<PAGE>
As filed with the Securities and Exchange Commission on May 31, 1996
Registration No. 33-26305
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. __ [_]
POST-EFFECTIVE AMENDMENT NO. 21 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 23 [x]
______________________________
COMPASS CAPITAL FUNDS(R)
(Formerly, The PNC(R) Fund)
(Exact Name of Registrant as Specified in Charter)
Bellevue Corporate Center Morgan R. Jones, Esq.
400 Bellevue Parkway Drinker Biddle & Reath
Suite 100 PNB Building
Wilmington, Delaware 19809 1345 Chestnut Street
(Address of Principal Executive Philadelphia, PA 19107
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 792-2555
____________________________
It is proposed that this filing will become effective (check appropriate box)
[x] 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)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
initial 24f-2 Notice for the fiscal year ended September 30, 1995 for all
investment portfolios then existing was
<PAGE>
Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A
of Compass Capital Funds(SM) does not include the prospectuses for Service,
Investor A, Investor B, Investor C, and Institutitonal Shares of the Value
Equity, Growth Equity, Small Cap Value Equity, Small Cap Growth Equity,
International Equity, International Emerging Markets, Select Equity, Index
Equity and Balanced Portfolios, and does not include the prospectus or the
Statement of Additional Information for Institutional Shares of the Multi-Sector
Mortgage Securities Portfolio III.
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Service Shares of the
Money Market Portfolio,
U.S. Treasury Money Market Portfolio,
Municipal Money Market Portfolio,
New Jersey Municipal Money Market Portfolio,
North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio,
Pennsylvania Municipal Money Market Portfolio and
Virginia Municipal Money Market Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Location
- -------------- --------
<S> <C>
PART A PROSPECTUS
1. Cover page............................................................... Cover Page
2. Synopsis................................................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial Information.......................................... What Are The Portfolios'
Financial Highlights?
4. General Description of Registrant........................................ Cover Page; What Are The
Portfolios?; What
Additional Investment
Policies Apply?; What
Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund................................................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance............................................................ Inapplicable
6. Capital Stock and Other Securities....................................... How Frequently Are Dividends
And Distributions Made
To Investors?; How Are
Fund Distributions
Taxed?; How Is The Fund
Organized?
7. Purchase of Securities Being Offered..................................... How Are Shares Purchased And
Redeemed?; How Is Net
Asset Value Calculated?;
How Is The Fund
Organized?
8. Redemption or Repurchase................................................. How Are Shares Purchased
and Redeemed?
9. Legal Proceedings........................................................ Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS/SM/
THE MONEY MARKET PORTFOLIOS/SERVICE SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following information has been added to the section entitled "What Are The
Portfolios' Financial Highlights?":
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolio's independent
accountants. This financial information should be read together with those
financial statements. Further information about the performance of the
Portfolio is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder reports may
be obtained from the Fund free of charge by calling (800) 441-7762.
New Jersey Municipal Money Market Portfolio/+/
-------------------------------------------
Service Class/(1)/
-------------
<TABLE>
<CAPTION>
For the Period
Ended 1/31/96
<S> <C>
Net asset value at beginning of
period................................ $ 1.00
-----------
Income from investment operations
Net investment income................ 0.03
Net realized gain (loss)............. --
-----------
Total from investment
operations......................... 0.03
Less distributions
-----------
Distributions from net investment
income........................... (0.03)
Distributions from net realized
capital gains.................... --
-----------
Total distributions................ (0.03)
-----------
Net asset value at end of period....... $ 1.00
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Period
Ended 1/31/96
-------------
<S> <C>
Total return........................... 3.23%/(2)/
Ratios/Supplemental data
Net assets at end of period (in
thousands)......................... $ 56,958
Ratios of expenses to average
net asset assets
After advisory/administration
fee waivers........................ 0.70%/(2)/
Before advisory/administration
fee waivers........................ 0.74%/(2)/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers........................ 3.17%/(2)/
Before advisory/administration
fee waivers........................ 3.13%/(2)/
</TABLE>
___________________
/+/ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor New Jersey Municipal Money Market Portfolio") of Compass
Capital Group, which was organized as a Massachusetts business trust. On
January 13, 1996, the assets and liabilities of the Predecessor New Jersey
Municipal Money Market Portfolio were transferred to this Portfolio, and
were combined with the assets of a pre-existing portfolio of investments
maintained by the Fund.
/1/ Service Class includes all activity of the prior class of shares before
January 13, 1996, the date of the merger.
/2/ Annualized.
The last sentence in the last paragraph of the section entitled "Who Manages The
Fund? -- Investment Adviser and Sub-Adviser" has been replaced with the
following:
For the period from March 1, 1995 through January 13, 1996, the Predecessor
New Jersey Municipal Money Market Portfolio (as defined on page 15) paid
investment advisory fees, after voluntary fee waivers, to its former
adviser pursuant to the investment advisory agreement then in effect at the
annual rate of 0.40% of its average daily net assets. For the period from
January 13, 1996 through January 31, 1996, the New Jersey Municipal Money
Market Portfolio paid investment advisory fees, after voluntary fee
waivers, at the annual rate of 0.06% of its average daily net assets.
This Supplement is dated May 31, 1996 and relates to the Prospectus originally
dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Money Market Portfolios Service Shares January 16, 1996
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This Prospectus
describes the Service Shares of eight of those portfolios (the
"Portfolios"):
Money Market Portfolio
U.S. Treasury Money Market Portfolio
Municipal Money Market Portfolio
New Jersey Municipal Money Market Portfolio
North Carolina Municipal Money Market Portfolio
Ohio Municipal Money Market Portfolio
Pennsylvania Municipal Money Market Portfolio
Virginia Municipal Money Market Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE THAT
THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 16.
COMPASS
CAPITAL
PORTFOLIO LIPPER PEER GROUP
Money Market Money Market Instrument Funds
U.S. Treasury U.S. Treasury Money Market Funds
Money Market
Municipal Tax-Exempt Money Market Funds
Money Market
NJ Municipal NJ Tax-Exempt Money Market Funds
Money Market
NC Municipal Other States Tax-Exempt Money Market Funds
Money Market
OH Municipal Ohio Tax-Exempt Money Market Funds
Money Market
PA Municipal PA Tax-Exempt Money Market Funds
Money Market
VA Municipal Other States Tax-Exempt Money Market Funds
Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. PNC Institutional Management Corporation
("PIMC") serves as the sub-adviser to the Portfolios as de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 5 to find descriptions of the
PORTFOLIOS Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective, or that any Portfolio will be able
MONEY MARKET to maintain a stable net asset value of $1.00 per share. Cer-
INVESTING tain Portfolios may invest in U.S. dollar-denominated instru-
ments of foreign issuers or municipal securities backed by the
credit of foreign banks, which may be subject to risks in ad-
dition to those inherent in U.S. investments. Each state-spe-
cific municipal Portfolio will concentrate in the securities
of issuers located in a particular state, and is non-diversi-
fied, which means that its performance may be dependent upon
the performance of a smaller number of securities than the
other Portfolios, which are considered diversified. See "What
Additional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?" and
CAPITAL FUNDS "What Special Purchase And Redemption Procedures May Apply?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 16
What Additional Investment Policies And Risks Apply?......... 20
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 26
Who Manages The Fund?........................................ 28
How Are Shares Purchased And Redeemed?....................... 32
What Special Purchase And Redemption Procedures May Apply?... 35
How Is Net Asset Value Calculated?........................... 37
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 38
How Are Fund Distributions Taxed?............................ 39
How Is The Fund Organized?................................... 44
How Is Performance Calculated?............................... 45
How Can I Get More Information?.............................. 46
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Service Shares of the Portfolios after fee waivers for the current fiscal year
ending September 30, 1996 as a percentage of average daily net assets. An exam-
ple based on the summary is also shown.
<TABLE>
<CAPTION>
NEW NORTH
U.S. JERSEY CAROLINA OHIO PENNSYLVANIA VIRGINIA
TREASURY MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees
(after fee
waivers)(/1/) .06% .06% .06% .05% .06% .06% .06% .05%
Other operating expenses .53 .53 .53 .54 .53 .53 .53 .54
---- ---- ---- ---- ---- ---- ------ ----
Administration fees
(after fee
waivers)(/1/) .13 .12 .11 .02 .05 .10 .12 .02
Shareholder servicing
fee .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .25 .26 .27 .37 .33 .28 .26 .37
---- ---- ---- ---- ---- ---- ------ ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .59% .59% .59% .59% .59% .59% .59% .59%
==== ==== ==== ==== ==== ==== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .44% for the Money Market Portfolio
and .45% for each of the other Portfolios and administration fees would be
.17% for the Money Market Portfolio and .18% for each of the other Portfo-
lios. PAMG and the Portfolios' administrators are under no obligation to
waive or continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total operat-
ing expenses during the remainder of the current fiscal year at the levels
set forth in the table. The information in the table is based on the advi-
sory fees, administration fees and other expenses payable after fee waivers
for the fiscal year ended September 30, 1995, as restated to reflect cur-
rent expenses and fee waivers. Without waivers, "Other operating expenses"
would be .56%, .58%, .59%, .69%, 65%, .60%, .58% and .69%, respectively,
and "Total Portfolio operating expenses" would be 1.00%, 1.03%, 1.04%,
1.14%, 1.04%, 1.05%, 1.03% and 1.14%, respectively.
6
<PAGE>
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market $ 6 $19 $33 $74
U.S. Treasury Money
Market 6 19 33 74
Municipal Money Market 6 19 33 74
New Jersey Municipal
Money Market 6 19 33 74
North Carolina Municipal
Money Market 6 19 33 74
Ohio Municipal Money
Market 6 19 33 74
Pennsylvania Municipal
Money Market 6 19 33 74
Virginia Municipal Money
Market 6 19 33 74
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They do not reflect any charges that may be imposed by
affiliates of the Portfolios' investment adviser or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and, except for the period
March 1, 1995 through August 31, 1995 with respect to the New
Jersey Municipal Money Market Portfolio, has been audited by
the Portfolio's independent accountant. This financial infor-
mation should be read together with those financial state-
ments. For the periods shown, the New Jersey Municipal Money
Market Portfolio offered only one class of shares to both in-
stitutional and retail investors. Further information about
the performance of the Portfolios is available in the Fund's
annual shareholder reports. Both the Statement of Additional
Information and the annual shareholder reports may be obtained
from the Fund free of charge by calling (800) 441-7764.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 10/4/89/1/
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
Net realized gain (loss)
on investments - - - - - - - - - - - -
---------- -------- -------- -------- -------- --------
Total from investment
operations 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
---------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0534) (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
Distributions from net
realized capital gains - - - - - - - - - - - -
---------- -------- -------- -------- -------- --------
Total distributions (0.0534) (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
---------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ======== ======== ======== ========
Total return 5.48% 3.37% 2.77% 4.05% 6.64% 8.07%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,194,017 $575,948 $415,328 $838,012 $637,076 $628,075
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.51% 0.59% 0.61% 0.62% 0.62%/2/
Before
advisory/administration
fee waivers 0.94% 0.92% 0.70% 0.66% 0.67% 0.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.35% 3.35% 2.73% 3.86% 6.45% 7.83%/2/
Before
advisory/administration
fee waivers 4.98% 2.95% 2.62% 3.81% 6.40% 7.75%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
Net realized gain (loss)
on investments - - - - - - - - - - - -
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0525) (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
Distributions from net
realized capital gains - - - - - - - - - - - -
-------- -------- -------- -------- -------- --------
Total distributions (0.0525) (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total return 5.38% 3.36% 2.72% 4.01% 6.46% 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $550,959 $372,883 $185,400 $160,269 $180,776 $146,148
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.52% 0.60% 0.62% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 0.98% 0.97% 0.73% 0.67% 0.70% 0.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.27% 3.42% 2.68% 3.91% 6.27% 7.62%/2/
Before
advisory/administration
fee waivers 4.85% 2.97% 2.55% 3.86% 6.22% 7.57%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- -------- ------- --------
Income from investment
operations
Net investment income 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
Net realized gain (loss)
on investments - - - - - - - - - - - -
-------- -------- ------- -------- ------- --------
Total from investment
operations 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
-------- -------- ------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0334) (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
Distributions from net
realized capital gains - - - - - - - - - - - -
-------- -------- ------- -------- ------- --------
Total distributions (0.0334) (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
-------- -------- ------- -------- ------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ======== ======= ========
Total return 3.39% 2.20% 2.10% 2.85% 4.47% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $265,629 $133,358 $93,937 $125,152 $89,312 $112,108
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.51% 0.61% 0.63% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 1.01% 0.99% 0.72% 0.68% 0.70% 0.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.35% 2.18% 2.02% 2.78% 4.40% 5.31%/2/
Before
advisory/administration
fee waivers 2.91% 1.71% 1.91% 2.73% 4.35% 5.26%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/1/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0333 0.0225 0.0074
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0333 0.0225 0.0074
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0333) (0.0225) (0.0074)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0333) (0.0225) (0.0074)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.38% 2.27% 0.75%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 49,857 $ 44,066 $ 15,239
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.57% 0.40% 0.23%/2/
Before advisory/administration fee waivers 1.03% 1.04% 0.96%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.35% 2.29% 2.23%/2/
Before advisory/administration fee waivers 2.89% 1.65% 1.50%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/11/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- ------- --------
Income from investment operations
Net investment income 0.0325 0.0221 0.0074
Net realized gain (loss) on investments - - - - - -
-------- ------- --------
Total from investment operations 0.0325 0.0221 0.0074
-------- ------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0325) (0.0221) (0.0074)
Distributions from net realized capital gains - - - - - -
-------- ------- --------
Total distributions (0.0325) (0.0221) (0.0074)
-------- ------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======= ========
Total return 3.33% 2.24% 0.74%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $147,739 $60,560 $ 8,919
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.57% 0.42% 0.32%/2/
Before advisory/administration fee waivers 0.99% 0.99% 1.20%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.29% 2.31% 2.42%/2/
Before advisory/administration fee waivers 2.87% 1.75% 1.54%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA VIRGINIA
MUNICIPAL MONEY MUNICIPAL MONEY
MARKET PORTFOLIO MARKET PORTFOLIO
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
11/01/94/4/ 4/29/94/1/ 10/11/94/1/
THROUGH THROUGH THROUGH
9/30/95 9/30/94 9/30/95
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0305 0.0099 0.0330
Net realized gain (loss) on
investments - - - - - -
-------- -------- --------
Total from investment operations 0.0305 0.0099 0.0330
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0305) (0.0099) (0.0330)
Distributions from net realized
capital gains - - - - - -
-------- -------- --------
Total distributions (0.0305) (0.0099) (0.0330)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.11% 0.99% 3.35%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 1,841 $ - - /3/ $ 821
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.55%/2/ 0.36%/2/ 0.40%/2/
Before advisory/administration
fee waivers 1.08%/2/ 1.02%/2/ 1.25%/2/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 3.34%/2/ 2.54%/2/ 3.50%/2/
Before advisory/administration
fee waivers 2.81%/2/ 1.87%/2/ 2.65%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/There were no Service Shares outstanding as of September 30, 1994.
/4/Reissuance of shares.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD PERIOD
ENDED FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91/1/
8/31/95 ENDED ENDED ENDED TO
(UNAUDITED) 02/28/95 02/28/94 02/28/93 02/28/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.02 0.02 0.02 0.02 0.02
Net realized gain (loss)
on investments - - - - - - - - - -
------- ------- ------- ------- -------
Total from investment
operations 0.02 0.02 0.02 0.02 0.02
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) (0.02) (0.02) (0.02) (0.02)
------- ------- ------- ------- -------
Distributions from net
realized capital gains - - - - - - - - - -
------- ------- ------- ------- -------
Total distributions (0.02) (0.02) (0.02) (0.02) (0.02)
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return 3.36% 2.46% 1.79% 2.19% 3.53%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $49,628 $43,610 $39,408 $38,836 $35,005
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.68%/2/ 0.63% 0.65% 0.73% 0.47%/2/
Before
advisory/administration
fee waivers 0.68%/2/ 0.70% 0.72% 0.76% 0.62%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.30%/2/ 2.46% 1.77% 2.17% 3.44%/2/
Before
advisory/administration
fee waivers 3.30%/2/ 2.39% 1.70% 2.14% 3.29%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Money Market Fund, a separate investment portfolio (the "Predecessor New
Jersey Municipal Money Market Portfolio") of Compass Capital Group, which was
organized as a Massachusetts business trust. On January 12, 1996, the assets
and liabilities of the Predecessor New Jersey Municipal Money Market Portfo-
lio were transferred to this Portfolio.
/1/Commencement of operations.
/2/Annualized.
15
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of principal.
The Portfolio may invest in a broad range of short-term, high
quality, U.S. dollar-denominated instruments, such as govern-
ment, bank, commercial and other obligations, that are avail-
able in the money markets. In particular, the Portfolio may
invest in:
(A) U.S. dollar-denominated obligations issued or supported by
the credit of U.S. or foreign banks or savings institu-
tions with total assets in excess of $1 billion (including
obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) A-2 or higher by
Standard & Poor's Ratings Group ("S&P"), Prime-2 or higher
by Moody's Investors Service, Inc. ("Moody's"), Duff 2 or
higher by Duff & Phelps Credit Co. ("D&P"), F-2 or higher
by Fitch Investors Service, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW"), as well as high
quality corporate bonds rated (at the time of purchase) AA
or higher by S&P, D&P, Fitch or TBW or Aa or higher by
Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations
and credit card receivables);
(E) securities issued or guaranteed as to principal and inter-
est by the U.S. Government or by its agencies or instru-
mentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign governments or their political subdivisions, agencies
or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
16
<PAGE>
U.S. The investment objective of the U.S. Treasury Money Market Port-
TREASURY folio is to provide as high a level of current interest income
MONEY as is consistent with maintaining liquidity and stability of
MARKET principal. It pursues this objective by investing exclusively in
PORTFOLIO short-term bills, notes and other obligations issued or guaran-
teed by the U.S. Treasury and repurchase agreements relating to
such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfolio
PORTFOLIOS is to provide as high a level of current interest income exempt
from Federal income taxes as is consistent with maintaining li-
quidity and stability of principal. It pursues this objective by
investing substantially all of its assets in short-term obliga-
tions issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authori-
ties ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market Port-
folio (the "State-Specific Municipal Portfolios") is, for each
Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the
specific state in which a Portfolio concentrates, as is consis-
tent with maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher
by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of compa-
rable quality as determined by the Portfolios' sub-adviser
under guidelines established by the Fund's Board of Trust-
ees; and
(E) municipal bonds and notes which are guaranteed as to princi-
pal and interest by the U.S. Government or an agency or in-
strumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
17
<PAGE>
During normal market conditions, at least 80% of each Munici-
pal Portfolio's net assets will be invested in securities
which are Municipal Obligations. In addition, under normal
conditions each State-Specific Municipal Portfolio intends to
invest at least 65% of its net assets in Municipal Obligations
of issuers located in the particular state indicated by its
name ("State-Specific Obligations"). The Municipal Money Mar-
ket Portfolio intends, on the other hand, to invest less than
25% of its total assets in Municipal Obligations of issuers
located in the same state. During temporary defensive periods,
each Municipal Portfolio may invest without limitation in ob-
ligations that are not Municipal Obligations and may hold
without limitation uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest
on AMT Paper that is received by taxpayers subject to the Fed-
eral alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its net as-
sets in Municipal Obligations the interest on which is paid
solely from revenues of similar projects. To the extent a
Portfolio's assets are invested in Municipal Obligations pay-
able from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the
peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested.
QUALITY, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, under
DIVERSIFICATION guidelines established by the Fund's Board of Trustees, to
present minimal credit risks and will be "Eligible Securities"
as defined by the SEC. Eligible Securities are (a) securities
that either (i) have short-term debt ratings at the time of
purchase in the two highest rating categories by at least two
unaffiliated nationally recognized statistical rating organi-
zations ("NRSROs") (or one NRSRO if the security is rated by
only one NRSRO), or (ii) are comparable in priority and secu-
rity with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including secu-
rities of issuers that have long-term but not short-term rat-
18
<PAGE>
ings) but are of comparable quality as determined in accordance
with guidelines approved by the Board of Trustees.
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not ex-
ceed 90 days. In no event will a Portfolio purchase securities
which mature more than 397 days from the date of purchase (ex-
cept for certain variable and floating rate instruments and se-
curities collateralizing repurchase agreements). Securities in
which the Portfolios invest may not earn as high a level of in-
come as longer term or lower quality securities, which generally
have greater market risk and more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal Money
Market Portfolios are classified as diversified portfolios, and
the State-Specific Municipal Portfolios are classified as non-
diversified portfolios, under the Investment Company Act of 1940
(the "1940 Act"). Investment returns on a non-diversified port-
folio typically are dependent upon the performance of a smaller
number of securities relative to the number held in a diversi-
fied portfolio. Consequently, the change in value of any one se-
curity may affect the overall value of a non-diversified portfo-
lio more than it would a diversified portfolio.
19
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios may invest in debt obligations of domes-
tic or foreign corporations and banks, and may acquire commercial obligations
issued by Canadian corporations and Canadian counterparts of U.S. corporations,
as well as Europaper, which is U.S. dollar-denominated commercial paper of a
foreign issuer. Bank obligations may include certificates of deposit, notes,
bankers' acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or sub-
sidiary by the terms of the specific obligation or by government regulation.
The Money Market Portfolio may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of its total as-
sets. For purposes of determining the permissibility of an investment in bank
obligations, the total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their respective in-
vestment objectives, the Portfolios may also purchase obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities. Obli-
gations of certain agencies and instrumentalities of the U.S. Government are
backed by the full faith and credit of the United States. Others are backed by
the right of the issuer to borrow from the U.S. Treasury or are backed only by
the credit of the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
20
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates. Each Municipal Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may not be as extensive as that which is made available by
public corporations, and the secondary market for Municipal Obligations may be
less liquid than that for taxable obligations. Accordingly, the ability of a
Municipal Portfolio to buy and sell tax-exempt securities may, at any particu-
lar time and with respect to any particular securities, be limited.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal or state income tax are rendered by counsel to
the respective issuers or sponsors at the time of issuance. The Fund and its
investment adviser will rely on such opinions and will not review independently
the underlying proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued by
private companies. Mortgage-related securities may include collateralized mort-
gage obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or
instrumentalities or issued by private companies. The average life of mortgage-
related securities is likely to be less than the original maturity of the mort-
gage pools underlying the securities as a result of mortgage prepayments. For
this and other reasons, a mortgage-
21
<PAGE>
related security's stated maturity may be shortened and, therefore, it may be
difficult to predict precisely the security's total return to the particular
Portfolio. In addition, in periods of falling interest rates, the rate of
mortgage prepayments tends to increase. During such periods, the reinvestment
of prepayment proceeds by the particular Portfolio will generally be at lower
rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instru-
ments may include variable amount master demand notes that permit the indebt-
edness thereunder to vary in addition to providing for periodic adjustments in
the interest rate. Issuers of unrated variable and floating rate instruments
must satisfy the same criteria as set forth above for the particular Portfo-
lio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements").
The securities held subject to a repurchase agreement may have stated maturi-
ties exceeding 13 months, so long as the repurchase agreement itself matures
in less than 13 months. Default by or bankruptcy of the seller would, however,
expose the Portfolio to possible loss because of adverse market action or de-
lays in connection with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Port-
folio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield avail-
able in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a
22
<PAGE>
current basis equal in value to at least the market value of the loaned securi-
ties. A Portfolio may not make such loans in excess of 33 1/3% of the value of
its total assets. Securities loans involve risks of delay in receiving addi-
tional collateral or in recovering the loaned securities, or possibly loss of
rights in the collateral if the borrower of the securities becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, each Portfolio may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, GICs, and repur-
chase agreements and time deposits that do not provide for payment within seven
days after notice, without taking a reduced price, are subject to this 10% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines, acting under guidelines
approved and monitored by the Board, that an adequate trading market exists for
that security. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio during any period that qualified institu-
tional buyers become uninterested in purchasing these restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Municipal Portfolios in State-
Specific Obligations raises special investment considerations. Changes in the
economic condition and governmental policies of a state and its political sub-
divisions could adversely affect the value of a Portfolio's shares.
23
<PAGE>
Certain matters relating to the states in which the State-Specific Municipal
Portfolios invest are described below. For further information, see "Special
Consideration Regarding State-Specific Obligations" in the Statement of Addi-
tional Information.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture is an im-
portant segment of the Ohio economy with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness. In prior
years, the State's overall unemployment rate was commonly somewhat higher than
the national figure. For example, the reported 1990 average monthly State rate
was 5.7%, compared to the 5.5% national figure. However, for the last four
years the State rates were below the national rates (5.5% versus 6.1% in 1994).
The unemployment rate and its effects vary among particular geographic areas of
the State. There can be no assurance that future national, regional or state-
wide economic difficulties and the resulting impact on State or local govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal Obligations held in the Portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund has a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January 1995, but the Commonwealth is likely to continue to show
fiscal restraint.
North Carolina. Growth of North Carolina tax revenues slowed considerably dur-
ing fiscal 1990-92 requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in the timing of
certain collections and payments, and other short-term budget adjustments, that
were needed to comply with North Carolina's constitutional mandate for a bal-
anced budget. Fiscal years 1993, 1994 and 1995, however, ended with a positive
General Fund balance each year. By law, 25% of such positive fund balance was
required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve" (subject to a maximum reserve of 5% of the preceding fiscal
year's operating appropriation). An additional portion of such positive fund
balance was reserved in the General Fund as
24
<PAGE>
part of a "Reserve for Repair and Renovation of State Facilities," leaving the
remaining unrestricted fund balance at the end of each such year available for
future appropriations.
Virginia. Because of Northern Virginia, with its proximity to Washington, DC,
and Hampton Roads, which has the nation's largest concentration of military in-
stallations, the Federal government has a greater impact on Virginia relative
to its size than any states other than Alaska and Hawaii. Virginia's economy
has continued to grow over the last decade, and while per capita income has
grown both faster and slower than the U.S. average from year to year, per cap-
ita income continues to be above the national average. Virginia's unreserved
general fund balances have continued to grow in recent years from a low in
1991. The Virginia Constitution requires a balanced budget and, since 1993, the
funding of a Revenue Stabilization Fund. Current debt levels are well below
limits established by the Constitution.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
25
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax, except during defensive periods or during periods
of unusual market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax or in instruments which are subject to AMT, ex-
cept during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal Portfolio will not hold any securities (except U.S. Government securities
and related repurchase agreements) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in securities of any
one issuer, except that up to 50% of a Portfolio's total assets may be invested
without regard to this limitation so long as no more than 25% of the Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S.
