its functions as sub-
custodian).
(15) 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.
(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 Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A.
(c) Registrant undertakes to file a Post-Effective Amendment with respect
to BlackRock Non-Dollar Portfolio I and BlackRock Non-Dollar Portfolio
II using financial statements which need not be certified within four
to six months from the effective date of this Post-Effective Amendment
No. 26 to Registrant's Registration Statement on Form N-1A.
C-27
<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. 26 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 December, 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. 26 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
<TABLE>
<CAPTION>
<S> <C> <C>
*Raymond J. Clark Trustee, President and December 18, 1996
- ----------------------------
(Raymond J. Clark) Treasurer
*David R. Wilmerding, Jr. Chairman of the Board December 18, 1996
- ----------------------------
(David R. Wilmerding, Jr.)
*Anthony M. Santomero Vice-Chairman of December 18, 1996
- ----------------------------
(Anthony M. Santomero) the Board
*William O. Albertini Trustee December 18, 1996
- ----------------------------
(William O. Albertini)
*Robert M. Hernandez Trustee December 18, 1996
- ----------------------------
(Robert M. Hernandez)
</TABLE>
*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.
IN WITNESS THEREOF, I have hereunto signed my name and affixed the seal of
the Fund on December 10, 1996.
/S/
---------------
Morgan R. Jones
Secretary
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ----------- ----------- --------
(5)(d) Form of Amendment No. 1 to
Investment Advisory Agreement
between Registrant and BlackRock
Financial Management, Inc. with
respect to BlackRock Non-Dollar
Portfolio I and BlackRock
Non-Dollar Portfolio II.
(6)(d) Form of Appendix A to Distribution
Agreement between Registrant and
Compass Distributors, Inc.
(8)(f) Form of Appendix B to Custodian
Agreement between Registrant and
PNC Bank, National Association.
(9)(c) Forms of Appendix A and
Appendix B to Administration
Agreement between Registrant,
Compass Distributors, Inc.
and PFPC Inc.
(9)(f) Form of Appendix A to
Co-Administration Agreement
between Registrant and Compass
Capital Group, Inc.
(9)(n) Form of Appendix C to Transfer
Agreement between Registrant and
PFPC Inc.
(11)(a) Consent of Drinker Biddle & Reath.
(11)(b) Consent of Coopers & Lybrand, L.L.P.
(13)(k) Form of Purchase Agreement between
Registrant and Compass Distributors,
Inc. relating to shares of Class
FF-I and GG-I.
<PAGE>
Exhibit (5)(d)
COMPASS CAPITAL FUNDS/SM/
Addendum No. 1 to the Investment Advisory Agreement
This Addendum dated as of the ____ day of March, 1997 is entered into
by and between COMPASS CAPITAL FUNDS, a Massachusetts business trust (the
"Fund"), and BLACKROCK FINANCIAL MANAGEMENT, 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 BlackRock Non-Dollar Portfolio
I and BlackRock Non-Dollar Portfolio II (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 BlackRock Non-Dollar Portfolio I and BlackRock
Non-Dollar Portfolio II (considered separately on a Portfolio-by-
Portfolio
<PAGE>
basis): .20% of the average daily net assets of each Portfolio.
Such fee as is attributable to each respective Portfolio shall be
a separate charge to such Portfolio and shall be the several (and
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 BlackRock Non-Dollar Portfolio I and BlackRock
Non-Dollar Portfolio II.
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.
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:
BLACKROCK
FINANCIAL MANAGEMENT, INC.
[SEAL] By:________________________
its:
2
<PAGE>
EXHIBIT (6)(d)
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)
<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)
BlackRock Non-Dollar Portfolio I (Institutional Shares)
BlackRock Non-Dollar Portfolio II (Institutional Shares)
Agreed to and accepted as of March ____, 1997.
COMPASS CAPITAL FUNDS
By: _____________________
COMPASS DISTRIBUTORS, INC.
By: _____________________
-3-
<PAGE>
EXHIBIT (8)(f)
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
. BlackRock Non-Dollar Portfolio I
. BlackRock Non-Dollar Portfolio II
Agreed to and accepted as of
___________________, 1997
Compass Capital Funds
By:_____________________
PNC Bank, National Association
By:_____________________
<PAGE>
EXHIBIT (9)(c)
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)
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
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)
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
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)
BlackRock Non-Dollar Portfolio I (Institutional Shares)
BlackRock Non-Dollar Portfolio II (Institutional Shares)
Agreed to and accepted as of ________________, 1997
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
Government Income, BlackRock next $1 billion of each Portfolio's
Non-Dollar Portfolio I and BlackRock average daily net assets; and .15% of
Non-Dollar Portfolio II Portfolios. 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 _____________,1997:
COMPASS CAPITAL FUNDS
By: _________________________
PFPC INC.
By: _________________________
COMPASS DISTRIBUTORS, INC.
By: _________________________
<PAGE>
EXHIBIT (9)(f)
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
<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
<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
<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
<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
BlackRock Non-Dollar
Portfolio I.............. Institutional
BlackRock Non-Dollar
Portfolio II............. Institutional
Agreed to and accepted as of _______________, 1997:
COMPASS CAPITAL FUNDS/SM/
By:____________________________
COMPASS CAPITAL GROUP, INC.
By:____________________________
<PAGE>
EXHIBIT (9)(n)
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
. BlackRock Non-Dollar Portfolio I
. BlackRock Non-Dollar Portfolio II
Agreed to and accepted as of _______________, 1997:
Compass Capital Funds
By:__________________________________
PFPC Inc.
By:__________________________________
<PAGE>
Exhibit (11)(a)
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. 26 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
December 18, 1996
<PAGE>
EXHIBIT 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent in this Post-Effective Amendment No. 26 under the
Securities Act of 1933, as amended, to this Registration Statement on Form N-1A
(File No. 33-26305) of the Compass Capital Funds to the reference to our Firm
under the heading "Miscellaneous - Independent Accountants" in the Statement of
Additional Information.
/s/
- -------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 17, 1996
<PAGE>
EXHIBIT (13)(k)
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 the
Fund's BlackRock Non-Dollar Portfolio I and BlackRock Non-Dollar Portfolio II
(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 ____________________, 1997.
COMPASS CAPITAL FUNDS/SM/
By:______________________
COMPASS DISTRIBUTORS, INC.
By:_______________________