26
<PAGE>
Government securities and related repurchase agreements) to not more than 5% of
the value of its total assets at the time of purchase, except that 25% of the
value of its total assets may be invested in any one issuer for a period of up
to three business days. The Money Market Portfolio will also limit its invest-
ments in Eligible Securities that are not in the highest rating category as de-
termined by two NRSROs (or one NRSRO if the security is rated by only one
NRSRO) or, if unrated, are not of comparable quality, to 5% of its total as-
sets, with investments in any one such issuer being limited to no more than 1%
of its total assets or $1 million, whichever is greater, measured at the time
of purchase.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any commitment is no
longer in the best interests of a Portfolio, it will revoke the commitment by
terminating sales of shares of the Portfolio in the state involved.
27
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the di-
TRUSTEES rection of the Fund's Board of Trustees. The following indi-
viduals were elected by shareholders on January 4, 1996 to
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT The Adviser to Compass Capital Funds is PNC Asset Management
ADVISER AND Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform
SUB-ADVISER advisory services for investment companies, and has its prin-
cipal offices at 1835 Market Street, Philadelphia, Pennsylva-
nia 19103. PAMG is an indirect wholly-owned subsidiary of PNC
Bank Corp., a multi-bank holding company. PNC Institutional
Management Corporation ("PIMC"), a wholly-owned subsidiary of
PAMG, serves as each Portfolio's sub-adviser. PIMC's principal
business address is 400 Bellevue Parkway, Wilmington, Delaware
19809.
As adviser, PAMG is responsible for the overall investment
management of the Portfolios. As sub-adviser, PIMC is respon-
sible for the day-to-day management of the Portfolios, and
generally makes all purchase and sale investment decisions for
the Portfolios. PIMC also provides research and credit analy-
sis. Portfolio transactions for a Portfolio may be directed
through broker/dealers who sell Fund shares, subject to the
requirements of best execution.
For their investment advisory and sub-advisory services, PAMG
and PIMC are entitled to fees, computed daily on a Portfolio-
by-Portfolio basis and payable monthly, at the annual rates
set forth below. All sub-advisory fees payable to PIMC are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
28
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR EACH PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For more information about the advisory fees the Portfolios ex-
pect to pay for the current fiscal year, see "What Are The Ex-
penses Of The Portfolios?" For the fiscal year ended September
30, 1995, the Portfolios (other than the New Jersey Municipal
Money Market Portfolio) paid investment advisory fees at the
following annual rates (expressed as a percentage of average
daily net assets) after voluntary fee waivers: Money Market
Portfolio, .08%; U.S. Treasury Money Market Portfolio, .08%; Mu-
nicipal Money Market Portfolio, .08%; Ohio Municipal Money Mar-
ket Portfolio, .07%; Pennsylvania Municipal Money Market Portfo-
lio, .09%; North Carolina Municipal Money Market Portfolio,
.05%; and Virginia Municipal Money Market Portfolio, 0%. For the
fiscal year ended February 28, 1995, the Predecessor New Jersey
Municipal Money Market Portfolio paid investment advisory fees,
after voluntary fee waivers, to Midlantic Bank, N.A., its former
adviser, pursuant to the advisory agreement then in effect, at
the annual rate of .40% of its average daily net assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the Fund's co-administrators. CCG and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned
subsidiary of Provident Distributors, Inc. ("PDI"). A majority
of the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .15% of the first $500
million of each Portfolio's average daily net assets, .13% of
the next $500 million of each Portfolio's average daily net as-
sets, .11% of
29
<PAGE>
the next $1 billion of each Portfolio's average daily net as-
sets and .10% of each Portfolio's average daily net assets in
excess of $2 billion. From time to time the Administrators may
waive some or all of their administration fees from a Portfo-
lio.
For information about the operating expenses the Portfolios
expect to pay for the current fiscal year, see "What Are The
Expenses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service agreements with insti-
SERVICING tutional investors ("Institutions") (including PNC Bank, Na-
tional Association and its affiliates) which provide that the
Institutions will render support services to their customers
who are the beneficial owners of Service Shares. These serv-
ices are intended to supplement the services provided by the
Fund's Administrators and transfer agent to the Fund's share-
holders of record. In consideration for payment of a share-
holder processing fee of up to .15% (on an annualized basis)
of the average daily net asset value of Service Shares owned
beneficially by their customers, Institutions may provide one
or more of the following services: processing purchase and re-
demption requests from customers and placing orders with the
Fund's transfer agent or the distributor; processing dividend
payments from the Fund on behalf of customers; providing sub-
accounting with respect to Service Shares beneficially owned
by customers or the information necessary for sub-accounting;
and other similar services. In consideration for payment of a
separate shareholder servicing fee of up to .15% (on an
annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their customers, Institu-
tions may provide one or more of these additional services to
such customers: responding to customer inquiries relating to
the services performed by the Institution and to customer in-
quiries concerning their investments in Service Shares; pro-
viding information periodically to customers showing their po-
sitions in Service Shares; and other similar shareholder liai-
son services. Customers who are beneficial owners of Service
Shares should read this Prospectus in light of the terms and
fees governing their accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the invest-
ment of fiduciary funds in Portfolio shares. Institutions, in-
cluding banks regulated by the
30
<PAGE>
Comptroller of the Currency, Federal Reserve Board and state
banking commissions, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department
of Labor or state securities commissions, are urged to consult
their legal counsel before entering into agreements with the
Fund.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Institutions under their service agreements will not be prohib-
ited under these laws. However, state securities laws may differ
from the interpretations of Federal law on this issue, and banks
and financial institutions may be required to register as deal-
ers pursuant to state law.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and other
expenses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
31
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu-
tions acting on behalf of their customers, as well as to certain persons who
were shareholders of Compass Capital Group of Funds at the time of its combina-
tion with The PNC Fund during the first quarter of 1996. Service Shares will
normally be held of record by Institutions or in the names of nominees of In-
stitutions. Share purchases are normally effected through a customer's account
at an Institution through procedures established in connection with the re-
quirements of the account. In these cases, confirmations of share purchases and
redemptions will be sent to the Institutions. Beneficial ownership of shares
will be recorded by the Institutions and reflected in the account statements
provided by such Institutions to their customers. Investors wishing to purchase
shares should contact their Institutions.
Service Shares are sold at the net asset value per share next determined after
an order is received by PFPC Inc. ("PFPC"), the Fund's transfer agent. Shares
may be purchased by Institutions on any Business Day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business.
Purchase orders for each Portfolio except the U.S. Treasury Money Market Port-
folio may be placed by telephoning PFPC at (800) 441-7450 no later than 12:00
noon (Eastern Time) on a Business Day. Orders received before 12:00 noon (East-
ern Time) will be executed at 12:00 noon (Eastern Time). If payment for such
orders is not received by 4:00 p.m. (Eastern Time), the order will be cancelled
and notice thereof will be given to the Institution placing the order. Orders
received after 12:00 noon (Eastern Time) will not be accepted.
Purchase orders for the U.S. Treasury Money Market Portfolio may be placed by
telephoning PFPC at (800) 441-7450 no later than 4:00 p.m. (Eastern Time) on a
Business Day. Orders received before 12:00 noon (Eastern Time) will be executed
at 12:00 noon (Eastern Time); orders received after 12:00 noon (Eastern Time)
but before 4:00 p.m. (Eastern Time) will be executed at 4:00 p.m. (Eastern
Time). If payment for such orders is not received by 4:00 p.m. (Eastern Time),
the order will be cancelled and notice thereof will be given to the Institution
placing the order. Orders will not be accepted after 4:00 p.m. (Eastern Time).
Under certain circumstances, the Fund may reject large individual purchase or-
ders received after 12:00 noon (Eastern Time).
32
<PAGE>
Payment for Service Shares must normally be made only in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information. The minimum initial investment is $5,000;
however, Institutions may set a higher minimum for their customers. There is no
minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for Service Shares.
REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in
accordance with the procedures applicable to their accounts with the Institu-
tions. These procedures will vary according to the type of account and the In-
stitution involved, and customers should consult their account managers in this
regard. It is the responsibility of Institutions to transmit redemption orders
to PFPC and credit their customers' accounts with the redemption proceeds on a
timely basis. In the case of shareholders holding share certificates, the cer-
tificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the Administrators and the
Distributor will employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. The Fund and its service providers will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures. While the Fund intends to use its best efforts to maintain each
Portfolio's net asset value per share at $1.00, the proceeds paid upon redemp-
tion may be more or less than the amount invested depending upon the net asset
value of a Service Share at the time of redemption.
Payment for redeemed shares for which a redemption order is received by PFPC
before 12:00 noon (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the same Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received between 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) or
on a day when the Fund's custodian is closed is normally wired in Federal funds
on the next Business Day following redemption on which the Fund's custodian is
open for business. The Fund reserves the right to wire redemption proceeds
within seven days after receiving a redemption order if, in the judgment of
PAMG, an earlier payment could adversely affect a Portfolio. No charge for wir-
ing redemption payments is imposed by the Fund, although Institutions may
charge their customer accounts for redemption services. Information relating to
such redemption services and charges, if any, should be obtained by customers
from their Institution.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
400 Bellevue Parkway, Wilmington, DE 19809.
33
<PAGE>
The Fund may redeem Service Shares in any Portfolio account if the account bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count falls below that minimum, the customer may be obligated to redeem all or
part of his or her shares in the Portfolios to the extent necessary to maintain
the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
34
<PAGE>
What Special Purchase And Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC Fund(R)
may also purchase and redeem Service Shares of the same Portfolio and for the
same account in which they held shares on that date through the procedures de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. The minimum investment
is $100. Purchases through the Automatic Investment Plan described below are
subject to a lower purchase minimum. The name of the Portfolio with respect to
which shares are purchased must appear on the check or Federal Reserve Draft.
Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders for
shares of the Portfolios that are in proper form are executed at their net as-
set value per share next determined after receipt by the Fund; however, orders
will not be executed until payments not made in Federal funds are converted to
Federal funds (which normally occurs within two Business Days of receipt) un-
less a creditworthy financial institution undertakes to pay for an order in
Federal funds by 4:00 p.m. (Eastern Time) the same Business Day an order is
placed. Under certain circumstances, the Fund may reject large individual pur-
chase orders received after 12:00 noon. The Fund may in its discretion reject
any order for shares.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an investor
in shares of a Portfolio may arrange for periodic investments in that Portfolio
through automatic deductions from a checking or savings account by completing
the AIP Application Form. The minimum pre-authorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to Compass Capital Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Dela-
ware 19899-8907.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding share certificates must send
their certificates with the redemption request. Additional documentary evidence
of authority is required by PFPC in the event redemption is requested by a cor-
poration, partnership, trust, fiduciary, executor or administrator.
35
<PAGE>
If a shareholder has given authorization for expedited redemption, shares can
be redeemed by telephone and the proceeds sent by check to the shareholder or
by Federal wire transfer to a single previously designated bank account. Once
authorization is on file, PFPC will honor requests by any person by telephone
at (800) 441-7762 (in Delaware call collect (302) 791-1194) or other means.
The minimum amount that may be sent by check is $500, while the minimum amount
that may be wired is $10,000. Compass Capital reserves the right to change
these minimums or to terminate these redemption privileges. If the proceeds of
a redemption would exceed $25,000, the redemption request must be in writing
and will be subject to the signature guarantee requirement described above.
This privilege may not be used to redeem Shares in certificated form.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC
at P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed by the shareholder's bank. To change the name of the single designated
bank account to receive wire redemption proceeds, it is necessary to send a
written request (with a guaranteed signature as described above) to Compass
Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, the Administrators and the Distributor
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions reasonably believed to be genuine in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") which may be used
by investors who wish to receive regular distributions from their accounts.
Upon commencement of the SWP, the account must have a current value of $10,000
or more in a Portfolio. Shareholders may elect to receive automatic cash pay-
ments of $100 or more either monthly, every other month, quarterly, three
times a year, semi-annually, or annually. Automatic withdrawals are normally
processed on the 25th day of the applicable month or, if such day is not a
Business Day, on the next Business Day and are paid promptly thereafter. An
investor may utilize the SWP by completing the SWP Application Form which may
be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
36
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on each Business
Day by dividing the value of all securities and other assets owned by a Portfo-
lio that are allocated to its Service Shares, less the liabilities charged to
its Service Shares, by the number of Service Shares outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
37
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- -------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive
dividends for that day, while shareholders of each Portfolio whose redemption
orders are received after 12:00 noon (Eastern Time) do receive dividends for
that day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are sub-
ject to change by the Fund's Board of Trustees. The Portfolios do not expect
to realize net long-term capital gains.
Dividends are reinvested in additional full and fractional Service Shares of
the same Portfolio which pays the dividends, unless a shareholder elects to
receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.
38
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain regardless of the length of time a
shareholder holds the Shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns for
informational purposes and in two circumstances such amounts, while exempt from
regular Federal income tax, are taxable to persons subject to alternative mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum and environmen-
tal tax purposes. In addition, investors should be aware of the possibility of
state and local alternative minimum or minimum income tax liability on interest
from private activity bonds. Shareholders who are recipients of Social Security
Act or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest
39
<PAGE>
on obligations which, if realized directly, would be exempt from such income
taxes. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
OHIO TAXES. Individuals and estates that are subject to Ohio personal income
tax or municipal or school district income taxes in Ohio will not be subject to
such taxes on distributions from the Ohio Municipal Money Market Portfolio to
the extent that such distributions are properly attributable to interest on
Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Municipal Money Market Portfo-
lio in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends for Federal income tax purposes or are properly at-
tributable to interest on Ohio Municipal Obligations or U.S. Obligations. How-
ever, shares of the Ohio Municipal Money Market Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions properly attributable to gain on the sale, ex-
change or other disposition of Ohio Municipal Obligations will not be subject
to the Ohio personal income tax, or municipal or school district income taxes
in Ohio and will not be included in the net income base of the Ohio corporation
franchise tax. Distributions attributable to other sources will be subject to
the Ohio personal income tax and the Ohio corporation franchise tax.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to interest
realized by the Pennsylvania Municipal Money Market Portfolio from Pennsylvania
State-Specific Obligations or attributable to insurance proceeds on account of
such interest is not taxable to individuals, estates or trusts under the Per-
sonal Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal income tax purposes); to corporations under the Corporate Net
Income Tax (in the case of insurance proceeds, to the extent they are exempt
for Federal income tax purposes); nor to individuals under the Philadelphia
School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Portfolio of Pennsylvania State-Specific Obligations is taxable
under the Personal Income Tax, the Corporate Net Income Tax, and, unless these
assets were held by the Portfolio for more than six months, the School District
Tax.
This discussion does not address the extent, if any, to which shares of the
Pennsylvania Municipal Money Market Portfolio, and interest and gain earned by
the Portfolio, is subject to, or included in the measure of, special taxes im-
posed by the Commonwealth of Pennsylvania on
40
<PAGE>
banks and other financial institutions or with respect to any privilege, ex-
cise, franchise or other tax imposed on business entities not discussed above
(including the Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania state-specific obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
NORTH CAROLINA TAXES. Interest received in the form of dividends from the North
Carolina Municipal Money Market Portfolio is exempt from North Carolina state
income tax to the extent the distributions represent interest on direct obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments thereof and their agencies, instrumentalities and authorities, are also
exempt from North Carolina state income tax. Distributions paid out of interest
earned on obligations that are merely backed or guaranteed by the U.S. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment securities or on obligations of other states (which the Portfolio may
acquire and hold for temporary or defensive purposes) are not exempt from North
Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of certain obligations of the
State of North Carolina or its subdivisions that were issued before July 1,
1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
VIRGINIA TAXES. Subject to the provisions discussed below, dividends paid to
shareholders by the Virginia Municipal Money Market Portfolio and derived from
interest on obligations of the Commonwealth of Virginia or of any political
subdivision or instrumentality of the Commonwealth or derived from interest or
dividends on obligations of the United States excludable from Virginia taxable
income under the laws of the United States, which obligations are issued in the
exercise of the borrowing power of the Commonwealth or the United States and
are backed by the full faith and credit of the Commonwealth or the United
States, will be exempt from the Virginia income tax. Dividends paid to share-
holders by the Portfolio and derived from interest on debt obligations of cer-
tain territories and possessions of the United States (those issued by Puerto
Rico, the Virgin Islands and Guam) will be exempt from the Virginia income tax.
To the extent a portion of the dividends are derived from interest on debt ob-
ligations other than those described above, such portion will be subject to the
Virginia income tax even though it may be excludable from gross income for Fed-
eral income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. To the extent any por-
tion of the dividends are derived from taxable interest for Virginia purposes
or from net short-term capital gains, such portion will be
41
<PAGE>
taxable to the shareholders as ordinary income. The character of long-term cap-
ital gains realized and distributed by the Portfolio will flow through to its
shareholders regardless of how long the shareholders have held their shares.
Capital gains distributed to shareholders derived from Virginia obligations is-
sued pursuant to special Virginia enabling legislation which provides a spe-
cific exemption for such gains will be exempt from Virginia income tax. Gener-
ally, interest on indebtedness incurred by shareholders to purchase or carry
shares of the Portfolio will not be deductible for Virginia income tax purpos-
es.
As a regulated investment company, the Portfolio may distribute dividends that
are exempt from the Virginia income tax to its shareholders if the Portfolio
satisfies all requirements for conduit treatment under Federal law and, at the
close of each quarter of its taxable year, at least 50% of the value of its to-
tal assets consists of obligations the interest on which is exempt from taxa-
tion under Federal law. If the Portfolio fails to qualify, no part of its divi-
dends will be exempt from the Virginia income tax.
When taxable income of a regulated investment company is commingled with exempt
income, all distributions of the income are presumed taxable to the sharehold-
ers unless the portion of income that is exempt from Virginia income tax can be
determined with reasonable certainty and substantiated. Generally, this deter-
mination must be made for each distribution to each shareholder. The Virginia
Department of Taxation has adopted a policy, however, of allowing shareholders
to exclude from their Virginia taxable income the exempt portion of distribu-
tions from a regulated investment company even though the shareholders receive
distributions monthly but receive reports substantiating the exempt portion of
such distributions at less frequent intervals. Accordingly, if the Portfolio
receives taxable income, the Portfolio must determine the portion of income
that is exempt from Virginia income tax and provide such information to the
shareholders in accordance with the foregoing so that the shareholders may ex-
clude from Virginia taxable income the exempt portion of the distribution from
the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends paid by
the New Jersey Municipal Money Market Portfolio will not be subject to New Jer-
sey personal income tax. In accordance with the provisions of New Jersey law as
currently in effect, distributions paid by a "qualified investment fund" will
not be subject to the New Jersey personal income tax to the extent that the
distributions are attributable to income received as interest or gain from New
Jersey State-Specific Obligations, or as interest or gain from direct U.S. Gov-
ernment obligations. Distributions by a qualified investment fund that are at-
tributable to most other sources will be subject to the New Jersey personal in-
come tax. To be classified as a qualified investment fund, at least 80% of the
Portfolio's investments must consist of New Jersey State-Specific Obligations
or direct U.S. Government obligations; it must have no investments other than
interest-bearing obligations, obligations issued at a discount, and cash and
cash items (including receivables); and it must satisfy certain reporting obli-
gations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
42
<PAGE>
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
43
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Service Shares of the eight money market portfolios de-
scribed herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. Because of these "class expenses," the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The Fund offers various services and privileges in connection with its
Investor Shares that are not generally offered in connection with its Institu-
tional and Service Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Institutional or Investor Share classes, contact PFPC at (800) 441-7764 (Insti-
tutional Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
44
<PAGE>
How is Performance Calculated?
- --------------------------------------------------------------------------------
From time to time each Portfolio may advertise its "yield" and "effective
yield" for Service Shares. Both yield figures are based on historical earnings
and are not intended to indicate future performance. "Yield" refers to the in-
come generated by an investment in a Portfolio's Service Shares over a seven-
day period. This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. "Ef-
fective yield" is calculated similarly but, when annualized, the income earned
by an investment in a Portfolio's Service Shares is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. A Municipal Portfolio's "tax
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to the Portfolio's tax-free yield for
Service Shares.
The performance of Service Shares of a Portfolio may be compared to the perfor-
mance of mutual funds with similar investment objectives and to relevant indi-
ces, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the yield of Service Shares of a Portfolio may be compared
to data prepared by Lipper Analytical Services, Inc., CDA Investment Technolo-
gies, Inc. and Weisenberger Investment Company Service. Performance information
may also include evaluations of the Portfolios published in nationally recog-
nized ranking services, and information as reported by financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
45
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
46
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL
INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DIS-
TRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-----------------
MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO
THE MONEY
MARKET
PORTFOLIOS
SERVICE SHARES
Prospectus
January 16, 1996
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Investor A, Investor B and Investor C Shares of the
Money Market Portfolio,
U.S. Treasury Money Market Portfolio,
Municipal Money Market Portfolio,
New Jersey Municipal Money Market Portfolio,
North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio
Pennsylvania Municipal Money Market Portfolio and
Virginia Municpal Money Market Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Location
- -------------- --------
PART A PROSPECTUS
<S> <C>
1. Cover Page................................... Cover Page
2. Synopsis..................................... What Are The Expenses
Of The Portfolios?
3. Condensed Financial Information.............. What Are The Portfolios'
Financial Highlights?
4. General Description of Registrant............ Cover Page; What Are The
Portfolios?; What
Additional Investment
Policies Apply?; What
Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund....................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance................................ Inapplicable
6. Capital Stock and Other Securities........... How Frequently Are
Dividends And
Distributions Made To
Investors?; How Are Fund
Distributions Taxed?;
How Is The Fund
Organized?
7. Purchase of Securities Being Offered......... How Are Shares Purchased
And Redeemed?; How Is
Net Asset Value
Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase..................... How Are Shares Purchased
and Redeemed?
9. Legal Proceedings............................ Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS/SM/
THE MONEY MARKET PORTFOLIOS/INVESTOR SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following information has been added to the section entitled "What Are The
Portfolios' Financial Highlights?":
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolio's independent
accountants. This financial information should be read together with those
financial statements. Further information about the performance of the
Portfolio is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder reports may
be obtained from the Fund free of charge by calling (800) 441-7762.
New Jersey Municipal Money Market Portfolio/+/
----------------------------------------------
Investor A Class
----------------
<TABLE>
<CAPTION>
For the Period
1/16/96/1/ through
1/31/96
------------------
<S> <C>
Net asset value at beginning of
period................................ $ 1.00
-----------
Income from investment operations
Net investment income................ 0.00
Net realized gain (loss)............. --
-----------
Total from investment
operations......................... 0.00
-----------
Less distributions
Distributions from net investment
income........................... 0.00
Distributions from net realized
capital gains.................... --
-----------
Total distributions................ 0.00
-----------
Net asset value at end of period....... $ 1.00
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Period
1/16/96/1/ through
1/31/96
------------------
<S> <C>
Total return........................... 2.66%/(2)/
Ratios/Supplemental data
Net assets at end of period (in
thousands)......................... $ 21,662
Ratios of expenses to average
net assets
After advisory/administration
fee waivers........................ 0.71%/(2)/
Before advisory/administration
fee waivers........................ 1.20%/(2)/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers........................ 2.66%/(2)/
Before advisory/administration
fee waivers........................ 2.17%/(2)/
</TABLE>
____________________
/+/ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor New Jersey Municipal Money Market Portfolio") of Compass
Capital Group, which was organized as a Massachusetts business trust. On
January 13, 1996, the assets and liabilities of the Predecessor New Jersey
Municipal Money Market Portfolio were transferred to this Portfolio, and
were combined with the assets of a pre-existing portfolio of investments
maintained by the Fund.
/1/ Commencement of operations of Investor A Class. Prior to its transfer to
the Fund, the Predecessor New Jersey Municipal Money Market Portfolio
offered one class of shares, which is now known as the Service Class.
/2/ Annualized.
The last sentence in the last paragraph of the section entitled "Who Manages The
Fund? -- Investment Adviser and Sub-Adviser" has been replaced with the
following:
For the period from March 1, 1995 through January 13, 1996, the Predecessor
New Jersey Municipal Money Market Portfolio (as defined on page 17) paid
investment advisory fees, after voluntary fee waivers, to its former
adviser pursuant to the investment advisory agreement then in effect at the
annual rate of 0.40% of its average daily net assets. For the period from
January 13, 1996 through January 31, 1996, the New Jersey Municipal Money
Market Portfolio paid investment advisory fees, after voluntary fee
waivers, at the annual rate of 0.06% of its average daily net assets.
This Supplement is dated May 31, 1996 and relates to the Prospectus originally
dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Money Market Portfolios Investor Shares January 16, 1996
- --------------------------------------------------------------------------------
Compass Capital Funds (SM) ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This Prospectus
describes the Investor Shares of eight of those portfolios
(the "Portfolios"):
. Money Market Portfolio
. U.S. Treasury Money Market Portfolio
. Municipal Money Market Portfolio
. New Jersey Municipal Money Market Portfolio
. North Carolina Municipal Money Market Portfolio
. Ohio Municipal Money Market Portfolio
. Pennsylvania Municipal Money Market Portfolio
. Virginia Municipal Money Market Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE THAT
THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 18.
COMPASS LIPPER PEER GROUP
CAPITAL
PORTFOLIO
Money Market Money Market Instrument Funds
U.S. Treasury U.S. Treasury Money Market Funds
Money Market
Municipal Tax-Exempt Money Market Funds
Money Market
NJ Municipal NJ Tax-Exempt Money Market Funds
Money Market
NC Municipal Other States Tax-Exempt Money Market Funds
Money Market
OH Municipal Ohio Tax-Exempt Money Market Funds
Money Market
PA Municipal PA Tax-Exempt Money Market Funds
Money Market
VA Municipal Other States Tax-Exempt Money Market Funds
Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. PNC Institutional Management Corporation
("PIMC") serves as the sub-adviser to the Portfolios as de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 5 of to find descriptions of
PORTFOLIOS the Portfolios, including the investment objectives, portfolio
management styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective, or that any Portfolio will be able
MONEY MARKET to maintain a stable net asset value of $1.00 per share. Cer-
INVESTING tain Portfolios may invest in U.S. dollar-denominated instru-
ments of foreign issuers or municipal securities backed by the
credit of foreign banks, which may be subject to risks in ad-
dition to those inherent in U.S. investments. Each state-spe-
cific municipal Portfolio will concentrate in the securities
of issuers located in a particular state, and is non-diversi-
fied, which means that its performance may be dependent upon
the performance of a smaller number of securities than the
other Portfolios, which are considered diversified. See "What
Additional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are Shares
CAPITAL FUNDS Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 10
What Are The Portfolios?..................................... 18
What Additional Investment Policies And Risks Apply?......... 22
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 28
Who Manages The Fund?........................................ 30
How Are Shares Purchased?.................................... 34
How Are Shares Redeemed?..................................... 36
What Are The Shareholder Features Of The Fund?............... 38
How Is Net Asset Value Calculated?........................... 41
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 42
How Are Fund Distributions Taxed?............................ 43
How Is The Fund Organized?................................... 48
How Is Performance Calculated?............................... 49
How Can I Get More Information?.............................. 50
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Investor Shares of the Portfolios after fee waivers for the current fiscal
year ending September 30, 1996 as a percentage of average daily net assets. An
example based on the summary is also shown.
<TABLE>
<CAPTION>
MONEY U.S. TREASURY MUNICIPAL
MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/1/) .06% .06% .06% .06% .06% .06% .06% .06% .06%
12b-1 fees(/2/) .10 .75 .75% .10 .75 .75 .10 .75 .75
Other operating
expenses (after
fee
waivers)(/1/) .70 .55 .55 .70 .55 .55 .70 .55 .55
--- --- --- --- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00 .15 .00 .00
Other expenses .30 .30 .30 .30 .30 .30 .30 .30 .30
----- ---- ---- ----- ---- ---- ----- ---- ----
Total Portfolio
operating
expense (after
fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% for each class of each
Portfolio (.44% for the Investor A Shares of the Money Market Portfolio)
and administration fees would be .17% for each class of the Money Market
Portfolio and .18% for each class of the U.S. Treasury Money Market and
Municipal Money Market Portfolios. PAMG and the Portfolios' administrators
are under no obligation to waive or continue waiving their fees, but have
informed the Fund that they expect to waive fees as necessary to maintain
the Portfolios' total operating expenses during the remainder of the cur-
rent fiscal year at the levels set forth in the table. The information in
the table is based on the advisory fees, administration fees and other ex-
penses payable after fee waivers for the fiscal year ended September 30,
1995, as restated to reflect current expenses and fee waivers. Without
waivers, "Other operating expenses" would be: (i) .73%, .75% and .76%, re-
spectively, for Investor A Shares; (ii) .58% .60% and .61%, respectively,
for Investor B Shares; and (iii) .58%, .60% and .61%, respectively, for
Investor C Shares; and "Total Portfolio Operating Expenses" would be:
(iv) 1.27%, 1.29% and 1.30%, respectively, for Investor A Shares; (v)
1.77%, 1.79% and 1.80%, respectively, for Investor B Shares; and (vi)
1.77%, 1.79% and 1.80%, respectively, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the National As-
sociation of Securities Dealers, Inc. ("NASD").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY NORTH CAROLINA OHIO
MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory Fees
(after fee
waivers)(/1/) .05% .05% .05% .06% .06% .06% .06% .06% .06%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75 .10 .75 .75
Other operating
expenses (after
fee
waivers)(/1/) .71 .56 .56 .70 .55 .55 .70 .55 .55
----- ----- ----- ----- ----- ----- ----- ----- -----
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00 .15 .00 .00
Other expenses .31 .31 .31 .30 .30 .30 .30 .30 .30
----- ---- ---- ----- ---- ---- ----- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
The information in the table is based on the advisory fees, administration
fees and other expenses payable after fee waivers for the fiscal year ended
September 30, 1995, as restated to reflect current expenses and fee waiv-
ers. Without waivers, "Other operating expenses" would be: (i) .86%, .82%
and .77%, respectively, for Investor A Shares; (ii) .71%, .67% and .62%,
respectively, for Investor B Shares; and (iii) .71%, .67% and .62%, respec-
tively, for Investor C Shares; and "Total Portfolio operating expenses"
would be: (iv) 1.41%, 1.37%, and 1.32%, respectively, for Investor A
Shares; (v) 1.91%, 1.87%, and 1.82%, respectively, for Investor B Shares;
and (vi) 1.91%, 1.87% and 1.82%, respectively, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA VIRGINIA
MUNICIPAL MUNICIPAL
MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)(/1/) .06% .06% .06% .05% .05% .05%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75
Other operating expenses
(after fee
waivers)(/1/) .70 .55 .55 .71 .56 .56
----- ------ ------ ----- ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .00 .00 .15 .00 .00
Other expenses .30 .30 .30 .31 .31 .31
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ====== ====== ===== ====== ======
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
The information in the table is based on the advisory fees, administration
fees and other expenses payable after fee waivers for the fiscal year ended
September 30, 1995, as restated to reflect current expenses and fee waiv-
ers. Without waivers, "Other operating expenses" would be: (i) .75% and
.86%, respectively, for Investor A Shares; (ii) .60% and .71%, respective-
ly, for Investor B Shares; and (iii) .60% and .71%, respectively, for In-
vestor C Shares; and "Total Portfolio operating expenses" would be: (iv)
1.30% and 1.41%, respectively, for Investor A Shares; (v) 1.80% and 1.91%,
respectively, for Investor B Shares; and (vi) 1.80% and 1.91%, respective-
ly, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the NASD.
8
<PAGE>
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market
A Shares $ 9 $27 $48 $106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
U.S. Treasury Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
New Jersey Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
North Carolina Municipal Money
Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Ohio Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Pennsylvania Municipal Money
Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Virginia Municipal Money
Portfolio
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
</TABLE>
* These expense figures do not reflect the imposition of the deferred sales
charge which may be deducted upon the redemption of Investor B or Investor C
Shares of a Portfolio received in an exchange transaction for Investor B or
Investor C Shares of a non-money market investment portfolio of the Fund.
See "What Are The Shareholder Features Of The Fund?--Exchange Privilege."
** Based on the conversion of Investor B Shares to Investor A Shares after
eight years (applies to shares received in an exchange transaction for In-
vestor B Shares of an equity portfolio of the Fund).
*** Based on the conversion of Investor B Shares to Investor A Shares after
seven years (applies to shares received in an exchange transaction for In-
vestor B Shares of a fixed income portfolio of the Fund).
The foregoing Tables and Example are intended to assist investors in under-
standing the expenses the Portfolios pay. Investors bear these expenses either
directly or indirectly. They do not reflect any charges that may be imposed by
brokers or other institutions directly on their customer accounts in connection
with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
9
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and, except for the period
March 31, 1995 through August 31, 1995 with respect to the New
Jersey Municipal Money Market Portfolio, has been audited by
the Portfolios' independent accountants. This financial infor-
mation should be read together with those financial state-
ments. For the periods shown, the New Jersey Municipal Money
Market Portfolio offered only one class of shares to both in-
stitutional and retail investors. For the period shown there
were no outstanding Investor Shares of the Virginia Municipal
Money Market Portfolio. Further information about the perfor-
mance of the Portfolios is available in the annual shareholder
reports. Both the Statement of Additional Information and the
annual shareholder reports may be obtained from the Fund free
of charge by calling (800) 441-7762.
10
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 1/13/93/1/ 9/15/95/1/
ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/95
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment
operations
Net investment income 0.0511 0.0308 0.0188 0.0020
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment
operations 0.0511 0.0308 0.0188 0.0020
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0511) (0.0308) (0.0188) (0.0020)
Distributions from net
realized capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0511) (0.0308) (0.0188) (0.0020)
-------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 5.23% 3.12% 1.89% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $ 10,185 $ 4,342 $ 49 $ 27
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.81% 0.75% 0.67%/2/ 1.34%/2/
Before advisory/administration
fee waivers 1.19% 1.16% 0.78%/2/ 1.72%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.15% 3.39% 2.62%/2/ 4.58%/2/
Before advisory/administration
fee waivers 4.78% 2.98% 2.51%/2/ 4.20%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 11/2/92/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0311 0.0193 0.0181
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0311 0.0193 0.0181
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0311) (0.0193) (0.0181)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0311) (0.0193) (0.0181)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.15% 1.95% 1.83%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 20 $ 41 $ 15
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.79% 0.75% 0.72%/2/
Before advisory/administration fee waivers 1.23% 1.23% 0.83%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.08% 2.05% 2.23%/2/
Before advisory/administration fee waivers 2.64% 1.58% 2.12%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 1/14/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0501 0.0309 0.0183
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0501 0.0309 0.0183
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0501) (0.0309) (0.0183)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0501) (0.0309) (0.0183)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 5.13% 3.11% 1.85%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 1,285 $ 1,656 $ 50
Ratios of expenses to average net assets
After advisory/administration fee
waivers 0.80% 0.75% 0.65%/2/
Before advisory/administration fee
waivers 1.21% 1.20% 0.78%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.03% 3.60% 2.57%/2/
Before advisory/administration fee
waivers 4.62% 3.14% 2.44%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR 10/5/93/1/
ENDED THROUGH
9/30/95 9/30/94
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00
-------- --------
Income from investment operations
Net investment income 0.0310 0.0199
Net realized gain (loss) on investments - - - -
-------- --------
Total from investment operations 0.0310 0.0199
-------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0310) (0.0199)
Distributions from net realized capital gains - - - -
-------- --------
Total distributions (0.0310) (0.0199)
-------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00
======== ========
Total return 3.15% 2.01%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 75 $ 28
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.80% 0.62%/2/
Before advisory/administration fee waivers 1.26% 1.26%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 3.02% 1.94%/2/
Before advisory/administration fee waivers 2.56% 1.30%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR 12/28/93/1/
ENDED THROUGH
9/30/95 9/30/94
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00
-------- --------
Income from investment operations
Net investment income 0.0302 0.0153
Net realized gain (loss) on investments - - - -
-------- --------
Total from investment operations 0.0302 0.0153
-------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0302) (0.0153)
Distributions from net realized capital gains - - - -
-------- --------
Total distributions (0.0302) (0.0153)
-------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00
======== ========
Total return 3.06% 1.58%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 750 $ 139
Ratios of expenses to average net assets
After advisory/administration fee waivers .82% 0.65%/2/
Before advisory/administration fee waivers 1.24% 1.22%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.03% 2.11%/2/
Before advisory/administration fee waivers 2.61% 1.54%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
2/14/95/1/
THROUGH
9/30/95
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00
-------
Income from investment operations
Net investment income 0.0194
Net realized gain (loss) on investments - -
-------
Total from investment operations 0.0194
-------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0194)
Distributions from net realized capital gains - -
-------
Total distributions (0.0194)
-------
NET ASSET VALUE AT END OF PERIOD $ 1.00
=======
Total return 1.95%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 53
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.83%/2/
Before advisory/administration fee waivers 1.36%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 3.05%/2/
Before advisory/administration fee waivers 2.52%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD FOR THE PERIOD
ENDED FISCAL YEAR FISCAL YEAR FISCAL YEAR JULY 1, 1991/1/
AUGUST 31, 1995 ENDED ENDED ENDED TO
(UNAUDITED) FEBRUARY 28, 1995 FEBRUARY 28, 1994 FEBRUARY 28, 1993 FEBRUARY 28, 1992
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.02 0.02 0.02 0.02 0.02
Net realized gain (loss)
on investments - - - - - - - - - -
------- ------- ------- ------- -------
Total from investment
operations 0.02 0.02 0.02 0.02 0.02
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) (0.02) (0.02) (0.02) (0.02)
Distributions from net
realized capital gains - - - - - - - - - -
------- ------- ------- ------- -------
Total distributions (0.02) (0.02) (0.02) (0.02) (0.02)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return 3.36% 2.46% 1.79% 2.19% 3.53%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $49,628 $43,610 $39,408 $38,836 $35,005
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.68%/2/ 0.63% 0.65% 0.73% 0.47%/2/
Before
advisory/administration
fee waivers 0.68%/2/ 0.70% 0.72% 0.76% 0.62%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.30%/2/ 2.46% 1.77% 2.17% 3.44%/2/
Before
advisory/administration
fee waivers 3.30%/2/ 2.39% 1.70% 2.14% 3.29%/2/
</TABLE>
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Money Market Fund, a separate investment portfolio (the "Predecessor New Jersey
Municipal Money Market Portfolio") of Compass Capital Group, which was orga-
nized as a Massachusetts business trust. On January 12, 1996, the assets and
liabilities of the Predecessor New Jersey Municipal Money Market Portfolio were
transferred to this Portfolio, which had no prior operating history.
/1/Commencement of operations.
/2/Annualized.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of principal.
The Portfolio may invest in a broad range of short-term, high
quality, U.S. dollar-denominated instruments, such as govern-
ment, bank, commercial and other obligations, that are avail-
able in the money markets. In particular, the Portfolio may
invest in:
(A) U.S. dollar-denominated obligations issued or supported by
the credit of U.S. or foreign banks or savings institu-
tions with total assets in excess of $1 billion (including
obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) A-2 or higher by
Standard & Poor's Ratings Group ("S&P"), Prime-2 or higher
by Moody's Investors Service, Inc. ("Moody's"), Duff 2 or
higher by Duff & Phelps Credit Co. ("D&P"), F-2 or higher
by Fitch Investors Service, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW"), as well as high
quality corporate bonds rated (at the time of purchase) AA
or higher by S&P, D&P, Fitch or TBW or Aa or higher by
Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations
and credit card receivables);
(E) securities issued or guaranteed as to principal and inter-
est by the U.S. Government or by its agencies or instru-
mentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign governments or their political subdivisions, agencies
or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
18
<PAGE>
U.S. The investment objective of the U.S. Treasury Money Market Port-
TREASURY folio is to provide as high a level of current interest income
MONEY as is consistent with maintaining liquidity and stability of
MARKET principal. It pursues this objective by investing exclusively in
PORTFOLIO short-term bills, notes and other obligations issued or guaran-
teed by the U.S. Treasury and repurchase agreements relating to
such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfolio
PORTFOLIOS is to provide as high a level of current interest income exempt
from Federal income taxes as is consistent with maintaining li-
quidity and stability of principal. It pursues this objective by
investing substantially all of its assets in short-term obliga-
tions issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authori-
ties ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market Port-
folio (the "State-Specific Municipal Portfolios") is, for each
Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the
specific state in which a Portfolio concentrates, as is consis-
tent with maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher
by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of compa-
rable quality as determined by the Portfolios' sub-adviser
under guidelines established by the Fund's Board of Trust-
ees; and
(E) municipal bonds and notes which are guaranteed as to princi-
pal and interest by the U.S. Government or an agency or in-
strumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
19
<PAGE>
During normal market conditions, at least 80% of each Munici-
pal Portfolio's net assets will be invested in securities
which are Municipal Obligations. In addition, under normal
conditions each State-Specific Municipal Portfolio intends to
invest at least 65% of its net assets in Municipal Obligations
of issuers located in the particular state indicated by its
name ("State-Specific Obligations"). The Municipal Money Mar-
ket Portfolio intends, on the other hand, to invest less than
25% of its total assets in Municipal Obligations of issuers
located in the same state. During temporary defensive periods,
each Municipal Portfolio may invest without limitation in ob-
ligations that are not Municipal Obligations and may hold
without limitation uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest
on AMT Paper that is received by taxpayers subject to the Fed-
eral alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its net as-
sets in Municipal Obligations the interest on which is paid
solely from revenues of similar projects. To the extent a
Portfolio's assets are invested in Municipal Obligations pay-
able from the revenues of similar projects or are invested in
private activity bonds, the Portfolio will be subject to the
peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested.
QUALITY, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, under
DIVERSIFICATION guidelines established by the Fund's Board of Trustees, to
present minimal credit risks and will be "Eligible Securities"
as defined by the SEC. Eligible Securities are (a) securities
that either (i) have short-term debt ratings at the time of
purchase in the two highest rating categories by at least two
unaffiliated nationally recognized statistical rating organi-
zations ("NRSROs") (or one NRSRO if the security is rated by
only one NRSRO), or (ii) are comparable in priority and secu-
rity with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including secu-
rities of issuers that have long-term but not short-term rat-
ings) but are of comparable quality as determined in accor-
dance with guidelines approved by the Board of Trustees.
20
<PAGE>
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not ex-
ceed 90 days. In no event will a Portfolio purchase securities
which mature more than 397 days from the date of purchase (ex-
cept for certain variable and floating rate instruments and se-
curities collateralizing repurchase agreements). Securities in
which the Portfolios invest may not earn as high a level of in-
come as longer term or lower quality securities, which generally
have greater market risk and more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal Money
Market Portfolios are classified as diversified portfolios, and
the State-Specific Municipal Portfolios are classified as non-
diversified portfolios, under the Investment Company Act of 1940
(the "1940 Act"). Investment returns on a non-diversified port-
folio typically are dependent upon the performance of a smaller
number of securities relative to the number held in a diversi-
fied portfolio. Consequently, the change in value of any one se-
curity may affect the overall value of a non-diversified portfo-
lio more than it would a diversified portfolio.
21
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios may invest in debt obligations of domes-
tic or foreign corporations and banks, and may acquire commercial obligations
issued by Canadian corporations and Canadian counterparts of U.S. corporations,
as well as Europaper, which is U.S. dollar-denominated commercial paper of a
foreign issuer. Bank obligations may include certificates of deposit, notes,
bankers' acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or sub-
sidiary by the terms of the specific obligation or by government regulation.
The Money Market Portfolio may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of its total as-
sets. For purposes of determining the permissibility of an investment in bank
obligations, the total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their respective in-
vestment objectives, the Portfolios may also purchase obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities. Obli-
gations of certain agencies and instrumentalities of the U.S. Government are
backed by the full faith and credit of the United States. Others are backed by
the right of the issuer to borrow from the U.S. Treasury or are backed only by
the credit of the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
22
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates. Each Municipal Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may not be as extensive as that which is made available by
public corporations, and the secondary market for Municipal Obligations may be
less liquid than that for taxable obligations. Accordingly, the ability of a
Municipal Portfolio to buy and sell tax-exempt securities may, at any particu-
lar time and with respect to any particular securities, be limited.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal or state income tax are rendered by counsel to
the respective issuers or sponsors at the time of issuance. The Fund and its
investment adviser will rely on such opinions and will not review independently
the underlying proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued by
private companies. Mortgage-related securities may include collateralized mort-
gage obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or
instrumentalities or issued by private companies. The average life of mortgage-
related securities is likely to be less than the original maturity of the mort-
gage pools underlying the securities as a result of mortgage prepayments. For
this and other reasons, a mortgage-
23
<PAGE>
related security's stated maturity may be shortened and, therefore, it may be
difficult to predict precisely the security's total return to the particular
Portfolio. In addition, in periods of falling interest rates, the rate of mort-
gage prepayments tends to increase. During such periods, the reinvestment of
prepayment proceeds by the particular Portfolio will generally be at lower
rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the in-
terest rate. Issuers of unrated variable and floating rate instruments must
satisfy the same criteria as set forth above for the particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements"). The
securities held subject to a repurchase agreement may have stated maturities
exceeding 13 months, so long as the repurchase agreement itself matures in less
than 13 months. Default by or bankruptcy of the seller would, however, expose
the Portfolio to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield available
in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a
24
<PAGE>
current basis equal in value to at least the market value of the loaned securi-
ties. A Portfolio may not make such loans in excess of 33 1/3% of the value of
its total assets. Securities loans involve risks of delay in receiving addi-
tional collateral or in recovering the loaned securities, or possibly loss of
rights in the collateral if the borrower of the securities becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, each Portfolio may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, GICs, and repur-
chase agreements and time deposits that do not provide for payment within seven
days after notice, without taking a reduced price, are subject to this 10% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illi-quid so long as the sub-adviser determines, acting under guidelines
approved and monitored by the Board, that an adequate trading market exists for
that security. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio during any period that qualified institu-
tional buyers become uninterested in purchasing these restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Municipal Portfolios in State-Spe-
cific Obligations raises special investment considerations. Changes in the eco-
nomic condition and governmental policies of a state and its political subdivi-
sions could adversely affect the value of a Portfolio's shares.
25
<PAGE>
Certain matters relating to the states in which the State-Specific Municipal
Portfolios invest are described below. For further information, see "Special
Considerations Regarding State-Specific Obligations" in the Statement of Addi-
tional Information.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cycli-
cal than in some other states and in the nation as a whole. Agriculture is an
important segment of the Ohio economy with over half the State's area devoted
to farming and approximately 15% of total employment in agribusiness. In prior
years, the State's overall unemployment rate was commonly somewhat higher than
the national figure. For example, the reported 1990 average monthly State rate
was 5.7%, compared to the 5.5% national figure. However, for the last four
years the State rates were below the national rates (5.5% versus 6.1% in
1994). The unemployment rate and its effects vary among particular geographic
areas of the State. There can be no assurance that future national, regional
or state-wide economic difficulties and the resulting impact on State or local
government finances generally will not adversely affect the market value of
Ohio Municipal Obligations held in the Portfolio or the ability of particular
obligors to make timely payments of debt service on (or lease payments relat-
ing to) those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases resulted in surpluses the following
three years; as of June 30, 1994, the General Fund has a surplus of $892.9
million. The deficit in the Commonwealth's unreserved/undesignated funds also
has been eliminated, and there was a surplus of $79.2 million as of June 30,
1994. Rising unemployment, a relatively high proportion of persons 65 and
older in the Commonwealth and court ordered increases in healthcare reimburse-
ment rates place increased pressures on the tax resources of the Commonwealth
and its municipalities. The Commonwealth has sold a substantial amount of
bonds over the past several years, but the debt burden remains moderate. The
recession has affected Pennsylvania's economic base, with income and job
growth at levels below national averages. Employment growth has shifted to the
trade and service sectors, with losses in more high-paid manufacturing posi-
tions. A new governor took office in January 1995, but the Commonwealth is
likely to continue to show fiscal restraint.
North Carolina. Growth of North Carolina tax revenues slowed considerably dur-
ing fiscal 1990-92 requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in the timing
of certain collections and payments, and other short-term budget adjustments,
that were needed to comply with North Carolina's constitutional mandate for a
balanced budget. Fiscal years 1993, 1994 and 1995, however, ended with a posi-
tive General Fund balance each year. By law, 25% of such positive fund balance
was required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve" (subject to a maximum reserve of 5% of the preceding fiscal
year's operating appropriation). An additional portion of such positive fund
balance was reserved in the General Fund as
26
<PAGE>
part of a "Reserve for Repair and Renovation of State Facilities," leaving the
remaining unrestricted fund balance at the end of each such year available for
future appropriations.
Virginia. Because of Northern Virginia, with its proximity to Washington, DC
and Hampton Roads, which has the nation's largest concentration of military in-
stallations, the Federal government has a greater impact on Virginia relative
to its size than any states other than Alaska and Hawaii. Virginia's economy
has continued to grow over the last decade, and while per capita income has
grown both faster and slower than the U.S. average from year to year, per cap-
ita income continues to be above the national average. Virginia's unreserved
general fund balances have continued to grow in recent years from a low in
1991. The Virginia Constitution requires a balanced budget and, since 1993, the
funding of a Revenue Stabilization Fund. Current debt levels are well below
limits established by the Constitution.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
27
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax, except during defensive periods or during periods
of unusual market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax or in instruments which are subject to AMT, ex-
cept during defensive periods or during periods of unusual market condi-
tions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal Portfolio will not hold any securities (except U.S. Government securities
and related repurchase agreements) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in securities of any
one issuer, except that up to 50% of a Portfolio's total assets may be invested
without regard to this limitation so long as no more than 25% of the Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S.
28
<PAGE>
Government securities and related repurchase agreements) to not more than 5% of
the value of its total assets at the time of purchase, except that 25% of the
value of its total assets may be invested in any one issuer for a period of up
to three business days. The Money Market Portfolio will also limit its invest-
ments in Eligible Securities that are not in the highest rating category as de-
termined by two NRSROs (or one NRSRO if the security is rated by only one
NRSRO) or, if unrated, are not of comparable quality, to 5% of its total as-
sets, with investments in any one such issuer being limited to no more than 1%
of its total assets or $1 million, whichever is greater, measured at the time
of purchase.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any commitment is no
longer in the best interests of a Portfolio, it will revoke the commitment by
terminating sales of shares of the Portfolio in the state involved.
29
<PAGE>
Who Manages The Fund?
- -------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of the Fund's Board of Trustees. The following in-
dividuals were elected by shareholders on January 4, 1996 to
serve as trustees of Compass Capital 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 Of-
ficer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT The Adviser to Compass Capital Funds is PNC Asset Management
ADVISER AND Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform
SUB-ADVISER advisory services for investment companies, and has its prin-
cipal offices at 1835 Market Street, Philadelphia, Pennsylva-
nia 19103. PAMG is an indirect wholly-owned subsidiary of PNC
Bank Corp., a multi-bank holding company. PNC Institutional
Management Corporation ("PIMC"), a wholly-owned subsidiary of
PAMG, serves as each Portfolio's sub-adviser. PIMC's princi-
pal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809.
As adviser, PAMG is responsible for the overall investment
management of the Portfolios. As sub-adviser, PIMC is respon-
sible for the day-to-day management of the Portfolios, and
generally makes all purchase and sale investment decisions
for the Portfolios. PIMC also provides research and credit
analysis. Portfolio transactions for a Portfolio may be di-
rected through broker/dealers who sell Fund shares, subject
to the requirements of best execution.
For their investment advisory and sub-advisory services, PAMG
and PIMC are entitled to fees, computed daily on a Portfolio-
by-Portfolio basis and payable monthly, at the annual rates
set forth below. All sub-advisory fees payable to PIMC are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
30
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL
FEE RATE FOR EACH PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
SUB-
AVERAGE DAILY NET INVESTMENT ADVISORY
ASSETS ADVISORY FEE FEE
----------------- ------------ --------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For more information about the advisory fees the Portfolios ex-
pect to pay for the current fiscal year, see "What Are the Ex-
penses of the Portfolios?" For the fiscal year ended September
30, 1995, the Portfolios (other than the New Jersey Municipal
Money Market Portfolio) paid investment advisory fees at the
following annual rates (expressed as a percentage of average
daily net assets) after voluntary fee waivers: Money Market
Portfolio, .08%; U.S. Treasury Money Market Portfolio, .08%; Mu-
nicipal Money Market Portfolio, .08%; Ohio Municipal Money Mar-
ket Portfolio, .07%; Pennsylvania Municipal Money Market Portfo-
lio, .09%; North Carolina Municipal Money Market Portfolio,
.05%; and Virginia Municipal Money Market Portfolio, 0%. For the
fiscal year ended February 28, 1995, the Predecessor New Jersey
Municipal Money Market Portfolio paid investment advisory fees,
after voluntary fee waivers, to Midlantic Bank, N.A., its former
adviser, pursuant to the advisory agreement then in effect, at
the annual rate of .40% of its average daily net assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the Fund's co-administrators. CCG and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned
subsidiary of Provident Distributors, Inc. ("PDI"). A majority
of the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .15% of the first $500
million of each Portfolio's average daily net assets, .13% of
the next $500 million of each Portfolio's average daily net as-
sets, .11% of
31
<PAGE>
the next $1 billion of each Portfolio's average daily net as-
sets and .10% of each Portfolio's average daily net assets in
excess of $2 billion. From time to time the Administrators
may waive some or all of their administration fees from a
Portfolio.
For information about the operating expenses the Portfolios
expect to pay for the current fiscal year, see "What Are The
Expenses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION Under the Fund's Distribution and Service Plan (the "Plan"),
AND SERVICE Investor Shares of the Portfolios bear the expense of pay-
PLAN ments ("distribution fees") made to CDI, as the Fund's dis-
tributor (the "Distributor"), or affiliates of PNC Bank, Na-
tional Association ("PNC Bank") for distribution and sales
support services. The distribution fees will be used primar-
ily to compensate the Distributor for distribution services
and to compensate the Distributor and PNC Bank affiliates for
sales support services provided in connection with the offer-
ing and sale of Investor Shares. The distribution fees may
also be used to reimburse the Distributor and PNC Bank affil-
iates for related expenses, including payments to brokers,
dealers, financial institutions and industry professionals
("Service Organizations") for sales support services and re-
lated expenses. Distribution fees payable under the Plan will
not exceed .10% (annualized) of the average daily net asset
value of each Portfolio's outstanding Investor A Shares and
.75% (annualized) of the average daily net asset value of
each Portfolio's outstanding Investor B Shares and Investor C
Shares. Payments under the Plan are not tied directly to out-
of-pocket expenses and therefore may be used by the recipi-
ents as they choose (for example, to defray their overhead
expenses).
Under the Plan, the Fund intends to enter into service agree-
ments with Service Organizations (including PNC Bank and its
affiliates) with respect to each class of Investor Shares
pursuant to which Service Organizations will render certain
support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder
servicing fee of up to .25% (annualized) of the average daily
net asset value of Investor Shares owned by their customers,
Service Organizations may provide one or more of the follow-
ing services: responding to customer inquiries relating to
the services performed by the Service Organization and to
customer inquiries concerning their in-
32
<PAGE>
vestments in Investor Shares; providing information periodically
to customers showing their positions in Investor Shares; and
other similar shareholder liaison services. In consideration for
a separate shareholder processing fee of up to .15% (annualized)
of the average daily net asset value of Investor Shares owned by
their customers, Service Organizations may provide one or more
of these additional services to such customers: processing pur-
chase and redemption requests from customers and placing orders
with the Fund's transfer agent or the Distributor; processing
dividend payments from the Fund on behalf of customers; provid-
ing sub-accounting with respect to Investor Shares beneficially
owned by customers or the information necessary for sub-
accounting; and other similar services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of In-
vestor Shares should read this Prospectus in light of the terms
and fees governing their accounts with Service Organizations.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. However, state securities laws may
differ from the interpretations of Federal law on this issue,
and banks and financial institutions may be required to register
as dealers pursuant to state law.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and other
expenses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
33
<PAGE>
How Are Shares Purchased?
- -------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor Shares through a
broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$100 minimum for subsequent investments. Purchases through the Automatic In-
vestment Plan described below are subject to a lower initial purchase minimum.
In addition, the minimum initial investment for employees of the Fund, the
Fund's investment adviser, sub-advisers, Distributor or transfer agent or em-
ployees of their affiliates is $100.
PURCHASES THROUGH BROKERS. Shares may be purchased through brokers which have
entered into dealer agreements with the Distributor.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described below,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its sharehold-
ers. Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it
to the transfer agent, together with a check in at least the minimum initial
purchase amount payable to Compass Capital Funds. An Account Application Form
may be obtained by calling (800) 441-7762. The name of the Portfolio with re-
spect to which shares are purchased must also appear on the check or Federal
Reserve Draft. Investors may also wire Federal funds in connection with the
purchase of shares. The wire instructions must include the name of the Portfo-
lio and include the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, an investor must call PFPC at (800)
441-7762 in order to confirm the wire instructions.
OTHER PURCHASE INFORMATION. Purchase orders for Investor Shares of the Portfo-
lios that are in proper form are executed at their net asset value per share
next determined after receipt by the Fund; however, orders will not be exe-
cuted until payments not made in Federal funds are converted to Federal funds
(which normally occurs within two Business Days of receipt) unless a credit-
worthy financial institution undertakes to pay for an order in Federal funds
by 4:00 p.m. (Eastern Time) the same Business Day an order is placed.
Under certain circumstances, the Fund may reject large individual purchase or-
ders received after 12:00 noon. The Fund may in its discretion reject any or-
der for shares.
34
<PAGE>
Investor B Shares and Investor C Shares of the Portfolios are available only to
the holders of Investor B Shares or Investor C Shares, respectively, in the
Fund's non-money market portfolios who wish to exchange their shares in such
portfolios for Shares in a Portfolio described in this Prospectus. Investor B
Shares of a Portfolio will automatically convert to Investor A Shares at the
time the Investor B Shares of the non-money market portfolio that were previ-
ously purchased would have converted. The purpose of the conversion is to re-
lieve the holders of Investor B Shares of the higher operating expenses charged
to Investor B Shares. The conversion from Investor B Shares to Investor A
Shares will take place at the net asset value of each class of shares at the
time of the conversion. After such conversion, an investor would hold Investor
A Shares subject to the operating expenses for Investor A Shares discussed be-
low. Upon each conversion of Investor B Shares that were not acquired through
reinvestment of dividends or distributions, a proportionate amount of Investor
B Shares that were acquired through reinvestment of dividends or distributions
will likewise automatically convert to Investor A Shares.
Shares of each Portfolio are sold on a continuous basis by CDI as the Distribu-
tor. CDI maintains its principal offices at 259 Radnor-Chester Road, Suite 120,
Radnor, Pennsylvania 19087. Purchases may be effected on weekdays on which both
the New York Stock Exchange and the Federal Reserve Bank of Philadelphia are
open for business (a "Business Day"). Payment for orders which are not received
or accepted will be returned after prompt inquiry. The issuance of shares is
recorded on the books of the Fund. No certificates will be issued for shares.
Payments for shares of a Portfolio may, in the discretion of the Fund's invest-
ment adviser, be made in the form of securities that are permissible invest-
ments for that Portfolio. Compass Capital reserves the right to reject any pur-
chase order or to waive the minimum initial investment requirement.
35
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge that may be charged with respect to Investor B
and Investor C Shares, there is no charge for a redemption. Shareholders may
also place redemption requests through a broker or other institution, which may
charge a fee for this service. When redeeming Investor Shares in the Portfo-
lios, shareholders should indicate whether they are redeeming Investor A
Shares, Investor B Shares or Investor C Shares. If a redeeming shareholder owns
both Investor A Shares and Investor B or Investor C Shares in the same Portfo-
lio, the Investor A Shares will be redeemed first unless the shareholder indi-
cates otherwise. Except as noted below, a request for redemption must be signed
by all persons in whose names the shares are registered. Signatures must con-
form exactly to the account registration. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record owner
at the record address, or if the shareholder is a corporation, partnership,
trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding Investor A Share certificates
must send their certificates with the redemption request. Additional documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
REDEMPTION BY CHECK. Upon request, the Fund will provide the holders of In-
vestor A Shares with checkwriting privileges. An investor wishing to use this
checkwriting redemption procedure must complete the checkwriting application
and signature card when completing the account application. Investors inter-
ested in obtaining the checkwriting option on existing accounts may contact
PFPC at (800) 441-7762 and application forms will be provided. The checkwriting
option is not available in connection with the redemption of Investor B or In-
vestor C Shares.
Upon receipt of the checkwriting application and signature card by PFPC, checks
will be forwarded to the investor. The minimum amount of a check is $100.
Checks may be made payable to anyone and are negotiated according to bank
clearing procedures. If more than one shareholder owns the account, each share-
holder must sign each check, unless an election has been made to permit
checkwriting by a limited number of signatures and such election is on file
with PFPC. Investor A Shares represented by a check redemption will continue to
earn daily income until the check is presented for payment. PNC Bank, as the
investor's agent, will cause the Fund to redeem a sufficient number of Investor
A Shares owned to cover the check. When redeeming Investor A Shares by check,
an investor should make certain that there is an adequate number of Investor A
Shares in the account to cover the amount of the check. If an insufficient num-
ber of Investor A Shares is held or if checks are not properly endorsed, they
may not be honored and a service charge may be incurred. Checks may not be pre-
sented for cash payments at the offices of PNC Bank. This limitation does not
affect checks used for the payment of bills or cash at other banks.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by
36
<PAGE>
Federal wire transfer to a single previously designated bank account. Once au-
thorization is on file, PFPC will honor requests by any person by telephone at
(800) 441-7762 (in Delaware call collect (302) 791-1194) or other means. The
minimum amount that may be sent by check is $500, while the minimum amount that
may be wired is $10,000. The Fund reserves the right to change these minimums
or to terminate these redemption privileges. If the proceeds of a redemption
would exceed $25,000, the redemption request must be in writing and will be
subject to the signature guarantee requirement described above. This privilege
may not be used to redeem Investor A Shares in certificated form. During peri-
ods of substantial economic or market change, telephone redemptions may be dif-
ficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box
8907, Wilmington, Delaware 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Fund does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written request (with
a guaranteed signature as described above) to Compass Capital Funds c/o PFPC,
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the minimum initial investment requirement amount as
the result of a redemption or an exchange request. A shareholder will be noti-
fied in writing that the value of the shareholder's account in a Portfolio is
less than the required amount and will be allowed 30 days to make additional
investments before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. While the Fund intends to use its best efforts to
maintain each Portfolio's net asset value per share at $1.00, the proceeds paid
on redemption may be more or less than the amount invested depending on a
share's net asset value at the time of redemption. Proceeds from the redemption
of Investor B and Investor C Shares will be reduced by the amount of any appli-
cable contingent deferred sales charge. Unless another payment option is used
as described above, payment for redeemed shares is normally made by check
mailed within seven days after acceptance by PFPC of the request and any other
necessary documents in proper order. Payment may, however, be postponed or the
right of redemption suspended as provided by the rules of the SEC. If the
shares to be redeemed have been recently purchased by check, the Fund's trans-
fer agent may delay the payment of redemption proceeds, which may be a period
of up to 15 days after the purchase date, pending a determination that the
check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
37
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
Compass Capital Funds offers shareholders many special features which enable an
investor to have greater investment flexibility as well as greater access to
information about the Fund throughout the investment period.
Additional information on each of these features is available from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor A Shares, B Shares and C Shares of each Portfolio
may be exchanged for shares of the same class of other portfolios of the Fund
which offer that class of shares, based on their respective net asset values,
subject to any applicable sales charge.
Unless an exemption applies, a front-end sales charge will be charged in con-
nection with exchanges for Investor A Shares of the Fund's non-money market in-
vestment portfolios. Similarly, exchanges of Series A Shares of a Portfolio for
Series B or Series C Shares of a non-money market portfolio of the Fund will
also be subject to a CDSC, unless an exemption applies. Investor B Shares of
the Portfolios are only exchangeable for Investor B Shares of the Fund's other
investment portfolios, and Investor C Shares of the Portfolios are only ex-
changeable for Investor C Shares of the Fund's other investment portfolios. In-
vestor B and Investor C Shares are exchangeable without the payment of any con-
tingent deferred sales charge at the time the exchange is made. In determining
the holding period for calculating the contingent deferred sales charge payable
on redemption of Investor B and Investor C Shares, the holding period of the
Investor B or Investor C Shares originally held will be added to the holding
period of the Investor B or Investor C Shares acquired through exchange. No ex-
change fee is imposed by the Fund.
Investor A Shares of money market portfolios of the Fund that were (1) acquired
through the use of the exchange privilege and (2) can be traced back to a pur-
chase of shares in one or more investment portfolios of the Fund for which a
sales charge was paid, can be exchanged for Investor A Shares of a non-money
market portfolio based on their respective net asset values. Such exchanges of
Investor A Shares may be subject to the difference between the sales charge
previously paid and the higher sales charge (if any) payable with respect to
the shares acquired in the exchange.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide this option, a Telephone Exchange Authorization Form must be filed with
PFPC. This form is available from PFPC. Once this election has been made, the
shareholder may simply contact PFPC by telephone at (800) 441-7762 (in Delaware
call collect (302) 791-1194) to request the exchange.
38
<PAGE>
During periods of substantial economic or market change, telephone exchanges
may be difficult to complete and shareholders may have to submit exchange re-
quests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. Before making an exchange request, shareholders should consult a tax or
other financial adviser and should consider the investment objective, policies
and restrictions of the investment portfolio into which the shareholder is mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request. Telephone
exchanges may be subject to limitations as to amount or frequency, and to other
restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may
arrange for periodic investments in that Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts.
39
<PAGE>
Upon commencement of the SWP, the account must have a current value of $10,000
or more in a Portfolio. Shareholders may elect to receive automatic cash pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed on the 25th day of the applicable month or, if such day is not a Business
Day, on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form which may be obtained
from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested and may not
hold share certificates. Shareholders may change or cancel the SWP at any time,
upon written notice to PFPC. No contingent deferred sales charge will be as-
sessed on redemptions of Investor B and Investor C Shares made through the SWP
that do not exceed 12% of an account's net asset value on an annualized basis.
For example, monthly, quarterly and semi-annual SWP redemptions of Investor B
and Investor C Shares will not be subject to the CDSC if they do not exceed 1%,
3% and 6%, respectively, of an account's net asset value on the redemption
date. SWP redemptions of Investor B and Investor C Shares in excess of this
limit are still subject to the applicable CDSC.
40
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on
each Business Day by dividing the value of all securities and other assets
owned by a Portfolio that are allocated to a particular class of shares, less
the liabilities charged to that class, by the number of shares of the class
that are outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
41
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- -------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time)do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for
that day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are sub-
ject to change by the Fund's Board of Trustees. The Portfolios do not expect
to realize net long-term capital gains.
Dividends are reinvested in additional full and fractional Investor Shares of
the same class on which the dividends are paid, unless a shareholder elects to
receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.
42
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain regardless of the length of time a
shareholder holds the Shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns for
informational purposes and in two circumstances such amounts, while exempt from
regular Federal income tax, are taxable to persons subject to alternative mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum and environmen-
tal tax purposes. In addition, investors should be aware of the possibility of
state and local alternative minimum or minimum income tax liability on interest
from private activity bonds. Shareholders who are recipients of Social Security
Act or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
43
<PAGE>
tion, shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to differ-
ent Federal income tax treatment. Future legislative or administrative changes
or court decisions may materially affect the tax consequences of investing in
the Portfolios.
OHIO TAXES. Individuals and estates that are subject to Ohio personal income
tax or municipal or school district income taxes in Ohio will not be subject to
such taxes on distributions from the Ohio Municipal Money Market Portfolio to
the extent that such distributions are properly attributable to interest on
Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Municipal Money Market Portfo-
lio in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends for Federal income tax purposes or are properly at-
tributable to interest on Ohio Municipal Obligations or U.S. Obligations. How-
ever, shares of the Ohio Municipal Money Market Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions properly attributable to gain on the sale, ex-
change or other disposition of Ohio Municipal Obligations will not be subject
to the Ohio personal income tax, or municipal or school district income taxes
in Ohio and will not be included in the net income base of the Ohio corporation
franchise tax. Distributions attributable to other sources will be subject to
the Ohio personal income tax and the Ohio corporation franchise tax.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to interest
realized by the Pennsylvania Municipal Money Market Portfolio from Pennsylvania
State-Specific Obligations or attributable to insurance proceeds on account of
such interest is not taxable to individuals, estates or trusts under the Per-
sonal Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal income tax purposes); to corporations under the Corporate Net
Income Tax (in the case of insurance proceeds, to the extent they are exempt
for Federal income tax purposes); nor to individuals under the Philadelphia
School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Portfolio of Pennsylvania State-Specific Obligations is taxable
under the Personal Income Tax, the Corporate Net Income Tax, and, unless these
assets were held by the Portfolio for more than six months, the School District
Tax.
This discussion does not address the extent, if any, to which shares of the
Pennsylvania Municipal Money Market Portfolio, and interest and gain earned by
the Portfolio, is subject to, or included in the measure of, special taxes im-
posed by the Commonwealth of Pennsylvania on banks and other financial institu-
tions or with respect to any privilege, excise, franchise or other
44
<PAGE>
tax imposed on business entities not discussed above (including the Corporate
Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania state-specific obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
NORTH CAROLINA TAXES. Interest received in the form of dividends from the North
Carolina Municipal Money Market Portfolio is exempt from North Carolina state
income tax to the extent the distributions represent interest on direct obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments thereof and their agencies, instrumentalities and authorities, are also
exempt from North Carolina state income tax. Distributions paid out of interest
earned on obligations that are merely backed or guaranteed by the U.S. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment securities or on obligations of other states (which the Portfolio may
acquire and hold for temporary or defensive purposes) are not exempt from North
Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of certain obligations of the
State of North Carolina or its subdivisions that were issued before July 1,
1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
VIRGINIA TAXES. Subject to the provisions discussed below, dividends paid to
shareholders by the Virginia Municipal Money Market Portfolio and derived from
interest on obligations of the Commonwealth of Virginia or of any political
subdivision or instrumentality of the Commonwealth or derived from interest or
dividends on obligations of the United States excludable from Virginia taxable
income under the laws of the United States, which obligations are issued in the
exercise of the borrowing power of the Commonwealth or the United States and
are backed by the full faith and credit of the Commonwealth or the United
States, will be exempt from the Virginia income tax. Dividends paid to share-
holders by the Portfolio and derived from interest on debt obligations of cer-
tain territories and possessions of the United States (those issued by Puerto
Rico, the Virgin Islands and Guam) will be exempt from the Virginia income tax.
To the extent a portion of the dividends are derived from interest on debt ob-
ligations other than those described above, such portion will be subject to the
Virginia income tax even though it may be excludable from gross income for Fed-
eral income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. To the extent any por-
tion of the dividends are derived from taxable interest for Virginia purposes
or from net short-term capital gains, such portion will be taxable to the
shareholders as ordinary income. The character of long-term capital
45
<PAGE>
gains realized and distributed by the Portfolio will flow through to its share-
holders regardless of how long the shareholders have held their shares. Capital
gains distributed to shareholders derived from Virginia obligations issued pur-
suant to special Virginia enabling legislation which provides a specific exemp-
tion for such gains will be exempt from Virginia income tax. Generally, inter-
est on indebtedness incurred by shareholders to purchase or carry shares of the
Portfolio will not be deductible for Virginia income tax purposes.
As a regulated investment company, the Portfolio may distribute dividends that
are exempt from the Virginia income tax to its shareholders if the Portfolio
satisfies all requirements for conduit treatment under Federal law and, at the
close of each quarter of its taxable year, at least 50% of the value of its to-
tal assets consists of obligations the interest on which is exempt from taxa-
tion under Federal law. If the Portfolio fails to qualify, no part of its divi-
dends will be exempt from the Virginia income tax.
When taxable income of a regulated investment company is commingled with exempt
income, all distributions of the income are presumed taxable to the sharehold-
ers unless the portion of income that is exempt from Virginia income tax can be
determined with reasonable certainty and substantiated. Generally, this deter-
mination must be made for each distribution to each shareholder. The Virginia
Department of Taxation has adopted a policy, however, of allowing shareholders
to exclude from their Virginia taxable income the exempt portion of distribu-
tions from a regulated investment company even though the shareholders receive
distributions monthly but receive reports substantiating the exempt portion of
such distributions at less frequent intervals. Accordingly, if the Portfolio
receives taxable income, the Portfolio must determine the portion of income
that is exempt from Virginia income tax and provide such information to the
shareholders in accordance with the foregoing so that the shareholders may ex-
clude from Virginia taxable income the exempt portion of the distribution from
the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends paid by
the New Jersey Municipal Money Market Portfolio will not be subject to New Jer-
sey personal income tax. In accordance with the provisions of New Jersey law as
currently in effect, distributions paid by a "qualified investment fund" will
not be subject to the New Jersey personal income tax to the extent that the
distributions are attributable to income received as interest or gain from New
Jersey State-Specific Obligations, or as interest or gain from direct U.S. Gov-
ernment obligations. Distributions by a qualified investment fund that are at-
tributable to most other sources will be subject to the New Jersey personal in-
come tax. To be classified as a qualified investment fund, at least 80% of the
Portfolio's investments must consist of New Jersey State-Specific Obligations
or direct U.S. Government obligations; it must have no investments other than
interest-bearing obligations, obligations issued at a discount, and cash and
cash items (including receivables); and it must satisfy certain reporting obli-
gations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
46
<PAGE>
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
47
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Investor Shares of the eight money market portfolios
described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. Because of these "class expenses", the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The Fund offers various services and privileges in connection with its
Investor Shares that are not generally offered in connection with its Institu-
tional and Service Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Service and Institutional share classes, contact PFPC at (800) 441-7762.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
48
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
From time to time each Portfolio may advertise its "yield" and "effective
yield" for each class of Investor Shares. Both yield figures are based on his-
torical earnings and are not intended to indicate future performance. "Yield"
refers to the income generated by an investment in a particular class of a
Portfolio's Investor Shares over a seven-day period. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. "Effective yield" is calculated simi-
larly but, when annualized, the income earned by an investment in a particular
class of a Portfolio's Investor Shares is assumed to be reinvested. The "effec-
tive yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. A Municipal Portfolio's "tax equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to the Portfolio's tax-free yield for a partic-
ular class of Investor Shares.
The performance of each class of Investor Shares of a Portfolio may be compared
to the performance of mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the yield of a particular class of Investor
Shares of a Portfolio may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Performance information may also include evaluations of the
Portfolios published in nationally recognized ranking services, and information
as reported by financial publications such as Business Week, Fortune, Institu-
tional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
49
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions, dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
50
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL
INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DIS-
TRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-----------------
MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO
THE MONEY
MARKET
PORTFOLIOS
INVESTOR SHARES
Prospectus
January 16, 1996
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Institutional Shares of the
Money Market Portfolio,
U.S. Treasury Money Market Portfolio,
Municipal Money Market Portfolio,
New Jersey Municipal Money Market Portfolio,
North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio,
Pennsylvania Municipal Money Market Portfolio and
Virginia Municipal Money Market Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Location
- -------------- --------
<S> <C>
PART A PROSPECTUS
1. Cover page................................... Cover Page
2. Synopsis..................................... What Are The Expenses Of
The Portfolios?
3. Condensed Financial Information.............. What Are the Portfolios'
Financial Highlights?
4. General Description of Registrant............ Cover Page; What Are The
Portfolios?; What
Additional Investment
Policies Apply?; What
Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund....................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance................................ Inapplicable
6. Capital Stock and Other Securities........... How Frequently Are
Dividends And
Distributions Made To
Investors?; How Are Fund
Distributions Taxed?;
How Is The Fund
Organized?
7. Purchase of Securities Being Offered......... How Are Shares Purchased
And Redeemed?; How Is
Net Asset Value
Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase..................... How Are Shares Purchased
and Redeemed?
9. Legal Proceedings............................ Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS/SM/
THE MONEY MARKET PORTFOLIOS/INSTITUTIONAL SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following information has been added to the section entitled "What Are The
Portfolios' Financial Highlights?":
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolio's independent
accountants. This financial information should be read together with those
financial statements. Further information about the performance of the
Portfolio is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder reports may
be obtained from the Fund free of charge by calling (800) 441-7762.
New Jersey Municipal Money Market Portfolio/+/
----------------------------------------------
Institutional Class
-------------------
<TABLE>
<CAPTION>
For the Period
1/16/96/1/ through
1/31/96
------------------
<S> <C>
Net asset value at beginning of
period................................ $ 1.00
-----------
Income from investment operations
Net investment income................ 0.00
Net realized gain (loss)............. --
-----------
Total from investment
operations......................... 0.00
-----------
Less distributions
Distributions from net investment
income........................... 0.00
Distributions from net realized
capital gains.................... --
-----------
Total distributions................ 0.00
-----------
Net asset value at end of period....... $ 1.00
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Period
1/16/96/1/ through
1/31/96
------------------
<S> <C>
Total return........................... 3.07%/(2)/
Ratios/Supplemental data
Net assets at end of period (in
thousands)......................... $ 4,195
Ratios of expenses to average
net asset assets
After advisory/administration
fee waivers........................ 0.29%/(2)/
Before advisory/administration
fee waivers........................ 0.78%/(2)/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers........................ 3.07%/(2)/
Before advisory/administration
fee waivers........................ 2.58%/(2)/
</TABLE>
- ----------------------
/+/ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor New Jersey Municipal Money Market Portfolio") of Compass
Capital Group, which was organized as a Massachusetts business trust. On
January 13, 1996, the assets and liabilities of the Predecessor New Jersey
Municipal Money Market Portfolio were transferred to this Portfolio, and
were combined with the assets of a pre-existing portfolio of investments
maintained by the Fund.
/1/ Commencement of operations of Institutional Class. Prior to its transfer
to the Fund the Predecessor New Jersey Municipal Money Market Portfolio
offered one class of shares, which is now known as the Service Class.
/2/ Annualized.
The last sentence in the last paragraph of the section entitled "Who Manages The
Fund? -- Investment Adviser and Sub-Adviser" has been replaced with the
following:
For the period from March 1, 1995 through January 13, 1996, the Predecessor
New Jersey Municipal Money Market Portfolio (as defined on page 14) paid
investment advisory fees, after voluntary fee waivers, to its former
adviser pursuant to the investment advisory agreement then in effect at the
annual rate of 0.40% of its average daily net assets. For the period from
January 13, 1996 through January 31, 1996, the New Jersey Municipal Money
Market Portfolio paid investment advisory fees, after voluntary fee
waivers, at the annual rate of 0.06% of its average daily net assets.
This Supplement is dated May 31, 1996 and relates to the Prospectus originally
dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Money Market Portfolios Institutional Shares January 16, 1996
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This Prospectus
describes the Institutional Shares of eight of those portfo-
lios (the "Portfolios"):
Money Market Portfolio
U.S. Treasury Money Market Portfolio
Municipal Money Market Portfolio
New Jersey Municipal Money Market Portfolio
North Carolina Municipal Money Market Portfolio
Ohio Municipal Money Market Portfolio
Pennsylvania Municipal Money Market Portfolio
Virginia Municipal Money Market Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE THAT
THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 15.
COMPASS
CAPITAL
PORTFOLIO LIPPER PEER GROUP
Money Market Institutional Money Market Instrument Funds
U.S. Treasury Institutional U.S. Treasury Money Market Funds
Money Market
Municipal Institutional Tax-Exempt Money Market Funds
Money Market
NJ Municipal NJ Tax-Exempt Money Market Funds
Money Market
NC Municipal Other States Tax-Exempt Money Market Funds
Money Market
OH Municipal Ohio Tax-Exempt Money Market Funds
Money Market
PA Municipal PA Tax-Exempt Money Market Funds
Money Market
VA Municipal Other States Tax-Exempt Money Market Funds
Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. PNC Institutional Management Corporation
("PIMC") serves as the sub-adviser to the Portfolios as de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 4 to find descriptions of the
PORTFOLIOS Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS investment objective, or that any Portfolio will be able to
IN MONEY maintain a stable net asset value of $1.00 per share. Certain
MARKET Portfolios may invest in U.S. dollar-denominated instruments of
INVESTING foreign issuers or municipal securities backed by the credit of
foreign banks, which may be subject to risks in addition to
those inherent in U.S. investments. Each state-specific munici-
pal Portfolio will concentrate in the securities of issuers lo-
cated in a particular state, and is non-diversified, which means
that its performance may be dependent upon the performance of a
smaller number of securities than the other Portfolios, which
are considered diversified. See "What Additional Investment Pol-
icies And Risks Apply?"
INVESTING For information on how to purchase and redeem shares of the
IN THE Portfolios, see "How Are Shares Purchased And Redeemed?"
COMPASS
CAPITAL
FUNDS
3
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 5
What Are The Portfolios' Financial Highlights?............... 7
What Are The Portfolios?..................................... 15
What Additional Investment Policies And Risks Apply?......... 19
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 25
Who Manages The Fund?........................................ 27
How Are Shares Purchased And Redeemed?....................... 30
How Is Net Asset Value Calculated?........................... 32
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 33
How Are Fund Distributions Taxed?............................ 34
How Is The Fund Organized?................................... 39
How Is Performance Calculated?............................... 40
How Can I Get More Information?.............................. 41
</TABLE>
4
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Institutional Shares of the Portfolios after fee waivers for the current fiscal
year ending September 30, 1996 as a percentage of average daily net assets. An
example based on the summary is also shown.
<TABLE>
<CAPTION>
NEW
JERSEY
U.S. TREASURY MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees (after fee
waivers) (/1/) .06% .06% .06% .05%
Other operating expenses .23 .23 .23 .24
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .13 .12 .11 .02
Other expenses .10 .11 .12 .22
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .29% .29% .29% .29%
==== ====== ====== ====
<CAPTION>
NORTH
CAROLINA OHIO PENNSYLVANIA VIRGINIA
MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .06% .06% .06% .05%
Other operating expenses .23 .23 .23 .24
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .05 .10 .12 .02
Other expenses .18 .13 .11 .22
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .29% .29% .29% .29%
==== ====== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .44% for the Money Market Portfolio
and .45% for each of the other Portfolios and administration fees would be
.17% for the Money Market Portfolio and .18% for each of the other Portfo-
lios. PAMG and the Portfolios' administrators are under no obligation to
waive or continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolios' total operat-
ing expenses during the remainder of the current fiscal year at the levels
set forth in the table. The information in the table is based on the advi-
sory fees, administration fees and other expenses payable after fee waivers
for the fiscal year ended September 30, 1995, as restated to reflect cur-
rent expenses and revised fee waivers. Without waivers, "Other operating
expenses" would be .26%, .28%, .29%, .39%, .35%, .30%, .28% and .39%, re-
spectively, and "Total Portfolio operating expenses" would be .70%, .73%,
.74%, .84%, .80%, .75%, .73% and .84%, respectively.
5
<PAGE>
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual return, and (2) redemption at the
end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market $ 3 $ 9 $16 $37
U.S. Treasury Money
Market 3 9 16 37
Municipal Money Market 3 9 16 37
New Jersey Municipal
Money Market 3 9 16 37
North Carolina Municipal
Money Market 3 9 16 37
Ohio Municipal Money
Market 3 9 16 37
Pennsylvania Municipal
Money Market 3 9 16 37
Virginia Municipal Money
Market 3 9 16 37
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They do not reflect any charges that may be imposed by
affiliates of the Portfolios' investment adviser or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and, except for the period March
1, 1995 through August 31, 1995 with respect to the New Jersey
Municipal Money Market Portfolio, has been audited by the Port-
folios' independent accountant. This financial information
should be read together with those financial statements. For the
periods shown, the New Jersey Municipal Money Market Portfolio
offered only one class of shares to both institutional and re-
tail investors. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder re-
ports. Both the Statement of Additional Information and the an-
nual shareholder reports may be obtained from the Fund free of
charge by calling (800) 441-7764.
7
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 8/2/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0564 0.0359 0.0054
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0564 0.0359 0.0054
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0564) (0.0359) (0.0054)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0564) (0.0359) (0.0054)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 5.79% 3.64% 0.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $654,157 $502,972 $435,586
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.27% 0.25% 0.27%/2/
Before advisory/administration fee waivers 0.64% 0.66% 0.38%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 5.66% 3.64% 3.01%/2/
Before advisory/administration fee waivers 5.28% 3.23% 2.90%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
8
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 8/2/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0555 0.0357 0.0049
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0555 0.0357 0.0049
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0555) (0.0357) (0.0049)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0555) (0.0357) (0.0049)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 5.69% 3.63% 0.49%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $120,540 $ 37,519 $ 13,513
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.27% 0.25% 0.25%/2/
Before advisory/administration fee waivers 0.69% 0.70% 0.38%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 5.64% 3.69% 3.01%/2/
Before advisory/administration fee waivers 5.22% 3.24% 2.88%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 8/2/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0364 0.0246 0.0040
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0364 0.0246 0.0040
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0364) (0.0246) (0.0040)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0364) (0.0246) (0.0040)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.70% 2.48% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 53,778 $ 30,608 $ 39,148
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.27% 0.25% 0.25%/2/
Before advisory/administration fee waivers 0.71% 0.73% 0.36%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.64% 2.48% 2.45%/2/
Before advisory/administration fee waivers 3.20% 2.01% 2.34%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/10/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0363 0.0252 0.0073
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0363 0.0252 0.0073
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0363) (0.0252) (0.0073)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0363) (0.0252) (0.0073)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.69% 2.55% 0.73%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 23,679 $ 10,521 $ 12,026
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.27% 0.13% 0.10%/2/
Before advisory/administration fee waivers 0.73% 0.77% 0.83%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.66% 2.56% 2.45%/2/
Before advisory/administration fee waivers 3.20% 1.93% 1.72%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/1/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0355 0.0247 0.0078
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0355 0.0247 0.0078
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0355) (0.0247) (0.0078)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0355) (0.0247) (0.0078)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.61% 2.49% 0.78%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $233,414 $158,102 $ 2,242
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.26% 0.16% 0.09%/2/
Before advisory/administration fee waivers 0.68% 0.73% 0.97%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.54% 2.64% 2.15%/2/
Before advisory/administration fee waivers 3.12% 2.07% 1.27%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA MUNICIPAL VIRGINIA MUNICIPAL
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 5/4/93/1/ YEAR 7/25/94/1/
ENDED ENDED THROUGH ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ----------- -----------
Income from investment
operations
Net investment income 0.0359 0.0249 0.0097 0.0368 0.0053
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- ----------- -----------
Total from investment
operations 0.0359 0.0249 0.0097 0.0368 0.0053
-------- -------- -------- ----------- -----------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0359) (0.0249) (0.0097) (0.0368) (0.0053)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- ----------- -----------
Total distributions (0.0359) (0.0249) (0.0097) (0.0053)
-------- -------- -------- ----------- -----------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== =========== ===========
Total return 3.65% 2.52% 0.97% 3.74% 0.53%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 76,673 $ 69,673 $ 34,135 $ 24,409 $ 13,831
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.21% 0.10% 0.10%/2/ 0.10% 0.10%/2/
Before
advisory/administration
fee waivers 0.74% 0.76% 0.81%/2/ 0.95% 1.02%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.61% 2.53% 2.35%/2/ 3.71% 2.89%/2/
Before
advisory/administration
fee waivers 3.08% 1.87% 1.64%/2/ 2.86% 1.97%/2/
</TABLE>
/1/Commencement of operations.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD PERIOD
ENDED FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91/1/
8/31/95 ENDED ENDED ENDED TO
(UNAUDITED) 02/28/95 02/28/94 02/28/93 02/28/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.02 0.02 0.02 0.02 0.02
Net realized gain (loss)
on investments - - - - - - - - - -
------- ------- ------- ------- -------
Total from investment
operations 0.02 0.02 0.02 0.02 0.02
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) (0.02) (0.02) (0.02) (0.02)
------- ------- ------- ------- -------
Distributions from net
realized capital gains - - - - - - - - - -
------- ------- ------- ------- -------
Total distributions (0.02) (0.02) (0.02) (0.02) (0.02)
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return 3.36% 2.46% 1.79% 2.19% 3.53%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $49,628 $43,610 $39,408 $38,836 $35,005
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.68%/2/ 0.63% 0.65% 0.73% 0.47%/2/
Before
advisory/administration
fee waivers 0.68%/2/ 0.70% 0.72% 0.76% 0.62%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.30%/2/ 2.46% 1.77% 2.17% 3.44%/2/
Before
advisory/administration
fee waivers 3.30%/2/ 2.39% 1.70% 2.14% 3.29%/2/
</TABLE>
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Money Market Fund, a separate investment portfolio (the "Predecessor New Jersey
Municipal Money Market Portfolio") of Compass Capital Group, which was orga-
nized as a Massachusetts business trust. On January 12, 1996, the assets and
liabilities of the Predecessor New Jersey Municipal Money Market Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-ex-
isting portfolio of investments maintained by the Fund.
/1/Commencement of operations.
/2/Annualized.
14
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO. The investment objective of the Money
Market Portfolio is to provide as high a level of current inter-
est income as is consistent with maintaining liquidity and sta-
bility of principal. The Portfolio may invest in a broad range
of short-term, high quality, U.S. dollar-denominated instru-
ments, such as government, bank, commercial and other obliga-
tions, that are available in the money markets. In particular,
the Portfolio may invest in:
(A) U.S. dollar-denominated obligations issued or supported by
the credit of U.S. or foreign banks or savings institutions
with total assets in excess of $1 billion (including obliga-
tions of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other is-
suers rated (at the time of purchase) A-2 or higher by Stan-
dard & Poor's Ratings Group ("S&P"), Prime-2 or higher by
Moody's Investors Service, Inc. ("Moody's"), Duff 2 or
higher by Duff & Phelps Credit Co. ("D&P"), F-2 or higher by
Fitch Investors Service, Inc. ("Fitch") or TBW-2 or higher
by Thomson BankWatch, Inc. ("TBW"), as well as high quality
corporate bonds rated (at the time of purchase) AA or higher
by S&P, D&P, Fitch or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of com-
parable quality as determined by the Portfolio's sub-adviser
under guidelines established by the Fund's Board of Trust-
ees;
(D) asset-backed securities (including interests in pools of as-
sets such as mortgages, installment purchase obligations and
credit card receivables);
(E) securities issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentali-
ties and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign governments or their political subdivisions, agencies
or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated U.S.
insurance companies;
(H) securities issued or guaranteed by state or local governmen-
tal bodies; and
(I) repurchase agreements relating to the above instruments.
15
<PAGE>
U.S. TREASURY MONEY MARKET PORTFOLIO. The investment objective
of the U.S. Treasury Money Market Portfolio is to provide as
high a level of current interest income as is consistent with
maintaining liquidity and stability of principal. It pursues
this objective by investing exclusively in short-term bills,
notes and other obligations issued or guaranteed by the U.S.
Treasury and repurchase agreements relating to such obliga-
tions.
MUNICIPAL PORTFOLIOS. The investment objective of the Munici-
pal Money Market Portfolio is to provide as high a level of
current interest income exempt from Federal income taxes as is
consistent with maintaining liquidity and stability of princi-
pal. It pursues this objective by investing substantially all
of its assets in short-term obligations issued by or on behalf
of states, territories and possessions of the United States,
the District of Columbia, and their political subdivisions,
agencies, instrumentalities and authorities ("Municipal Obli-
gations").
The investment objective of the New Jersey Municipal Money
Market Portfolio, North Carolina Municipal Money Market Port-
folio, Ohio Municipal Money Market Portfolio, Pennsylvania Mu-
nicipal Money Market Portfolio and Virginia Municipal Money
Market Portfolio (the "State-Specific Municipal Portfolios")
is, for each Portfolio, to seek as high a level of current in-
come exempt from Federal, and to the extent possible, state
income tax of the specific state in which a Portfolio concen-
trates, as is consistent with maintaining liquidity and sta-
bility of principal.
The Municipal Money Market Portfolio and the State-Specific
Municipal Portfolios (together, the "Municipal Portfolios")
seek to achieve their investment objectives by primarily in-
vesting in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2
or A-2 or higher by S&P, AA or higher by D&P or F-2 or
higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of com-
parable quality as determined by the Portfolios' sub-ad-
viser under guidelines established by the Fund's Board of
Trustees; and
(E) municipal bonds and notes which are guaranteed as to prin-
cipal and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly
or indirectly on the credit of the United States.
16
<PAGE>
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are
Municipal Obligations. In addition, under normal conditions each
State-Specific Municipal Portfolio intends to invest at least
65% of its net assets in Municipal Obligations of issuers lo-
cated in the particular state indicated by its name ("State-Spe-
cific Obligations"). The Municipal Money Market Portfolio in-
tends, on the other hand, to invest less than 25% of its total
assets in Municipal Obligations of issuers located in the same
state. During temporary defensive periods, each Municipal Port-
folio may invest without limitation in obligations that are not
Municipal Obligations and may hold without limitation uninvested
cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest on
AMT Paper that is received by taxpayers subject to the Federal
alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its net as-
sets in Municipal Obligations the interest on which is paid
solely from revenues of similar projects. To the extent a Port-
folio's assets are invested in Municipal Obligations payable
from the revenues of similar projects or are invested in private
activity bonds, the Portfolio will be subject to the peculiar
risks presented by the laws and economic conditions relating to
such projects and bonds to a greater extent than it would be if
its assets were not so invested.
QUALITY, MATURITY AND DIVERSIFICATION. All securities acquired
by the Portfolios will be determined at the time of purchase by
the Portfolios' sub-adviser, under guidelines established by the
Fund's Board of Trustees, to present minimal credit risks and
will be "Eligible Securities" as defined by the SEC. Eligible
Securities are (a) securities that either (i) have short-term
debt ratings at the time of purchase in the two highest rating
categories by at least two unaffiliated nationally recognized
statistical rating organizations ("NRSROs") (or one NRSRO if the
security is rated by only one NRSRO), or (ii) are comparable in
priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (in-
cluding securities of issuers that have long-term but not short-
term ratings) but are of comparable quality as determined in ac-
cordance with guidelines approved by the Board of Trustees.
17
<PAGE>
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not
exceed 90 days. In no event will a Portfolio purchase securi-
ties which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments and
securities collateralizing repurchase agreements). Securities
in which the Portfolios invest may not earn as high a level of
income as longer term or lower quality securities, which gen-
erally have greater market risk and more fluctuation in market
value.
The Money Market, U.S. Treasury Money Market and Municipal
Money Market Portfolios are classified as diversified portfo-
lios, and the State-Specific Municipal Portfolios are classi-
fied as non-diversified portfolios, under the Investment Com-
pany Act of 1940 (the "1940 Act"). Investment returns on a
non-diversified portfolio typically are dependent upon the
performance of a smaller number of securities relative to the
number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall
value of a non-diversified portfolio more than it would a di-
versified portfolio.
18
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios may invest in debt obligations of domes-
tic or foreign corporations and banks, and may acquire commercial obligations
issued by Canadian corporations and Canadian counterparts of U.S. corporations,
as well as Europaper, which is U.S. dollar-denominated commercial paper of a
foreign issuer. Bank obligations may include certificates of deposit, notes,
bankers' acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or sub-
sidiary by the terms of the specific obligation or by government regulation.
The Money Market Portfolio may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of its total as-
sets. For purposes of determining the permissibility of an investment in bank
obligations, the total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their respective in-
vestment objectives, the Portfolios may also purchase obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities. Obli-
gations of certain agencies and instrumentalities of the U.S. Government are
backed by the full faith and credit of the United States. Others are backed by
the right of the issuer to borrow from the U.S. Treasury or are backed only by
the credit of the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
19
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates. Each Municipal Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may not be as extensive as that which is made available by
public corporations, and the secondary market for Municipal Obligations may be
less liquid than that for taxable obligations. Accordingly, the ability of a
Municipal Portfolio to buy and sell tax-exempt securities may, at any particu-
lar time and with respect to any particular securities, be limited.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal or state income tax are rendered by counsel to
the respective issuers or sponsors at the time of issuance. The Fund and its
investment adviser will rely on such opinions and will not review independently
the underlying proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued by
private companies. Mortgage-related securities may include collateralized mort-
gage obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or
instrumentalities or issued by private companies. The average life of mortgage-
related securities is likely to be less than the original maturity of the mort-
gage pools underlying the securities as a result of mortgage prepayments. For
this and other reasons, a mortgage-related security's stated maturity may be
shortened and, therefore, it may be difficult to predict precisely the
security's total return to the particular Portfolio. In addition, in periods of
falling
20
<PAGE>
interest rates, the rate of mortgage prepayments tends to increase. During such
periods, the reinvestment of prepayment proceeds by the particular Portfolio
will generally be at lower rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the in-
terest rate. Issuers of unrated variable and floating rate instruments must
satisfy the same criteria as set forth above for the particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements"). The
securities held subject to a repurchase agreement may have stated maturities
exceeding 13 months, so long as the repurchase agreement itself matures in less
than 13 months. Default by or bankruptcy of the seller would, however, expose
the Portfolio to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield available
in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans
21
<PAGE>
involve risks of delay in receiving additional collateral or in recovering the
loaned securities, or possibly loss of rights in the collateral if the borrower
of the securities becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, each Portfolio may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, GICs, and repur-
chase agreements and time deposits that do not provide for payment within seven
days after notice, without taking a reduced price, are subject to this 10% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines, acting under guidelines
approved and monitored by the Board, that an adequate trading market exists for
that security. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio during any period that qualified institu-
tional buyers become uninterested in purchasing these restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Municipal Portfolios in State-
Specific Obligations raises special investment considerations. Changes in the
economic condition and governmental policies of a state and its political sub-
divisions could adversely affect the value of a Portfolio's shares. Certain
matters relating to the states in which the State-Specific Municipal Portfolios
invest are described below. For further information, see "Special Consideration
Regarding State-Specific Obligations" in the Statement of Additional
Information.
22
<PAGE>
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture is an im-
portant segment of the Ohio economy with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness. In prior
years, the State's overall unemployment rate was commonly somewhat higher than
the national figure. For example, the reported 1990 average monthly State rate
was 5.7%, compared to the 5.5% national figure. However, for the last four
years the State rates were below the national rates (5.5% versus 6.1% in 1994).
The unemployment rate and its effects vary among particular geographic areas of
the State. There can be no assurance that future national, regional or state-
wide economic difficulties and the resulting impact on State or local govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal Obligations held in the Portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund has a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January 1995, but the Commonwealth is likely to continue to show
fiscal restraint.
North Carolina. Growth of North Carolina tax revenues slowed considerably dur-
ing fiscal 1990-92 requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in the timing of
certain collections and payments, and other short-term budget adjustments, that
were needed to comply with North Carolina's constitutional mandate for a bal-
anced budget. Fiscal years 1993, 1994 and 1995, however, ended with a positive
General Fund balance each year. By law, 25% of such positive fund balance was
required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve" (subject to a maximum reserve of 5% of the preceding fiscal
year's operating appropriation). An additional portion of such positive fund
balance was reserved in the General Fund as part of a "Reserve for Repair and
Renovation of State Facilities," leaving the remaining unrestricted fund bal-
ance at the end of each such year available for future appropriations.
Virginia. Because of Northern Virginia, with its proximity to Washington, DC,
and Hampton Roads, which has the nation's largest concentration of military in-
stallations, the Federal govern-
23
<PAGE>
ment has a greater impact on Virginia relative to its size than any states
other than Alaska and Hawaii. Virginia's economy has continued to grow over the
last decade, and while per capita income has grown both faster and slower than
the U.S. average from year to year, per capita income continues to be above the
national average. Virginia's unreserved general fund balances have continued to
grow in recent years from a low in 1991. The Virginia Constitution requires a
balanced budget and, since 1993, the funding of a Revenue Stabilization Fund.
Current debt levels are well below limits established by the Constitution.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
24
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax, except during defensive periods or during periods
of unusual market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax or in instruments which are subject to AMT, ex-
cept during defensive periods or during periods of unusual market condi-
tions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal Portfolio will not hold any securities (except U.S. Government securities
and related repurchase agreements) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in securities of any
one issuer, except that up to 50% of a Portfolio's total assets may be invested
without regard to this limitation so long as no more than 25% of the Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S.
25
<PAGE>
Government securities and related repurchase agreements) to not more than 5% of
the value of its total assets at the time of purchase, except that 25% of the
value of its total assets may be invested in any one issuer for a period of up
to three business days. The Money Market Portfolio will also limit its invest-
ments in Eligible Securities that are not in the highest rating category as de-
termined by two NRSROs (or one NRSRO if the security is rated by only one
NRSRO) or, if unrated, are not of comparable quality, to 5% of its total as-
sets, with investments in any one such issuer being limited to no more than 1%
of its total assets or $1 million, whichever is greater, measured at the time
of purchase.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any commitment is no
longer in the best interests of a Portfolio, it will revoke the commitment by
terminating sales of shares of the Portfolio in the state involved.
26
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the di-
TRUSTEES rection of the Fund's Board of Trustees. The following individu-
als were elected by shareholders on January 4, 1996 to serve as
trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT The Adviser to Compass Capital Funds is PNC Asset Management
ADVISER AND Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform ad-
SUB-ADVISER visory services for investment companies, and has its principal
offices at 1835 Market Street, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company. PNC Institutional Management Corpo-
ration ("PIMC"), a wholly-owned subsidiary of PAMG, serves as
each Portfolio's sub-adviser. PIMC's principal business address
is 400 Bellevue Parkway, Wilmington, Delaware 19809.
As adviser, PAMG is responsible for the overall investment man-
agement of the Portfolios. As sub-adviser, PIMC is responsible
for the day-to-day management of the Portfolios, and generally
makes all purchase and sale investment decisions for the Portfo-
lios. PIMC also provides research and credit analysis. Portfolio
transactions for a Portfolio may be directed through
broker/dealers who sell Fund shares, subject to the requirements
of best execution.
For their investment advisory and sub-advisory services, PAMG
and PIMC are entitled to fees, computed daily on a Portfolio-by-
Portfolio basis and payable monthly, at the annual rates set
forth below. All sub-advisory fees payable to PIMC are paid by
PAMG, and do not represent an extra charge to the Portfolios.
27
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH
PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Average Daily Net Investment Sub-Advisory
Assets Advisory Fee Fee
----------------- ------------ ------------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For more information about the advisory fees the Portfolios
expect to pay for the current fiscal year, see "What Are The
Expenses Of The Portfolios?" For the fiscal year ended Septem-
ber 30, 1995, the Portfolios (other than the New Jersey Munic-
ipal Money Market Portfolio) paid investment advisory fees at
the following annual rates (expressed as a percentage of aver-
age daily net assets) after voluntary fee waivers: Money Mar-
ket Portfolio, .08%; U.S. Treasury Money Market Portfolio,
.08%; Municipal Money Market Portfolio, .08%; Ohio Municipal
Money Market Portfolio, .07%; Pennsylvania Municipal Money
Market Portfolio, .09%; North Carolina Municipal Money Market
Portfolio, .05%; and Virginia Municipal Money Market Portfo-
lio, 0%. For the fiscal year ended February 28, 1995, the
Predecessor New Jersey Municipal Money Market Portfolio paid
investment advisory fees, after voluntary fee waivers, to
Midlantic Bank, N.A., its former adviser, pursuant to the ad-
visory agreement then in effect, at the annual rate of .40% of
its average daily net assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). A majority of the outstanding stock of PDI is owned
by its officers and the remaining outstanding stock is owned
by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating
to the maintenance of financial records and fund accounting.
As compensation for these services, CCG is entitled to receive
a fee, computed daily and payable monthly, at an annual rate
of .03% of each Portfolio's average daily net assets, and PFPC
and CDI are entitled to receive a combined fee, computed daily
and payable monthly, at an annual rate of .15% of the first
$500 million of each Portfolio's average daily net assets,
.13% of the next $500 million of each Portfolio's average
daily net assets, .11% of
28
<PAGE>
the next $1 billion of each Portfolio's average daily net assets
and .10% of each Portfolio's average daily net assets in excess
of $2 billion. From time to time the Administrators may waive
some or all of their administration fees from a Portfolio.
For information about the operating expenses the Portfolios ex-
pect to pay for the current fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and other
expenses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
29
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Institutional Shares.
PURCHASE OF SHARES. Institutional Shares are offered to institutional
investors, including registered investment advisers with a minimum investment
of $500,000 and individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per share next deter-
mined after an order is received by PFPC. Shares may be purchased on any Busi-
ness Day. A "Business Day" is any weekday that the New York Stock Exchange (the
"NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for
business.
Purchase orders for each Portfolio except the U.S. Treasury Money Market Port-
folio may be placed by telephoning PFPC at (800) 441-7450 not later than 12:00
noon (Eastern Time) on a Business Day. Orders received before 12:00 noon (East-
ern Time) will be executed at 12:00 noon (Eastern Time). If payment for an or-
der is not received by 4:00 p.m. (Eastern Time), the order will be cancelled
and notice thereof will be given to the investor placing the order. Orders re-
ceived after 12:00 noon (Eastern Time) will not be accepted.
Purchase orders for the U.S. Treasury Money Market Portfolio may be placed by
telephoning PFPC at (800) 441-7450 no later than 4:00 p.m. (Eastern Time) on a
Business Day. Orders received before 12:00 noon (Eastern Time) will be executed
at 12:00 noon (Eastern Time); orders received after 12:00 noon (Eastern Time)
but before 4:00 p.m. (Eastern Time) will be executed at 4:00 p.m. (Eastern
Time). If payment for an order is not received by 4:00 p.m. (Eastern Time), the
order will be cancelled and notice thereof will be given to the investor plac-
ing the order. Orders will not be accepted after 4:00 p.m. (Eastern Time). Un-
der certain circumstances, the Fund may reject large individual purchase orders
received after 12:00 noon (Eastern Time).
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also, in
the discretion of the Fund, be made in the form of securities that are permis-
sible investments for the respective Portfolios. For further information, see
the Statement of Additional Information. The minimum initial investment for in-
stitutions is $5,000. There is no minimum subsequent investment requirement.
30
<PAGE>
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for Institutional Shares.
REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed
by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. The Fund and its service providers will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine in accordance with such procedures. While
the Fund intends to use its best efforts to maintain each Portfolio's net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount invested depending upon the net asset value of an Institutional
Share at the time of redemption.
Payment for redeemed shares for which a redemption order is received by PFPC
before 12:00 noon (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming institution on the same Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received between 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) or
on a day when the Fund's custodian is closed is normally wired in Federal funds
on the next Business Day following redemption on which the Fund's custodian is
open for business. The Fund reserves the right to wire redemption proceeds
within seven days after receiving a redemption order if, in the judgment of
PAMG, an earlier payment could adversely affect a Portfolio. No charge for wir-
ing redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count balance drops below $5,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000 on thirty days'
written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
31
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on each
Business Day by dividing the value of all securities and other assets owned by
a Portfolio that are allocated to its Institutional Shares, less the liabili-
ties charged to its Institutional Shares, by the number of its Institutional
Shares that are outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
32
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are subject
to change by the Fund's Board of Trustees. The Portfolios do not expect to re-
alize net long-term capital gains.
Dividends are reinvested in additional full and fractional Institutional Shares
of the same Portfolio which pays the dividends, unless a shareholder elects to
receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.
33
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain regardless of the length of time a
shareholder holds the Shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns for
informational purposes and in two circumstances such amounts, while exempt from
regular Federal income tax, are taxable to persons subject to alternative mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum and environmen-
tal tax purposes. In addition, investors should be aware of the possibility of
state and local alternative minimum or minimum income tax liability on interest
from private activity bonds. Shareholders who are recipients of Social Security
Act or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest
34
<PAGE>
on obligations which, if realized directly, would be exempt from such income
taxes. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
OHIO TAXES. Individuals and estates that are subject to Ohio personal income
tax or municipal or school district income taxes in Ohio will not be subject to
such taxes on distributions from the Ohio Municipal Money Market Portfolio to
the extent that such distributions are properly attributable to interest on
Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Municipal Money Market Portfo-
lio in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends for Federal income tax purposes or are properly at-
tributable to interest on Ohio Municipal Obligations or U.S. Obligations. How-
ever, shares of the Ohio Municipal Money Market Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions properly attributable to gain on the sale, ex-
change or other disposition of Ohio Municipal Obligations will not be subject
to the Ohio personal income tax, or municipal or school district income taxes
in Ohio and will not be included in the net income base of the Ohio corporation
franchise tax. Distributions attributable to other sources will be subject to
the Ohio personal income tax and the Ohio corporation franchise tax.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to interest
realized by the Pennsylvania Municipal Money Market Portfolio from Pennsylvania
State-Specific Obligations or attributable to insurance proceeds on account of
such interest is not taxable to individuals, estates or trusts under the Per-
sonal Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal income tax purposes); to corporations under the Corporate Net
Income Tax (in the case of insurance proceeds, to the extent they are exempt
for Federal income tax purposes); nor to individuals under the Philadelphia
School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Portfolio of Pennsylvania State-Specific Obligations is taxable
under the Personal Income Tax, the Corporate Net Income Tax, and, unless these
assets were held by the Portfolio for more than six months, the School District
Tax.
This discussion does not address the extent, if any, to which shares of the
Pennsylvania Municipal Money Market Portfolio, and interest and gain earned by
the Portfolio, is subject to, or included in the measure of, special taxes im-
posed by the Commonwealth of Pennsylvania
35
<PAGE>
on banks and other financial institutions or with respect to any privilege, ex-
cise, franchise or other tax imposed on business entities not discussed above
(including the Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania state-specific obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
NORTH CAROLINA TAXES. Interest received in the form of dividends from the North
Carolina Municipal Money Market Portfolio is exempt from North Carolina state
income tax to the extent the distributions represent interest on direct obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments thereof and their agencies, instrumentalities and authorities, are also
exempt from North Carolina state income tax. Distributions paid out of interest
earned on obligations that are merely backed or guaranteed by the U.S. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment securities or on obligations of other states (which the Portfolio may
acquire and hold for temporary or defensive purposes) are not exempt from North
Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of certain obligations of the
State of North Carolina or its subdivisions that were issued before July 1,
1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
VIRGINIA TAXES. Subject to the provisions discussed below, dividends paid to
shareholders by the Virginia Municipal Money Market Portfolio and derived from
interest on obligations of the Commonwealth of Virginia or of any political
subdivision or instrumentality of the Commonwealth or derived from interest or
dividends on obligations of the United States excludable from Virginia taxable
income under the laws of the United States, which obligations are issued in the
exercise of the borrowing power of the Commonwealth or the United States and
are backed by the full faith and credit of the Commonwealth or the United
States, will be exempt from the Virginia income tax. Dividends paid to share-
holders by the Portfolio and derived from interest on debt obligations of cer-
tain territories and possessions of the United States (those issued by Puerto
Rico, the Virgin Islands and Guam) will be exempt from the Virginia income tax.
To the extent a portion of the dividends are derived from interest on debt ob-
ligations other than those described above, such portion will be subject to the
Virginia income tax even though it may be excludable from gross income for Fed-
eral income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. To the extent any por-
tion of the dividends are derived from taxable interest for Virginia purposes
or from net short-term capital gains, such portion will be
36
<PAGE>
taxable to the shareholders as ordinary income. The character of long-term cap-
ital gains realized and distributed by the Portfolio will flow through to its
shareholders regardless of how long the shareholders have held their shares.
Capital gains distributed to shareholders derived from Virginia obligations is-
sued pursuant to special Virginia enabling legislation which provides a spe-
cific exemption for such gains will be exempt from Virginia income tax. Gener-
ally, interest on indebtedness incurred by shareholders to purchase or carry
shares of the Portfolio will not be deductible for Virginia income tax purpos-
es.
As a regulated investment company, the Portfolio may distribute dividends that
are exempt from the Virginia income tax to its shareholders if the Portfolio
satisfies all requirements for conduit treatment under Federal law and, at the
close of each quarter of its taxable year, at least 50% of the value of its to-
tal assets consists of obligations the interest on which is exempt from taxa-
tion under Federal law. If the Portfolio fails to qualify, no part of its divi-
dends will be exempt from the Virginia income tax.
When taxable income of a regulated investment company is commingled with exempt
income, all distributions of the income are presumed taxable to the sharehold-
ers unless the portion of income that is exempt from Virginia income tax can be
determined with reasonable certainty and substantiated. Generally, this deter-
mination must be made for each distribution to each shareholder. The Virginia
Department of Taxation has adopted a policy, however, of allowing shareholders
to exclude from their Virginia taxable income the exempt portion of distribu-
tions from a regulated investment company even though the shareholders receive
distributions monthly but receive reports substantiating the exempt portion of
such distributions at less frequent intervals. Accordingly, if the Portfolio
receives taxable income, the Portfolio must determine the portion of income
that is exempt from Virginia income tax and provide such information to the
shareholders in accordance with the foregoing so that the shareholders may ex-
clude from Virginia taxable income the exempt portion of the distribution from
the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends paid by
the New Jersey Municipal Money Market Portfolio will not be subject to New Jer-
sey personal income tax. In accordance with the provisions of New Jersey law as
currently in effect, distributions paid by a "qualified investment fund" will
not be subject to the New Jersey personal income tax to the extent that the
distributions are attributable to income received as interest or gain from New
Jersey State-Specific Obligations, or as interest or gain from direct U.S. Gov-
ernment obligations. Distributions by a qualified investment fund that are at-
tributable to most other sources will be subject to the New Jersey personal in-
come tax. To be classified as a qualified investment fund, at least 80% of the
Portfolio's investments must consist of New Jersey State-Specific Obligations
or direct U.S. Government obligations; it must have no investments other than
interest-bearing obligations, obligations issued at a discount, and cash and
cash items (including receivables); and it must satisfy certain reporting obli-
gations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
37
<PAGE>
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
38
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Institutional Shares of the eight money market portfo-
lios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. Because of these "class expenses", the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The Fund offers various services and privileges in connection with its
Investor Shares that are not generally offered in connection with its Institu-
tional and Service Shares, including an automatic investment plan, automatic
withdrawal plan and checkwriting. For further information regarding the Fund's
Service or Investor Share classes, contact PFPC at (800) 441-7764 (Service
Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
39
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
From time to time each Portfolio may advertise its "yield" and "effective
yield" for Institutional Shares. Both yield figures are based on historical
earnings and are not intended to indicate future performance. "Yield" refers to
the income generated by an investment in a Portfolio's Institutional Shares
over a seven-day period. This income is then "annualized." That is, the amount
of income generated by the investment during that week is assumed to be gener-
ated each week over a 52-week period and is shown as a percentage of the in-
vestment. "Effective yield" is calculated similarly but, when annualized, the
income earned by an investment in a Portfolio's Institutional Shares is assumed
to be reinvested. The "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment. A Mu-
nicipal Portfolio's "tax equivalent yield" may also be quoted, which shows the
level of taxable yield needed to produce an after-tax equivalent to the Portfo-
lio's tax-free yield for a particular class of Investor Shares.
The performance of Institutional Shares of a Portfolio may be compared to the
performance of mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the yield of Institutional Shares of a Portfolio may be
compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service. Performance in-
formation may also include evaluations of the Portfolios published in nation-
ally recognized ranking services, and information as reported by financial pub-
lications such as Business Week, Fortune, Institutional Investor, Money Maga-
zine, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
40
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current
dividend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
41
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL
INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
----------------
MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO
THE MONEY
MARKET
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
January 16, 1996
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Service Shares of the
Short Government Bond Portfolio,
Intermediate Government Portfolio,
Intermediate Bond Portfolio,
Core Bond Portfolio,
Managed Income Portfolio,
International Bond Portfolio,
Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and
Ohio Tax-Free Income Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Location
- -------------- --------
<S> <C>
PART A PROSPECTUS
1. Cover page................................... Cover Page
2. Synopsis..................................... What Are The Expenses of
The Portfolios?
3. Condensed Financial Information.............. What Are The Portfolios'
Financial Highlights?
4. General Description of Registrant............ Cover Page; What Are The
Portfolios?; What
Additional Investment
Policies Apply?; What
Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund....................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance................................ Inapplicable
6. Capital Stock and Other Securities........... How Frequently Are
Dividends And
Distributions Made To
Investors?; How Are Fund
Distributions Taxed?;
How Is The Fund
Organized?
7. Purchase of Securities Being Offered......... How Are Shares Purchased
And Redeemed?; How Is
Net Asset Value
Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase..................... How Are Shares Purchased
and Redeemed?
9. Legal Proceedings............................ Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS/SM/
THE BOND PORTFOLIOS/SERVICE SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following information has been added to the section entitled "What Are The
Portfolios' Financial Highlights?":
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolios' independent
accountants. This financial information should be read together with those
financial statements. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder reports may
be obtained from the Fund free of charge by calling (800) 441-7762.
<TABLE>
<CAPTION>
Short New Jersey
Government Tax-Free International
Bond Core Bond Income Bond
Portfolio/+/ Portfolio/+/ Portfolio+ Portfolio/+/
------------ ------------ ---------- -------------
For the For the For the For the
Period Period Period Period
1/13/96/1/ 1/13/96/1/ 3/1/95 3/1/95
through through through through
3/31/96 3/31/96 1/31/96/3/ 1/31/96/3/
<S> <C> <C> <C> <C>
Net asset value at beginning
of period....................... $9.91 $9.91 $10.94 $10.52
----- ----- ------ ------
Income from investment
operations
Net investment income.......... 0.11 0.11 0.46 0.62
Net gain (loss) on
investments and foreign
currency related
transactions
(both realized and
unrealized)................ (0.12) (0.30) 0.65 1.13
----- ----- ------ ------
Total from investment
operations................... (0.01) (0.19) 1.11 1.75
----- ----- ------ ------
Less distributions
Distributions from net
investment income.......... (0.11) (0.11) (0.44) (0.88)
Distributions from net
realized capital gains..... -- -- -- --
----- ----- ------ ------
Total distributions.......... (0.11) (0.11) (0.44) (0.88)
----- ----- ------ ------
Net asset value at end of
period......................... $9.79 $9.61 $11.61 $11.39
===== ===== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short New Jersey
Government Tax-Free International
Bond Core Bond Income Bond
Portfolio/+/ Portfolio/+/ Portfolio+ Portfolio/+/
------------ ------------ ---------- -------------
For the For the For the For the
Period Period Period Period
1/13/96/1/ 1/13/96/1/ 3/1/95 3/1/95
through through through through
3/31/96 3/31/96 1/31/96/3/ 1/31/96/3/
<S> <C> <C> <C> <C>
Total return..................... (0.11)%/4/ (1.90)%/4/ 10.35%/4/ 16.79%/4/
Ratios/Supplemental data
Net assets at end of period
(in thousands)............... $181,670 $232,040 $97,976 $37,627
Ratios of operating expenses
to average net assets
After advisory/
administration fee waivers... 0.85%/2,5/ 0.85%/2,5/ 0.88%/2/ 1.23%/2/
Before advisory/
administration fee waivers... 1.05%/2/ 1.10%/2/ 0.90%/2/ 1.23%/2/
Ratios of net investment
income to average net assets
After advisory/
administration fee waivers... 5.25%/2/ 5.46%/2/ 4.43%/2/ 5.62%/2/
Before advisory/
administration fee waivers... 5.05%/2/ 5.21%/2/ 4.41%/2/ 5.62%/2/
Portfolio turnover rate.......... 185% 723% 26% 159.00%
</TABLE>
_______________________
/+/ For information about the initial commencement of operations of these
Portfolios and their merger into the Fund in 1996, see the footnotes to the
Financial Highlights tables in the Prospectus. Prior to the merger, the
Short Government Bond Portfolio and Core Bond Portfolio each offered one
class of shares to institutional investors (now called Institutional
Shares), and the New Jersey Tax-Free Income Portfolio and International Bond
Portfolio each offered one class of shares to both institutional and retail
investors (now called Service Shares).
/1/ Commencement of operations of the Service Shares of this Portfolio.
/2/ Annualized.
/3/ Includes all activity of the prior class of shares before the Portfolio's
merger (January 13, 1996 for the New Jersey Tax-Free Income Portfolio and
February 13, 1996 for the International Bond Portfolio).
/4/ Not annualized.
/5/ Including interest expense, ratios for Short Government Bond and Core Bond
Portfolios would have been 1.18% and 0.94%, respectively, for the period
ended March 31, 1996. For the periods prior to March 31, 1996, interest
income was presented net of interest expense.
------------------------------------------
<PAGE>
The following paragraph has been inserted after the last paragraph in the
section entitled "What Additional Investment Policies And Risks Apply? --
Foreign Investments":
As of this date, the International Bond Portfolio has invested more than
25% of its total assets in the securities of issuers located in Germany.
Investments of 25% or more of the Portfolio's total assets in this or any
other country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries.
The fifth paragraph in the section entitled "Who Manages The Fund? -- Adviser
and Sub-Advisers" has been replaced with the following:
For their last fiscal year, the Intermediate Government Bond, Intermediate
Bond, Managed Income, Tax-Free Income, Pennsylvania Tax-Free Income and
Ohio Tax-Free Income Portfolios paid investment advisory fees at the
following annual rates (expressed as a percentage of average daily net
assets) after voluntary fee waivers: Intermediate Government Bond
Portfolio, .20%; Intermediate Bond Portfolio, .25%; Managed Income
Portfolio, .35%; Tax-Free Income Portfolio, 0%; Pennsylvania Tax-Free
Income Portfolio, .27%; and Ohio Tax-Free Income Portfolio, 0%. For the
period from July 1, 1995 through March 31, 1996, the Core Bond and Short
Government Bond Portfolios paid investment advisory fees at the following
annual rates (expressed as a percentage of average daily net assets) after
voluntary fee waivers: Core Bond Portfolio, .39%; and Short Government Bond
Portfolio, .28%. For the period from March 1, 1995 through January 31,
1996, the New Jersey Tax-Free Income and International Bond Portfolios paid
investment advisory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee waivers: New
Jersey Tax-Free Income Portfolio, .56%; and International Bond Portfolio,
.80%.
The fourth, fifth and sixth sentences of the section entitled "How Frequently
Are Dividends and Distributions Made To Shareholders?" have been replaced with
the following:
Each Portfolio will declare a dividend each day on "settled" shares (i.e.,
shares for which the particular Portfolio has received payment in Federal
funds) on the first Business Day after a purchase order is placed with the
Fund. Payments by check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year, substantially all of
the Portfolios' net investment income will be declared as dividends. The
amount of the daily dividend for each Portfolio will be based on periodic
projections of its net investment income. All dividends are paid within ten
days after the end of each month.
This Supplement is dated May 31, 1996 and relates to the Prospectus originally
dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Bond Portfolios Service Shares January 16, 1996
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This Prospec-
tus describes the Service Shares of ten of those portfolios
(the "Portfolios"):
Short Government Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond Portfolio
Managed Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
Ohio Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN
THE PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest in taxable bonds, and four of these
Portfolios invest in tax-exempt bonds. A detailed description of
each Portfolio begins on page 22.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCEMARK LIPPER PEER GROUP
<S> <C> <C>
Short Government Bond Merrill 1-3 Year Treasury Short U.S. Government
Index
Intermediate Government Lehman Brothers Intermediate U.S.
Bond Intermediate Government Government
Intermeditate Bond Lehman Brothers Intermediate
Intermediate Government/Corporate
Government/Corporate
Core Bond Lehman Aggregate Intermediate Investment
Grade Debt
Managed Income Salomon BIG Corporate Debt A-Rated
International Bond Salomon Non-U.S. Hedged General World Income
World Government Bond
Index
Tax-Free Income Lehman Municipal Bond General Municipal Debt
Index
PA Tax-Free Income Lehman Local GO Index PA Municipal Debt
NJ Tax-Free Income Lehman Local GO Index NJ Municipal Debt
OH Tax Free Income Lehman Local GO Index OH Municipal Debt
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc.
("BlackRock") serves as sub-adviser to each Portfolio except the
International Bond Portfolio, which is sub-advised by Morgan
Grenfell Investment Services Limited ("Morgan Grenfell").
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
BOND different directions in fixed income investing. You may wish to
PORTFOLIOS use the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?" and
CAPITAL FUNDS "What Special Purchase And Redemption Procedures May Apply?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 11
What Are The Portfolios?..................................... 22
What Are The Differences Among The Portfolios?............... 23
What Types of Securities Are In The Portfolios?.............. 24
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 25
What Additional Investment Policies And Risks Apply?......... 26
Who Manages The Fund?........................................ 38
How Are Shares Purchased And Redeemed?....................... 43
What Special Purchase And Redemption Procedures May Apply?... 45
How Is Net Asset Value Calculated?........................... 47
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 48
How Are Fund Distributions Taxed?............................ 49
How Is The Fund Organized?................................... 53
How Is Performance Calculated?............................... 54
How Can I Get More Information?.............................. 56
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Service Shares of the Portfolios after fee waivers for the current fiscal year
ending September 30, 1996 as a percentage of average daily net assets. An ex-
ample based on the summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE INTERMEDIATE
GOVERNMENT BOND GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .30% .30% .30%
Other operating expenses .55 .55 .55
-------- -------- ------
Administration fees (after fee
waivers)(/1/) .15 .15 .13
Shareholder servicing fees .15 .15 .15
Other expenses .25 .25 .27
------- ------- -----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .85% .85% .85%
======== ======== ======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are
under no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. The
information in the table is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended
September 30, 1995, as restated to reflect current expenses and fee waiv-
ers. Without waivers, "Other operating expenses" would be .63%, .63% and
.65%, respectively, and "Total Portfolio operating expenses" would be
1.13%, 1.13% and 1.15%, respectively.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED INCOME
CORE PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .35%
Other operating expenses .55 .53
------- -------
Administration fees (after fee waivers)(/1/) .15 .12
Shareholder servicing fees .15 .15
Other expenses .25 .26
------ ------
Total Portfolio operating expenses (after fee
waivers)(/1/) .85% .88%
======= =======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. The
information in the table is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended Sep-
tember 30, 1995, as restated to reflect current expenses and fee waivers.
Without waivers, "Other operating expenses" would be .63% and .64%, respec-
tively, and "Total Portfolio operating expenses" would be 1.13% and 1.14%,
respectively.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .55% .30% .30%
Other operating expenses .73 .55 .55
---------- -------- --------
Administration fees
(after fee
waivers)(/1/) .15 .13 .13
Shareholder servicing
fee .15 .15 .15
Other expenses .43 .27 .27
-------- ------- -------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) 1.28% .85% .85%
========== ======== ========
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50% and .50%, respectively,
and administration fees would be .23% for each Portfolio. In addition, the
Expense Summary reflects reimbursements made to the Tax-Free Income Port-
folio by the adviser. PAMG and the Portfolio's administrators are under no
obligation to waive fees or reimburse expenses, but have informed the Fund
that they expect to waive fees and reimburse expenses during the remainder
of the current fiscal year as necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the table. The information
in the table is based on the advisory and administration fees and other
expenses payable after fee waivers for the fiscal year ended September 30,
1995, as restated to reflect current expenses and fee waivers. Without
waivers, "Other operating expenses" would be .81%, .65% and .65%, respec-
tively, and "Total Portfolio operating expenses" would be 1.36%, 1.15% and
1.15%, respectively.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE TAX-FREE
INCOME INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)(/1/) .30% .30%
Other operating expenses .55 .55
----- -----
Administration fees (after fee waivers)(/1/) .10 .10
Shareholder servicing fees .15 .15
Other expenses .30 .30
---- ----
Total Portfolio operating expenses (after fee
waivers)(/1/) .85% .85%
===== =====
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. The
information in the tables is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended Sep-
tember 30, 1995, as restated to reflect current expenses and fee waivers.
Without waivers, "Other operating expenses" would be .68% and .68%, respec-
tively, and "Total Portfolio operating expenses" would be 1.18% and 1.18%,
respectively.
9
<PAGE>
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Short Government Bond Portfolio $ 9 $27 $47 $105
Intermediate Government Bond
Portfolio 9 27 47 105
Intermediate Bond Portfolio 9 27 47 105
Core Bond Portfolio 9 27 47 105
Managed Income Portfolio 9 28 49 108
International Bond Portfolio 13 41 70 155
Tax-Free Income Portfolio 9 27 47 105
Pennsylvania Tax-Free Income
Portfolio 9 27 47 105
New Jersey Tax-Free Income Portfolio 9 27 47 105
Ohio Tax-Free Income Portfolio 9 27 47 105
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and, except for the period March
1, 1995 through August 31, 1995 with respect to the Interna-
tional Bond Portfolio and the New Jersey Tax-Free Income Portfo-
lio, has been audited by the Portfolios' independent accountant
(or former accountants with respect to the Short Government Bond
and Core Bond Portfolios). This financial information should be
read together with those financial statements. For the periods
shown, the Short Government Bond Portfolio and Core Bond Portfo-
lio offered only one class of shares to institutional investors,
and the New Jersey Tax-Free Income Portfolio and International
Bond Portfolio offered one class of shares to both institutional
and retail investors. Further information about the performance
of the Portfolios is available in the Fund's annual shareholder
reports. Both the Statement of Additional Information and the
annual shareholder reports may be obtained from the Fund free of
charge by calling (800) 441-7764.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SHORT GOVERNMENT BOND PORTFOLIO+
(FORMERLY, THE SHORT-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
YEAR YEAR JULY 17, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.71 $ 9.96 $ 10.00
------- ------- -------
Net investment income (net of
$.014, $.011 and $.005
respectively, of interest
expense)(**) 0.58 0.48 0.51
Net realized and unrealized
loss on investments 0.13 (0.25) (0.06)
------- ------- -------
Net increase from investment
operations 0.71 0.23 0.45
------- ------- -------
Dividends from net investment
income (0.58) (0.48) (0.49)
Distributions from net realized
capital gains (0.01) - - - -
------- ------- -------
Total dividends and
distributions (0.59) (0.48) (0.49)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.71 $ 9.96
======= ======= =======
Total investment return(***) 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) 0.57% 0.57% 0.56%(****)
Net investment income(**) 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $34,236 $36,686 $67,540
Portfolio turnover 586% 455% 513%
Net assets, end of period (in
thousands) $44,486 $31,265 $51,611
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Short Govern-
ment Bond Portfolio") of The BFM Institutional Trust Inc., which was orga-
nized as a Maryland business corporation. On January 12, 1996, the assets
and liabilities of the Predecessor Short Government Bond Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-
existing portfolio investment maintained by the Fund.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Short Government Bond Portfolio
waived fees amounting to $102,707 and $110,232 and reimbursed expenses
amounting to $61,195 and $55,582, for the periods ended June 30, 1995 and
June 30, 1994, respectively. For the period July 17, 1992 through June 30,
1993, the administrator of the Predecessor Short Bond Portfolio waived
fees amounting to $64,580. If all expenses had been borne, the expense ra-
tios would have been 1.05%, 1.02% and 0.66% for the periods ended June 30,
1995, June 30, 1994 and June 30, 1993, respectively. The net investment
income ratios would have been 5.60%, 4.25% and 5.22% for the periods ended
June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The net in-
vestment income on a per share basis would have been $0.53, $0.43 and
$0.49 for the periods ended June 30, 1995, June 30, 1994 and June 30,
1993, respectively.
(***) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset
value per share on the last day of the period reported. Dividends are as-
sumed, for purposes of this calculation, to be reinvested at the net as-
set value per share on the payment date. Total investment return does not
reflect sales load on Investor Shares.
(****) Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29//93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.64 $ 10.60 $ 10.45
------- ------- -------
Income from investment operations
Net investment income 0.56 0.53 0.09
Net gain (loss) on investments (both realized
and unrealized) 0.37 (0.86) 0.15
------- ------- -------
Total from investment operations 0.93 (0.33) 0.24
------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.55) (0.53) (0.09)
Distributions from net realized capital gains - - (0.10) - -
------- ------- -------
Total distributions (0.55) (0.63) (0.09)
------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.02 $ 9.64 $ 10.60
======= ======= =======
Total return 9.99% (3.31)% 2.30%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $49,762 $60,812 $15,035
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.69% 0.65% 0.67%/2/
Before advisory/administration fee waivers 1.06% 1.05% 0.75%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 5.67% 5.30% 5.14%/2/
Before advisory/administration fee waivers 5.30% 4.90% 5.06%/2/
PORTFOLIO TURNOVER RATE 247% 9% 80%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/29//93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.05 $ 10.01 $ 9.99
------- ------- ------
Income from investment operations
Net investment income 0.54 0.54 - -
Net gain (loss) on investments (both realized
and unrealized) 0.38 (0.91) 0.02
------- ------- ------
Total from investment operations 0.92 (0.37) 0.02
------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.54) (0.53) - -
Distributions from net realized capital gains - - (0.06) - -
------- ------- ------
Total distributions (0.54) (0.59) - -
------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 9.43 $ 9.05 $10.01
======= ======= ======
Total return 10.46% (3.80)% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $36,718 $35,764 $ 91
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.74% 0.70% 0.70%/2/
Before advisory/administration fee waivers 1.09% 1.13% 1.09%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 5.90% 5.33% 4.35%/2/
Before advisory/administration fee waivers 5.55% 4.90% 3.96%/2/
PORTFOLIO TURNOVER RATE 262% 92% 4%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
YEAR YEAR DECEMBER 9, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.36 $ 10.37 $10.00
------- ------- ------
Net investment income (net of
$.004, $.003 and $.001,
respectively, of interest
expense)(**) 0.62 0.55 0.32
Net realized and unrealized
gains on investments 0.50 (0.60) 0.37
------- ------- ------
Net (decrease) increase from
investment operations 1.12 (0.05) 0.69
------- ------- ------
Dividends from net investment
income (0.62) (0.55) (0.32)
Distributions from net realized
capital gains (0.01) (0.41)
Total dividends and
distributions (0.63) (0.96) (0.32)
------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.36 $10.37
======= ======= ======
Total investment return(***) 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses(*) 0.55% 0.55% 0.55%(****)
Net investment income(**) 6.62% 5.61% 5.57%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $16,247 $ 9,702 $6,622
Portfolio turnover 435% 722% 354%
Net assets, end of period (in
thousands) $32,191 $12,507 $7,803
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 12, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Core Bond Portfolio waived fees
amounting to $56,894, $34,010 and $24,761 and reimbursed expenses amount-
ing to $137,364, $137,179 and $0 for the periods ended June 30, 1995, June
30, 1994 and June 30, 1993, respectively. The administrator of the Prede-
cessor Core Bond Portfolio waived fees amounting to $32,500 and $3,701 for
the periods ended June 30, 1994 and June 30, 1993, respectively. For the
period ended June 30, 1993, the custodian and transfer agent of the Prede-
cessor Core Bond Portfolio waived fees amounting to $24,272 and $17,283,
respectively. If the Predecessor Core Bond Portfolio had borne all ex-
penses for the periods ended June 30, 1995, 1994 and 1993, the expense ra-
tios would have been 1.75%, 2.65% and 2.44%, respectively; the net invest-
ment income ratios would have been 5.43%, 3.51% and 3.68%, respectively;
and the net investment income on a per share basis would have been $0.51,
$0.34 and $0.22, respectively.
(***) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset
value per share on the last day of the period reported. Dividends are as-
sumed, for purposes of this calculation, to be reinvested at the net as-
set value per share on the payment date.
(****) Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.79 $ 11.17 $ 10.96
-------- ------- -------
Income from investment operations
Net investment income 0.63 0.59 0.11
Net gain (loss) on investments (both
realized and unrealized) 0.60 (1.18) 0.21
-------- ------- -------
Total from investment operations 1.23 (0.59) 0.32
-------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.63) (0.62) (0.11)
Distribution in excess of net investment
income (0.01) (0.02) - -
Distributions from net realized capital
gains - - (0.14) - -
Distributions in excess of net realized
gains - - (0.01) - -
-------- ------- -------
Total distributions (0.64) (0.79) (0.11)
-------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.38 $ 9.79 $ 11.17
======== ======= =======
Total return 12.97% (5.49)% 2.93%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $116,846 $67,655 $15,322
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.85% 0.80% 0.80%/2/
Before advisory/administration fee waivers 1.05% 1.02% 0.84%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 6.14% 5.95% 5.83%/2/
Before advisory/administration fee waivers 5.94% 5.73% 5.79%/2/
PORTFOLIO TURNOVER RATE 203% 61% 72%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR YEAR YEAR PERIOD
8/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.39 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both realized
and unrealized) 0.55 (0.48) 0.46 0.47 0.26
------- ------- ------- ------- -------
Total from investment
operations 0.94 (0.14) 1.11 0.99 0.57
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.04) (0.13) (0.90) (0.30) - -
Distributions from net
realized capital gains - - (0.24) (0.22) (0.14) (0.06)
------- ------- ------- ------- -------
In Excess of Net Realized
Gains - - - - - - - - (0.30)
Total distributions (0.04) (0.37) 1.12 (0.44) (0.36)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.42 $ 10.52 $ 10.75 $ 10.76 $ 10.21
======= ======= ======= ======= =======
Total return 8.96%* 1.50% 10.24% 9.55% 8.92%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $45,242 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.18%* 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.18%* 1.24% 1.38% 1.30% 1.37%*
Ratios of net investment
income to average net
assets 5.75%* 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 5.75%* 5.96% 6.00% 6.31% 6.75%*
PORTFOLIO TURNOVER RATE 59% 131% 128% 115% 110%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. It is expected that the assets and liabil-
ities of the Predecessor International Bond Portfolio will be transferred to
this Portfolio, which has no prior operating history, on or about February
10, 1996.
* Annualized.
** Commenced operations on July 1, 1991.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $10.04 $11.31 $10.97
------ ------ ------
Income from investment operations
Net investment income 0.50 0.51 0.09
Net gain (loss) on investments (both realized
and unrealized) 0.59 (0.93) 0.34
------ ------ ------
Total from investment operations 1.09 (0.42) 0.43
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.50) (0.51) (0.09)
Distributions from net realized capital gains (0.02) (0.34) - -
------ ------ ------
Total distributions (0.52) (0.85) (0.09)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.61 $10.04 $11.31
====== ====== ======
Total return 11.24% (4.02)% 3.92%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $4,713 $2,109 $ 634
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.80% 0.75% 0.71%/2/
Before advisory/administration fee waivers 1.57% 1.98% 1.49%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 4.92% 4.75% 4.99%/2/
Before advisory/administration fee waivers 4.15% 3.52% 4.21%/2/
PORTFOLIO TURNOVER RATE 92% 40% 71%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.82 $ 10.70 $ 10.43
------- ------- -------
Income from investment operations
Net investment income 0.50 0.51 0.09
Net gain (loss) on investments (both realized
and unrealized) 0.51 (0.85) 0.28
------- ------- -------
Total from investment operations 1.01 (0.34) 0.37
------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.50) (0.51) (0.09)
Distributions from net realized capital gains - - (0.03) (0.01)
------- ------- -------
Total distributions (0.50) (0.54) (0.10)
------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.33 $ 9.82 $ 10.70
======= ======= =======
Total return 10.51% (3.20)% 3.54%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $13,815 $11,518 $ 3,894
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.79% 0.55% 0.34%/2/
Before advisory/administration fee waivers 1.11% 1.15% 1.22%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 5.04% 4.97% 4.90%/2/
Before advisory/administration fee waivers 4.72% 4.37% 4.02%/2/
PORTFOLIO TURNOVER RATE 66% 30% 40%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR YEAR YEAR PERIOD
8/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.94 $ 11.31 $ 11.30 $ 10.46 $ 10.00
------- ------- -------- ------- -------
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both realized
and unrealized) 0.28 (0.36) 0.04 0.85 0.45
------- ------- -------- ------- -------
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - (0.01) (0.03) - - - -
------- ------- -------- ------- -------
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
------- ------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.22 $ 10.94 $ 11.31 $ 11.30 $ 10.46
======= ======= ======== ======= =======
Total return 4.90% 1.49% 5.18% 13.48% 12.33%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
PORTFOLIO TURNOVER RATE 18.47% 28.43% 12.05% 16.09% 0.00%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 12, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
* Annualized.
** Commenced operations on July 1, 1991.
20
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 7/29/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.60 $10.53 $10.24
------ ------ ------
Income from investment operations
Net investment income 0.52 0.49 0.09
Net gain (loss) on investments (both realized
and unrealized) 0.45 (0.91) 0.29
------ ------ ------
Total from investment operations 0.97 (0.42) 0.38
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.52) (0.49) (0.09)
Distributions from net realized capital gains - - (0.02) - -
------ ------ ------
Total distributions (0.52) (0.51) (0.09)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.05 $ 9.60 $10.53
====== ====== ======
Total return 10.45% (4.00)% 3.68%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $5,150 $4,428 $ 907
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.39% 0.35% 0.32%/2/
Before advisory/administration fee waivers 1.46% 1.74% 2.83%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 5.39% 5.06% 4.71%/2/
Before advisory/administration fee waivers 4.31% 3.67% 2.20%/2/
PORTFOLIO TURNOVER RATE 63% 61% 36%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
21
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 28 portfolios and
has been structured to include many different investment
styles across the spectrum of fixed income investments so that
investors may participate across multiple disciplines in order
to seek their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Six of these Portfolios invest solely in taxable bonds
and four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods,
a fund that invests in any one of these styles may perform
above or below the market. An investment program that combines
these multiple disciplines allows investors to select from
among these various product options in the way that most
closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Short Government Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
22
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Short Gov't Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Managed Salomon BIG 5-10 Years Investment Grade BBB
Income Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
OH Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
23
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under
normal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
24
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securities
and related repurchase agreements) 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 Portfo-
lio's total assets may be invested without regard to this limitation so long as
no more than 25% of the Portfolio's total assets are invested in any one issuer
(except U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any such commitment is
no longer in the best interests of a Portfolio, it will revoke the commitment
by terminating sales of shares of the Portfolio in the state involved.
25
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Short Government Bond Portfolio
and Intermediate Government Bond Portfolio (the "Government Portfolios") will
be rated in the highest rating category at the time of purchase or, if unrated,
of comparable quality as determined by the Portfolios' sub-adviser. Securities
acquired by the other Portfolios will be rated investment grade at the time of
purchase (within the four highest voting categories by Standard & Poor's Rat-
ings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable
quality as determined by a Portfolio's sub-adviser. Securities rated "Baa" on
"BBB" are generally considered to be investment grade although they have specu-
lative characteristics. If a security's rating is reduced below the minimum
rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con-
sider whether the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Government Portfolios
will invest at least 65% of their net assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its net as-
sets in the debt obligations of foreign issuers located in at least three dif-
ferent foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jer-
sey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-
Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (together with
the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfolios") will in-
vest, during normal market conditions, at least 80% of their net assets in ob-
ligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their political sub-divisions,
agencies, instrumentalities and authorities and related tax-exempt derivative
securities ("Municipal Obligations") the interest on which is exempt from regu-
lar Federal income tax and is not an item of tax preference for purposes of the
Federal alternative minimum tax. In addition, each State-Specific Tax-Free
Portfolio intends to invest at least 65% of its net assets in Municipal Obliga-
tions of issuers located in the particular state indicated by its name. The
Tax-Free Income Portfolio intends to invest no more than 25% of its net assets
in Municipal Obligations of issuers located in the same state. During temporary
defensive periods each Tax-Free Portfolio may invest without limitation in se-
curities that are not Municipal Obligations and may hold without limitation
uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. The Managed Income Portfolio may invest up
to 10% of its total assets in debt securities of foreign issuers and may hold
from time to time various foreign currencies pending their investment or con-
version into U.S. dollars. Investing in securities of foreign issuers involves
considerations not typically associated with investing in securities of compa-
nies organized and operated in the United States. Because foreign securities
generally are denominated and pay dividends or interest in foreign currencies,
the value of a Portfolio that invests in foreign securities will be affected
favorably or unfavorably by changes in currency exchange rates.
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A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions
effected on foreign stock exchanges has increased in recent years, it remains
appreciably below that of the New York Stock Exchange. Accordingly, a Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. Such instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer.
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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 nor-
mally issued by special purpose public authorities. If the issuer of moral ob-
ligation bonds is unable to meet its debt service obligations from current rev-
enues, it may draw on a reserve fund the restoration of which is a moral com-
mitment but not a legal obligation of the state or municipality which created
the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its net assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects. To the ex-
tent a Portfolio's assets are invested in Municipal Obligations payable from
the revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. Each Tax-Free Portfolio will acquire stand-by commitments solely
to facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
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The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. The amount of information
regarding the financial condition of issuers of Municipal Obligations may not
be as extensive as that which is made available by public corporations and the
secondary market for Municipal Obligations may be less liquid than that for
taxable fixed-income securities. Accordingly, the ability of a Tax-Free Portfo-
lio to buy and sell tax-exempt securities may, at any particular time and with
respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its investment adviser and sub-adviser will rely on such
opinions and will not review independently the underlying proceedings relating
to the issuance of Municipal Obligations, the creation of any tax-exempt deriv-
ative securities, or the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may purchase securities that are secured or backed by mort-
gages as well as other assets (e.g., automobile loans and credit card receiv-
ables). Issuers of these mortgage-related and asset-backed securities include
the U.S. Government, the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), and private issuers such as commercial banks, financial
companies, finance subsidiaries of industrial companies, savings and loan asso-
ciations, mortgage banks and investment banks.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are not pre-
sented by mortgage-related securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws, many of which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of ve-
hicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of
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<PAGE>
the automobile receivables may not have an effective security interest in all
of the obligations backing such receivables. Therefore, there is a possibility
that recoveries on repossessed collateral may not, in some cases, be able to
support payments on these securities.
The yield characteristics of mortgage-related and asset-backed securities dif-
fer from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying as-
sets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-related or asset-backed security is purchased at a premium, a prepay-
ment rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if one of these securities is pur-
chased at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will decrease, yield to maturity. In calculat-
ing the average weighted maturity of a Portfolio, the maturity of mortgage-re-
lated and asset-backed securities will be based on estimates of average life
which take prepayments into account.
Prepayments on mortgage-related and asset-backed securities generally increase
with falling interest rates and decrease with rising interest rates; further-
more, prepayment rates are influenced by a variety of economic and social fac-
tors. In general, the collateral supporting non-mortgage asset-backed securi-
ties is of shorter maturity than mortgage loans and is less likely to experi-
ence substantial prepayments. Like other fixed income securities, when interest
rates rise the value of a mortgage-related or asset-backed security generally
will decline; how-ever, when interest rates decline, the value of these securi-
ties that have prepayment features may not increase as much as that of other
fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS
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that receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-related obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial invest-
ment will not be fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or instrumen-
tality) may be considered liquid under guidelines established by the Fund's
Board of Trustees if they can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of a Port-
folio's per share net asset value.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios (except the Tax-Free Portfolios) may in-
vest in debt obligations of domestic or foreign corporations and banks, and may
acquire commercial obligations issued by Canadian corporations and Canadian
counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-
denominated commercial paper of a foreign issuer. Bank obligations may include
certificates of deposit, notes, bankers' acceptances and fixed time deposits.
These obligations may be general obligations of the parent bank or may be lim-
ited to the issuing branch or subsidiary by the terms of a specific obligation
or by government regulation. The Portfolios may also make interest-bearing sav-
ings deposits in commercial and savings banks in amounts not in excess of 5% of
their respective total assets. For purposes of determining the permissibility
of an investment in bank obligations, the total assets of a bank are determined
on the basis of the bank's most recent annual financial statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA and the
Student Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government would provide financial support to
U.S. Government-sponsored agencies or instrumentalities if it is not obligated
to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their holdings, as a duration
management technique or to protect against an increase in the price of securi-
ties a Portfolio anticipates purchasing at a later date. The Portfolios intend
to use these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a
31
<PAGE>
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 re-
ceive payments of interest on a notional principal amount from the party sell-
ing such interest rate floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, financial instruments, foreign currencies, securities indi-
ces or the yield differential between two securities, and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options where
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corporation,
which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of the Fund's total assets, although a Portfolio will not pur-
chase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may
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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 occur-
ring prior to sales of securities in the value of the securities to be sold. In
addition, a Portfolio may utilize futures contracts in anticipation of changes
in the composition of its holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid high grade assets or will
otherwise cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master
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demand notes that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. The Portfolios may in-
vest up to 10% of their total assets in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater re-
sets in the opposite direction from the market rate of interest to which it is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Issuers of unrated variable and floating rate instruments must satisfy the same
criteria as set forth above for a Portfolio. The absence of an active secondary
market with respect to particular variable and floating rate instruments, how-
ever, could make it difficult for the Portfolio to dispose of a variable or
floating rate instrument if the issuer defaulted on its payment obligation or
during periods when the Portfolio is not entitled to exercise its demand
rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to make limited borrowings. If the securities held by a Portfolio should
decline in value while borrowings are outstanding, the net asset value of the
Portfolio's outstanding shares will decline in value by proportionately more
than the decline in value suffered by the Portfolio's securities. Borrowings
may be made through reverse repurchase agreements under which a Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolios
may use the proceeds of reverse repurchase agreements to purchase other securi-
ties either maturing, or under an agreement to resell, on a date simultaneous
with or prior to the expiration of the reverse repurchase agreement. The Port-
folios (except the Tax-Free Portfolios) may use reverse repurchase agreements
when it is anticipated that the interest income to be earned from the invest-
ment 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 maintain a segregated account with the Fund's custodian contain-
ing cash, U.S. Government or other appropriate liquid high-grade debt securi-
ties having a value at least equal to the repurchase price. A Portfolio's re-
verse repurchase agreements, together with any other borrowings, will not ex-
ceed, in the aggregate, 33 1/3% of the value of its total assets. In addition,
a Portfolio (except the Tax-Free Portfolios) may borrow up to an additional 5%
of its total assets for temporary purposes.
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INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and re-
purchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified institutional buyers" in accordance with Rule 144A under the 1933 Act.
Any such security will not be considered illiquid so long as it is determined
by a Portfolio's sub-adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and for-
ward commitment transactions involve the risk, however, that the price or yield
obtained in a transaction may be less favorable than the price or yield avail-
able in the market when the securities delivery takes place. Each Portfolio's
when-issued purchases and forward commitments are not expected to exceed 25% of
the value of its total assets absent unusual market conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing such securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time that a
Portfolio enters into a dollar roll transaction, it will place in a segregated
account maintained with its custodian cash, U.S. Government securities or other
liquid high grade debt obligations hav-
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<PAGE>
ing 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.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted and the instruments which the Portfolio is
required to repurchase may be worth less than an instrument which the Portfolio
originally held when the Portfolio is able to complete the purchase. Successful
use of mortgage dollar rolls may depend upon a sub-adviser's ability to cor-
rectly predict interest rates and prepayments. There is no assurance that dol-
lar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not, however, be a factor pre-
venting a sale or purchase when the sub-adviser believes investment considera-
tions warrant such sale or purchase. Portfolio turnover may vary greatly from
year to year as well as within a particular year. High portfolio turnover rates
will generally result in higher transaction costs to a Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the Portfolios can
be expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
36
<PAGE>
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture is an im-
portant segment of the Ohio economy with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness. In prior
years, the State's overall unemployment rate was commonly somewhat higher than
the national figure. For example, the reported 1990 average monthly State rate
was 5.7%, compared to the 5.5% national figure. However, for the last four
years the State rates were below the national rates (5.5% versus 6.1% in 1994).
The unemployment rate and its effects vary among particular geographic areas of
the State. There can be no assurance that future national, regional or state-
wide economic difficulties and the resulting impact on State or local govern-
ment finances generally will not adversely affect the market value of Ohio Mu-
nicipal Obligations held in the Portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those obligations.
37
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the di-
TRUSTEES rection of its Board of Trustees. The following individuals
were elected by shareholders on January 4, 1996 to serve as
trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Manage-
SUB-ADVISERS ment Group ("PAMG"). Each of the Portfolios within the Compass
Capital Fund family, except the International Bond Portfolio,
is managed by a specialized portfolio manager who is a member
of PAMG's fixed income portfolio management subsidiary, Black-
Rock Financial Management, Inc. ("BlackRock"). The sub-adviser
of the International Bond Portfolio is Morgan Grenfell Invest-
ment Services Limited ("Morgan Grenfell").
The ten portfolios and their investment sub-advisers and port-
folio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Short Government Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Intermediate Bond BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Core Bond BlackRock(/1/) Scott Amero (see above); Mr. Amero
has been Portfolio manager since its
inception.
Managed Income BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
International Bond Morgan Grenfell(/2/) Martin A. Hall; Director of Morgan
Grenfell since 1991; Portfolio
manager since 1991.
Tax-Free Income BlackRock(/1/) Kevin Klingert; portfolio manager at
BlackRock since 1991; prior to
joining BlackRock, Assistant Vice
President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager
since 1995.
Pennsylvania Tax-Free BlackRock(/1/) Kevin Klingert (see above);
Income Portfolio manager since 1995.
New Jersey Tax-Free In- BlackRock(/1/) Kevin Klingert (see above);
come Portfolio manager since 1995.
Ohio Tax-Free Income BlackRock(/1/) Kevin Klingert (see above);
Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
39
<PAGE>
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1835
Market Street, Philadelphia, Pennsylvania 19103. PAMG is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
bank holding company. Morgan Grenfell is an indirect wholly-
owned subsidiary of Deutsche Bank, A.G., a German financial
services conglomerate.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, com-
puted daily on a Portfolio-by-Portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are The Expenses Of The Portfolios?" PAMG
and the sub-advisers intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are paid
by PAMG, and do not represent an extra charge to the Portfo-
lios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For their last fiscal years, the Portfolios paid investment
advisory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee
waivers: Short Government Bond Portfolio, .30%; Intermediate
Government Bond Portfolio, .20%; Intermediate Bond Portfolio,
.25%; Core Bond Portfolio, .35%; Managed Income Portfolio,
.35%; International Bond Portfolio, .80%; Tax-Free Income
Portfolio, 0%; Pennsylvania Tax-Free Income Portfolio, .27%;
New Jersey Tax-Free Income Portfolio, .60%; and Ohio Tax-Free
Income Portfolio, 0%.
The sub-advisers to each Portfolio strive to achieve best exe-
cution on all transactions. Infrequently, brokerage transac-
tions for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements of
best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the
40
<PAGE>
Fund's 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"). A majority of the out-
standing stock of PDI is owned by its officers and the remaining
outstanding stock is owned by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .20% of the first $500
million of each Portfolio's average daily net assets, .18% of
the next $500 million of each Portfolio's average daily net as-
sets, .16% of the next $1 billion of each Portfolio's average
daily net assets and .15% of each Portfolio's average daily net
assets in excess of $2 billion. From time to time the Adminis-
trators may waive some or all of their administration fees from
a Portfolio.
For information about the operating expenses the Portfolios ex-
pect to pay for the current fiscal year, see "What Are the Ex-
penses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service agreements with institu-
SERVICING tional investors ("Institutions") (including PNC Bank, National
Association and its affiliates) which provide that the Institu-
tions will render support services to their customers who are
the beneficial owners of Service Shares. These services are in-
tended to supplement the services provided by the Fund's Admin-
istrators and transfer agent to the Fund's shareholders of rec-
ord. In consideration for payment of a shareholder processing
fee of up to .15% (on an annualized basis) of the average daily
net asset value of Service Shares owned beneficially by their
customers, Institutions may provide one or more of the following
services: processing purchase and redemption requests from cus-
tomers and placing orders with the Fund's transfer agent or the
distributor; processing dividend payments from the Fund on be-
half of customers; providing sub-accounting with respect to
Service Shares beneficially owned by customers or the informa-
tion necessary for sub-accounting; and other similar services.
In consideration for payment of a separate shareholder servicing
fee of up
41
<PAGE>
to .15% (on an annualized basis) of the average daily net as-
set value of Service Shares owned beneficially by their cus-
tomers, Institutions may provide one or more of these addi-
tional services to such customers: responding to customer in-
quiries relating to the services performed by the Institution
and to customer inquiries concerning their investments in
Service Shares; providing information periodically to custom-
ers showing their positions in Service Shares; and other simi-
lar shareholder liaison services. Customers who are beneficial
owners of Service Shares should read this Prospectus in light
of the terms and fees governing their accounts with Institu-
tions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the invest-
ment of fiduciary funds in Portfolio shares. Institutions, in-
cluding banks regulated by the Comptroller of the Currency,
Federal Reserve Board and state banking commissions, and in-
vestment advisers and other money managers subject to the ju-
risdiction of the SEC, the Department of Labor or state secu-
rities commissions, are urged to consult their legal counsel
before entering into agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided
by Institutions under their service agreements will not be
prohibited under these laws. However, state securities laws
may differ from the interpretations of Federal law on this is-
sue, and banks and financial institutions may be required to
register as dealers pursuant to state law.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and
processing fees, fees and expenses in registering and qualify-
ing the Portfolios and their shares for distribution under
Federal and state securities laws, expenses of preparing pro-
spectuses and statements of additional information and of
printing and distributing prospectuses and statements of addi-
tional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solici-
tations, insurance premiums, the expense of independent pric-
ing services, and other expenses which are not expressly as-
sumed by PAMG or the Fund's service providers under their
agreements with the Fund. Any general expenses of the Fund
that do not belong to a particular investment portfolio will
be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board de-
termines to be fair and equitable.
42
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu-
tions acting on behalf of their customers, as well as certain persons who were
shareholders of Compass Capital Group of Funds at the time of its combination
with the PNC(R) Fund during the first quarter of 1996. Service Shares will nor-
mally be held of record by Institutions or in the names of nominees of Institu-
tions. Share purchases are normally effected through a customer's account at an
Institution through procedures established in connection with the requirements
of the account. In these cases, confirmations of share purchases and redemp-
tions will be sent to the Institutions. Beneficial ownership of shares will be
recorded by the Institutions and reflected in the account statements provided
by such Institutions to their customers. Investors wishing to purchase shares
should contact their Institutions.
Service Shares are sold at their net asset value per share next computed after
an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern
Time) on a Business Day are priced the same day. A "Business Day" is any week-
day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of Philadelphia (the "FRB") are open for business. Purchase orders may be
placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after
4:00 p.m. (Eastern Time) are priced on the following Business Day.
Payment for Service Shares must normally be made in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information. The minimum initial investment is $5,000;
however, Institutions may set a higher minimum for their customers. There is no
minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may in its discretion reject any order for Service Shares.
REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in
accordance with the procedures applicable to their accounts with the Institu-
tions. These procedures will vary according to the type of account and the In-
stitution involved, and customers should consult their account managers in this
regard. It is the responsibility of Institutions to transmit redemption orders
to PFPC and credit their customers' accounts with redemption proceeds on
43
<PAGE>
a timely basis. In the case of shareholders holding share certificates, the
certificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the Administrators and the
Distributor will employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. The Fund and its service providers will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed by the Fund, although Institutions may charge their customer accounts for
redemption services. Information relating to such redemption services and
charges, if any, should be obtained by customers from their Institutions.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may redeem Service Shares in any Portfolio account if the account bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count falls below that minimum, the customer may be obligated to redeem all or
part of his or her shares in the Portfolios to the extent necessary to maintain
the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
44
<PAGE>
What Special Purchase and Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC(R) Fund
may also purchase and redeem Service Shares of the same Portfolio and for the
same account in which they held shares on that date through the procedures de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. The minimum investment
is $100. Purchases through the Automatic Investment Plan described below are
subject to a lower purchase minimum. The name of the Portfolio with respect to
which shares are purchased must appear on the check or Federal Reserve Draft.
Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders which
are received by PFPC, together with payment, before the close of regular trad-
ing hours on the NYSE (currently 4:00 p.m. Eastern Time) on any Business Day
(as defined above) are priced according to the net asset value next determined
on that day.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an investor
in shares of a Portfolio may arrange for periodic investments in that Portfolio
through automatic deductions from a checking or savings account by completing
the AIP Application Form which may be obtained from PFPC. The minimum pre-au-
thorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to Compass Capital Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Dela-
ware 19899-8907.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding share certificates must send
their certificates with the redemption request. Additional documentary evidence
of authority is required by PFPC in the event redemption is requested by a cor-
poration, partnership, trust, fiduciary, executor or administrator.
If a shareholder has given authorization for expedited redemption, shares can
be redeemed by telephone and the proceeds sent by check to the shareholder or
by Federal wire transfer to a
45
<PAGE>
single previously designated bank account. Once authorization is on file, PFPC
will honor requests by any person by telephone at (800) 441-7762 (in Delaware
call collect (302) 791-1194) or other means. The minimum amount that may be
sent by check is $500, while the minimum amount that may be wired is $10,000.
Compass Capital reserves the right to change these minimums or to terminate
these redemption privileges. If the proceeds of a redemption would exceed
$25,000, the redemption request must be in writing and will be subject to the
signature guarantee requirement described above. This privilege may not be used
to redeem shares in certificated form.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed by the shareholder's bank. To change the name of the single designated
bank account to receive wire redemption proceeds, it is necessary to send a
written request (with a guaranteed signature as described above, to Compass
Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, the Administrators and the Distributor
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions reasonably believed to be genuine in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") which may be used
by investors who wish to receive regular distributions from their accounts.
Upon commencement of the SWP, the account must have a current value of $10,000
or more in a Portfolio. Shareholders may elect to receive automatic cash pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed on the 25th day of the applicable month or, if such day is not a Business
Day, on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form which may be obtained
from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
46
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
The net asset value is calculated separately for Service Shares of each Portfo-
lio as of the close of regular trading hours on the NYSE (currently 4:00 p.m.
Eastern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its Service Shares,
less the liabilities charged to its Service Shares, by the number of its Serv-
ice Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices or the mean between their bid and asked
prices. Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such securi-
ties on their respective exchanges, except when an occurrence subsequent to the
time a value was so established is likely to have changed such value. Securi-
ties 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 re-
spect to debt obligations with sixty days or less remaining to maturity unless
a Portfolio's sub-adviser under the supervision of the Board of Trustees deter-
mines such method does not represent fair value.
47
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
Service Shares of the relevant Portfolio unless a shareholder elects otherwise.
Such election, or any revocation thereof, must be made in writing to PFPC, and
will become effective with respect to dividends paid after its receipt by PFPC.
The net investment income of the Managed Income, Tax-Free Income, Intermediate
Government Bond, Intermediate Bond and International Bond Portfolios is de-
clared monthly as a dividend to investors who are shareholders of such Portfo-
lio at the close of business on the day of declaration. The net investment in-
come of the Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-
Free Income, Core Bond and Short Government Bond Portfolios is declared daily
as a dividend to investors who are shareholders of such Portfolio at, and whose
payment for share purchases are available to the particular Portfolio in Fed-
eral funds by, the close of business on the day of declaration. All dividends
are paid within ten days after the end of each month and, in the case of the
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income,
Core Bond and Short Government Bond Portfolios, within seven days after redemp-
tion of all of a shareholder's shares in a Portfolio. Net realized capital
gains (including net short-term capital gains), if any, will be distributed by
each Portfolio at least annually.
48
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), 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.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. Shareholders
who are recipients of Social Security Act or Railroad Retirement Act benefits
should note that "exempt interest dividends" will be taken into account in de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
Compass Capital will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer.
49
<PAGE>
Generally, shareholders may include sales charges paid on the purchase of
Shares in their tax basis for the purposes of determining gain or loss on a re-
demption, transfer or exchange of such Shares. However, if a shareholder ex-
changes the Shares for Shares of another Portfolio within 90 days of purchase
and is able to reduce the sales charges applicable to the new Shares (by virtue
of the Fund's exchange privilege), the amount equal to such reduction may not
be included in the tax basis of the shareholder's exchanged Shares for the pur-
pose of determining gain or loss but may be included (subject to the same limi-
tation) in the tax basis of the new Shares.
Any loss upon the sale or exchange of shares held for six months or less will
be disallowed for Federal income tax purposes to the extent of any exempt in-
terest dividends received by the shareholder. For the Ohio Tax-Free Income
Portfolio, the loss will be disallowed for Ohio income tax purposes to the same
extent, even though, for Ohio income tax purposes, some portion of such divi-
dends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of the taxable year in question consists
of stock or securities of foreign corporations, the Portfolio may elect, for
U.S. Federal income tax purposes, to treat certain foreign taxes paid by it,
including generally any withholding taxes and other foreign income taxes, as
paid by its shareholders. The Portfolio intends to make this election. As a re-
sult, the amount of such foreign taxes paid by the Portfolio will be included
in its shareholders' income pro rata (in addition to taxable distributions ac-
tually received by them), and each shareholder generally will be entitled ei-
ther (a) to credit a proportionate amount of such taxes against U.S. Federal
income tax liabilities, or (b) if a shareholder itemizes deductions, to deduct
such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania Municipal Obligations or attributable to insurance proceeds on account
of such interest, is not taxable to individuals, estates or trusts under the
Personal Income Tax (in the case of insurance proceeds, to the extent they are
exempt for Federal Income Tax purposes); to corporations under the Corporate
Net Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal Income Tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
50
<PAGE>
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free Income
Portfolio, such gain may be subject to the Personal Income Tax and Corporate
Net Income Tax. Such gain may also be subject to the School District Tax, ex-
cept that gain realized with respect to a share held for more than six months
is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or inter-
est and gain thereon, is subject to, or included in the measure of, the special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax).
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania Municipal Obligations and Federal obligations (if
the interest on such obligations is exempt from state and local taxation under
the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey personal
income tax. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions or direct U.S. Government obligations; it must have no investments other
than interest-bearing obligations, obligations issued at a discount, and cash
and cash items (including receivables); and it must satisfy certain reporting
obligations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
51
<PAGE>
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Tax-Free Income Portfolio in
their net income base for purposes of calculating their Ohio corporation fran-
chise tax liability to the extent that such distributions either constitute ex-
empt-interest dividends for Federal income tax purposes or are properly attrib-
utable to interest on Ohio Municipal Obligations or U.S. Obligations. However,
Shares of the Ohio Tax-Free Income Portfolio will be included in a corpora-
tion's net worth base for purposes of calculating the Ohio corporation fran-
chise tax. Distributions properly attributable to gain on the sale, exchange or
other disposition of Ohio Municipal Obligations will not be subject to the Ohio
personal income tax, or municipal or school district income taxes in Ohio and
will not be included in the net income base of the Ohio corporation franchise
tax. Distributions attributable to other sources will be subject to the Ohio
personal income tax and the Ohio corporation franchise tax.
52
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio, except the Intermediate Bond, Managed Income and Ohio Tax-Free In-
come Portfolios, offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. The
Intermediate Bond, Managed Income and Ohio Tax-Free Income Portfolios each of-
fer Institutional Shares, Service Shares and Investor A Shares and, in addi-
tion, the Ohio Tax-Free Income Portfolio offers Investor B Shares. This pro-
spectus relates only to Service Shares of the ten Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. In addition, each class of Investor
Shares is sold with different sales charges. Because of these "class expenses"
and sales charges, the performance of a Portfolio's Institutional Shares is ex-
pected to be higher than the performance of the Portfolio's Service Shares, and
the performance of both the Institutional Shares and Service Shares of a Port-
folio is expected to be higher than the performance of the Portfolio's classes
of Investor Shares. The Fund offers various services and privileges in connec-
tion with its Investor Shares that are not generally offered in connection with
its Institutional and Service Shares, including an automatic investment plan,
automatic withdrawal plan and checkwriting. For further information regarding
the Fund's Institutional or Investor Share classes, contact PFPC at (800) 441-
7764 (Institutional Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
53
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Service Shares of the Portfolios may be quoted in
advertisements and communications to shareholders. Total return will be calcu-
lated on an average annual total return basis for various periods. Average an-
nual total return reflects the average annual percentage change in value of an
investment in Service Shares of a Portfolio over the measuring period. Total
return may also be calculated on an aggregate total return basis. Aggregate to-
tal return reflects the total percentage change in value over the measuring pe-
riod. Both methods of calculating total return assume that dividend and capital
gain distributions made by a Portfolio with respect to its Service Shares are
reinvested in Service Shares.
The yield of Service Shares is computed by dividing the Portfolio's net income
per share allocated to its Service Shares during a 30-day (or one month) period
by the net asset value per share on the last day of the period and annualizing
the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to a Portfolio's tax-free yield. This is done
by increasing the Portfolio's yield (calculated above) by the amount necessary
to reflect the payment of Federal and/or state income tax at a stated tax rate.
The performance of a Portfolio's Service Shares may be compared to the perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Portfolio's Service Shares may be com-
pared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Lehman GMNA Index, the T-Bill Index and the "stocks, bonds
and inflation index" published annually by Ibbotson Associates and the Lehman
Government Corporate Bond Index, as well as the benchmarks attached to this
Prospectus. Performance information may also include evaluations of the Portfo-
lios and their Service Shares published by nationally recognized ranking serv-
ices, and information as reported in financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of a dividend in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Service Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for
Service Shares of a Portfolio cannot necessarily be used to compare an invest-
ment in
54
<PAGE>
such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in
Service Shares will not be included in the Portfolio performance calculations.
55
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
56
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Short Government Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Lehman Brothers Aggregate Index is:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
Managed Income Salomon BIG Very similar to the Lehman Aggregate, the
Salomon BIG is a market-weighted index
comprised of U.S. Treasury, government-
sponsored, investment grade corporate (Baa-
3/BBB- or better), mortgage- and asset-
backed securities.
. Issues comprising the index have an
average life of at least 1 year, with no
maximum maturity
. Corporate and government-sponsored issues
have a minimum face amount of $100
million to qualify for entry, and a
minimum of $75 million face amount to
exit
. Treasury and mortgage issues have a
minimum face amount of $1 billion for
both entry and exit
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Index is:
53% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
57
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Investor A and Investor B Shares of the
Short Government Bond Portfolio,
Intermediate Government Portfolio,
Intermediate Bond Portfolio,
Core Bond Portfolio,
Managed Income Portfolio,
Government Income Portfolio,
International Bond Portfolio,
Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and
Ohio Tax-Free Income Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Location
- -------------- --------
<S> <C>
PART A PROSPECTUS
1. Cover page................................... Cover Page
2. Synopsis..................................... What Are The Expenses Of
The Portfolios?
3. Condensed Financial Information.............. What Are The Portfolios'
Financial Highlights?
4. General Description of Registrant............ Cover Page; What Are The
Portfolios?; What
Additional Investment
Policies Apply?; What
Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund....................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance................................ Inapplicable
6. Capital Stock and Other Securities........... How Frequently Are
Dividends And
Distributions Made To
Investors?; How Are Fund
Distributions Taxed?;
How Is The Fund
Organized?
7. Purchase of Securities Being Offered......... How Are Shares Purchased
And Redeemed?; How Is
Net Asset Value
Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase..................... How Are Shares Purchased
and Redeemed?
9. Legal Proceedings............................ Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS/SM/
THE BOND PORTFOLIOS/INVESTOR SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following information has been added to the section entitled "What Are The
Portfolios' Financial Highlights?":
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolios' independent
accountants. This financial information should be read together with those
financial statements. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder reports may
be obtained from the Fund free of charge by calling (800) 441-7762.
<TABLE>
<CAPTION>
Short New Jersey
Government Tax-Free
Bond Income
Portfolio+ Core Bond Portfolio+ Portfolio+
--------- -------------------- --------- Inter-
national
Investor A Investor A Investor B Investor A Bond
Class Class Class Class Portfolio+
----------- ------------------------- ---------- ---------
For the For the For the For the For the
Period Period Period Period Period
1/13/96/1/ 1/31/96/1/ 3/18/96/1/ 1/26/96/1/ 3/1/95
through through through through through
3/31/96 3/31/96 3/31/96 1/31/96 1/31/96/2/
<S> <C> <C> <C> <C> <C>
-------- ------------ ----------- ---------- ---------
Net asset value at
beginning of
period...................... $9.91 $9.99 $9.58 $11.54 $10.52
----- ----- ----- ------ ------
Income from investment
operations
Net investment income....... 0.10 0.08 0.01 0.00 0.62
Net gain (loss) on
investments and
foreign currency
related transactions
(both realized
and unrealized)........ (0.12) (0.38) 0.03 0.07 1.13
----- ----- ----- ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short New Jersey
Government Tax-Free
Bond Income
Portfolio+ Core Bond Portfolio+ Portfolio+
--------- -------------------- --------- Inter-
national
Investor A Investor A Investor B Investor A Bond
Class Class Class Class Portfolio+
-------------- ------------------------- ---------- ---------
For the For the For the For the For the
Period Period Period Period Period
1/13/96/1/ 1/31/96/1/ 3/18/96/1/ 1/26/96/1/ 3/1/95
through through through through through
3/31/96 3/31/96 3/31/96 1/31/96 1/31/96/2/
<S> <C> <C> <C> <C> <C>
-------------- ------------ ----------- ---------- ---------
Total from investment
operations................ (0.02) (0.30) 0.04 0.07 1.75
------ ------ ---- ---- ----
Less distributions
Distributions from
net investment
income.................. (0.10) (0.08) (0.01) 0.00 (0.88)
Distributions from
net realized capital
gains..................... - - - - -
------ ------ ----- ---- ----
Total distributions..... (0.10) (0.08) (0.01) 0.00 (0.88)
------ ------ ------ ----- ------
Net asset value at end of
period...................... $ 9.79 $ 9.61 $ 9.61 $ 11.61 $ 11.39
====== ====== ====== ======= =======
Total return................ (0.15)%/4,6/ (2.96)%/4,6/ 0.33%/5,6/ 0.63%/4,6/ 16.79%/4,6/
Ratios/Supplemental data
Net assets at end of
period (in thousands)....... $ 719 $ 80 $ 77 $ 14 $ 37,627
Ratios of operating
expenses to
average net assets
After
advisory/administration
fee waivers............... 1.01%/3,7/ 1.02%/3,7/ 1.77%/3,7/ 1.02%/3/ 1.23%/3/
Before
advisory/administration
fee waivers............... 1.21%/3/ 1.27%/3/ 2.02%/3/ 1.36%/3/ 1.23%/3/
Ratios of net investment
income
to average net assets
After
advisory/administration
fee waivers............. 4.94%/3/ 5.43%/3/ 4.71%/3/ 2.79%/3/ 5.62%/3/
Before
advisory/administration
fee waivers............. 4.74%/3/ 5.19%/3/ 4.46%/3/ 2.45%/3/ 5.62%/3/
Portfolio turnover rate....... 185% 723% 723% 26% 159%
</TABLE>
____________________
/+/ For information about the initial commencement of operations of these
Portfolios and their merger into the Fund in 1996, see the footnotes to
the Financial Highlights tables in the Prospectus. Prior to the merger,
the Short Government Bond Portfolio and Core Bond Portfolio each offered
one class of shares to institutional investors (now called Institutional
Shares), and the New Jersey Tax-Free Income Portfolio and
<PAGE>
International Bond Portfolio each offered one class of shares to both
institutional and retail investors (now called Service Shares).
/1/ Commencement of operations of the respective Investor A and Investor B
Classes.
/2/ The financial information shown for this Portfolio includes all activity
of the prior class of shares before February 13, 1996, the date of the
Portfolio's merger.
/3/ Annualized.
/4/ Sales load not reflected in total return.
/5/ Contingent deferred sales load not reflected in total return.
/6/ Not annualized.
/7/ Including interest expense, ratios for Short Government Bond and Core
Bond Portfolios (Investor A and Investor B classes) would have been
1.34%, 1.11% and 1.86%, respectively, for the period ended March 31,
1996. For the periods prior to March 31, 1996, interest income was
presented net of interest expense.
--------------------------------------
The following paragraph has been inserted after the last paragraph in
the section entitled "What Additional Investment Policies And Risks
Apply? --Foreign Investments":
As of this date, the International Bond Portfolio has invested
more than 25% of its total assets in the securities of issuers
located in Germany. Investments of 25% or more of the
Portfolio's total assets in this or any other country will make
the Portfolio's performance more dependent upon the political
and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different
countries.
The fifth paragraph in the section entitled "Who Manages The Fund? --
Adviser and Sub-Advisers" has been replaced with the following:
For their last fiscal year, the Intermediate Government Bond,
Intermediate Bond, Government Income, Managed Income, Tax-Free
Income, Pennsylvania Tax-Free Income and Ohio Tax-Free Income
Portfolios paid investment advisory fees at the following annual
rates (expressed as a percentage of average daily net assets)
after voluntary fee waivers: Intermediate Government Bond
Portfolio, .20%; Intermediate Bond Portfolio, .25%; Government
Income Portfolio, 0%; Managed Income Portfolio, .35%; Tax-Free
Income Portfolio, 0%; Pennsylvania Tax-Free Income Portfolio,
.27%; and Ohio Tax-Free Income Portfolio, 0%. For the period
from July 1, 1995 through March 31, 1996, the Core Bond and
Short Government Bond Portfolios paid investment advisory fees
at the following annual rates (expressed as a percentage of
average daily net assets) after voluntary fee waivers: Core Bond
Portfolio, .39%; and Short Government Bond Portfolio, .28%. For
the period from March 1, 1995 through January 31, 1996, the New
Jersey Tax-Free Income and International Bond Portfolios paid
investment advisory fees at the following annual rates
(expressed as a percentage of average daily net assets) after
voluntary fee waivers: New Jersey Tax-Free Income Portfolio,
.56%; and International Bond Portfolio, .80%.
The fourth, fifth and sixth sentences of the section entitled "How
Frequently Are Dividends and Distributions Made To Shareholders?" have
been replaced with the following:
Each Portfolio will declare a dividend each day on "settled"
shares (i.e., shares for which the particular Portfolio has
received payment in Federal funds) on the first Business Day
after a purchase order is placed with the Fund. Payments by
check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year,
substantially all of the Portfolios' net investment income will
be declared as dividends. The amount of the daily dividend for
each Portfolio will be based on periodic projections of its net
investment income. All dividends are paid within ten days after
the end of each month.
This Supplement is dated May 31, 1996 and relates to the Prospectus
originally dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Bond Portfolios Investor Shares January 16, 1996
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This
Prospectus describes the Investor Shares of eleven of those
portfolios (the "Portfolios"):
Short Government Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond Portfolio
Government Income Portfolio
Managed Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
Ohio Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN
THE PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eleven
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Seven of these Portfolios invest in taxable bonds, and four of
these Portfolios invest in tax-exempt bonds. A detailed descrip-
tion of each Portfolio begins on page 23.
COMPASS PERFORMANCE LIPPER PEER GROUP
CAPITAL BENCHMARK
PORTFOLIO
Short Merrill 1-3 Short U.S. Government
Government Year
Bond Treasury
Index
Intermediate Lehman Intermediate U.S. Government
Government Brothers
Bond Intermediate
Government
Intermediate Lehman Intermediate Government/Corporate
Bond Brothers
Intermediate
Government/
Corporate
Core Bond Lehman Intermediate Investment Grade
Aggregate Debt
Government Lehman General U.S. Government
Income Mortgage/
10 Year
Treasury
Managed Salomon BIG Corporate Debt A-Rated
Income
International Salomon General World Income
Bond Non-U.S.
Hedged World
Government
Bond Index
Tax-Free Lehman General Municipal Debt
Income Municipal
Bond Index
PA Tax-Free Lehman PA Municipal Debt
Income Local GO
Index
NJ Tax-Free Lehman NJ Municipal Debt
Income Local GO
Index
OH Tax-Free Lehman OH Municipal Debt
Income Local GO
Index
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc.
("BlackRock") serves as sub-adviser to each Portfolio except the
International Bond Portfolio, which is sub-advised by Morgan
Grenfell Investment Services Limited ("Morgan Grenfell").
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
BOND different directions in fixed income investing. You may wish to
PORTFOLIOS use the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are
CAPITAL FUNDS Shares Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 11
What Are The Portfolios?..................................... 23
What Are The Differences Among The Portfolios?............... 24
What Types Of Securities Are In The Portfolios?.............. 25
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 26
What Additional Investment Policies And Risks Apply?......... 27
Who Manages The Fund?........................................ 40
What Pricing Options Are Available To Investors?............. 46
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 48
How Are Shares Purchased?.................................... 49
How Are Shares Redeemed?..................................... 51
What Are The Shareholder Features Of The Fund?............... 53
What Is The Schedule Of Sales Charges And Exemptions?........ 56
How Is Net Asset Value Calculated?........................... 62
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 63
How Are Fund Distributions Taxed?............................ 64
How Is The Fund Organized?................................... 68
How Is Performance Calculated?............................... 69
How Can I Get More Information?.............................. 71
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Investor Shares of the Portfolios for the current fiscal year ending September
30, 1996 as a percentage of average daily net assets. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE INTERMEDIATE
GOVERNMENT BOND GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO+
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 3.0% None 4.0% None 4.0%
Sales Charge on
Reinvested Dividends None None None None None
Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower) None 4.5% None 4.5% None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .30% .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00
Other operating expenses
(after fee
waivers)(/3/) .72 .72 .72 .72 .72
------ ------ ------ ------ -------
Shareholder servicing
fee .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32
---- ---- ---- ---- -----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.02% 1.77% 1.02% 1.77% 1.02%
====== ====== ====== ====== =======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse ex-
penses, but have informed the Fund that they expect to waive fees and re-
imburse expenses during the remainder of the current fiscal year as neces-
sary to maintain the Portfolios' total operating expenses at the levels
set forth in the table. The information in the table is based on the advi-
sory and administration fees and other expenses payable after fee waivers
for the fiscal year ended September 30, 1995, as restated to reflect cur-
rent expenses and fee waivers. Without waivers, "Other operating expenses"
would be: (i) .80%, .80% and .82%, respectively, for Investor A Shares;
and (ii) .80% and .80%, respectively, for Investor B shares; and "Total
Portfolio operating expenses" would be: (iii) 1.30%, 1.30% and 1.32%, re-
spectively, for Investor A Shares; and (iv) 2.06% and 2.05%, respectively,
for Investor B Shares. The Portfolios do not expect to incur any 12b-1
fees with respect to Investor A Shares (otherwise payable at the maximum
rate of .10%) during the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are The Key Considerations In Selecting A Pricing
Option?" on page 48. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor B Shares (as well as investors in Investor
A Shares if 12b-1 fees are charged in the future) may pay more than the
economic equivalent of the maximum front-end sales charges permitted by
the rules of the National Association of Securities Dealers, Inc.
("NASD").
+ The Intermediate Bond Portfolio does not currently offer Investor B Shares.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT MANAGED
CORE BOND INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO+
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 4.0% None 4.5% None 4.5%
Sales Charge on
Reinvested Dividends None None None None None
Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower) None 4.5% None 4.5% None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .30% .30% .30% .30% .35%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00
Other operating expenses
(after fee
waivers)(/3/) .72 .72 .72 .72 .70
------ ------ ------ ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .30
---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.02% 1.77% 1.02% 1.77% 1.05%
====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. The information in the table is based on the advisory and ad-
ministration fees and other expenses payable after fee waivers for the fis-
cal year ended September 30, 1995, as restated to reflect current expenses
and fee waivers. Without waivers, "Other operating expenses" would be: (i)
.80%, .80% and .81%, respectively, for Investor A Shares; and (ii) .80% and
.80%, respectively, for Investor B Shares; and "Total Portfolio operating
expenses" would be: (iii) 1.30%, 1.30% and 1.31%, respectively, for In-
vestor A Shares; and (iv) 2.05% and 2.05%, respectively, for Investor B
Shares. The Portfolios do not expect to incur any 12b-1 fees with respect
to Investor A Shares (otherwise payable at the maximum rate of .10%) during
the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" on page 48. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor B Shares (as well as investors in Investor A
Shares if 12b-1 fees are charged in the future) may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
+ The Managed Income Portfolio does not currently offer Investor B Shares.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 5.0% None 4.0% None 4.0% None
Sales Charge on
Reinvested Dividends None None None None None None
Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower) None 4.5% None 4.5% None 4.5%
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .55% .55% .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75 .00 .75
Other operating expenses
(after fee waivers and
expense
reimbursements)(/3/) .90 .90 .72 .72 .67 .72
------ ------ ------ ------ ----- ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .50 .50 .32 .32 .27 .32
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee waivers and
expense
reimbursements)(/3/) 1.45% 2.20% 1.02% 1.77% .97% 1.77%
====== ====== ====== ====== ===== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .50% and .50%, respec-
tively, and administration fees would be .23% for each class of each Port-
folio. In addition, the Expense Summary reflects reimbursements made to
the Tax-Free Income Portfolio by the adviser. PAMG and the Portfolios' ad-
ministrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse
expenses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. The information in the table is based on the advisory and
administration fees and other expenses payable after fee waivers for the
fiscal year ended September 30, 1995, as restated to reflect current ex-
penses and fee waivers. Without waivers, "Other operating expenses" would
be: (i) .98%, .82% and .77%, respectively, for Investor A Shares; and (ii)
.98%, .82% and .82%, respectively, for Investor B Shares; and "Total Port-
folio operating expenses" would be: (iii) 1.52%, 1.32% and 1.32%, respec-
tively, for Investor A Shares; and (iv) 2.27%, 2.07% and 2.07%, respec-
tively, for Investor B Shares. The Portfolios do not expect to incur any
12b-1 fees with respect to Investor A Shares (otherwise payable at the
maximum rate of .10%) during the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are the Key Considerations in Selecting a Pricing
Option?" on page 48. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor B Shares (as well as investors in Investor
A Shares if 12b-1 fees are charged in the future) may pay more than the
economic equivalent of the maximum front-end sales charges permitted by
the rules of the NASD.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge(/1/)
(as a percentage of offering
price) 4.0% None 4.0% None
Sales Charge on Reinvested
Dividends None None None None
Deferred Sales
Charge(/1/)(/2/)
(as a percentage of original
purchase price or redemption
proceeds, whichever is
lower) None 4.5% None 4.5%
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory Fees (after fee
waivers)(/3/) .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .00 .75
Other operating expenses
(after fee waivers)(/3/) .72 .72 .72 .72
------ ------ ------ ------
Shareholder servicing fee .25 .25 .25 .25
Shareholder processing fee .15 .15 .15 .15
Other expenses .32 .32 .32 .32
---- ---- ---- ----
Total Portfolio operating
expenses (after fee
waivers)(/3/) 1.02% 1.77% 1.02% 1.77%
====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge decreases for redemptions made in subsequent years. No de-
ferred sales charge is charged after the sixth year on Investor B Shares.
See "What Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. The information in the table is based on the advisory and ad-
ministration fees and other expenses payable after fee waivers for the fis-
cal year ended September 30, 1995, as restated to reflect current expenses
and fee waivers. Without waivers, "Other operating expenses" would be: (i)
.85% and .85%, respectively, for Investor A Shares; and (ii) .85% and .85%,
respectively, for Investor B Shares; and "Total Portfolio operating ex-
penses" would be: (iii) 1.32% and 1.35% for Investor A Shares; and (iv)
2.07% and 2.10% for Investor B Shares. The Portfolios do not expect to in-
cur 12b-1 fees with respect to Investor A Shares (otherwise payable at the
maximum rate of .10%) during the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" on page 48. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor B Shares (as well as investors in Investor A
Shares if 12b-1 fees are charged in the future) may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
9
<PAGE>
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000
investment assuming (1) 5% annual return, and (2) redemption at the end of
each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Short Government Bond Portfolio
A Shares* $40 $61 $ 85 $151
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Intermediate Government Bond
Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Intermediate Bond Portfolio
A Shares* 50 71 94 160
Core Bond Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Government Income Portfolio
A Shares* 55 76 99 164
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Managed Income Portfolio
A Shares* 55 77 100 167
International Bond Portfolio
A Shares* 64 94 125 215
B Shares (Redemption)** 67 106 140 234
B Shares (No Redemption) 22 69 118 234
Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Pennsylvania Tax-Free Income
Portfolio
A Shares* 50 70 91 154
B Shares (Redemption)** 63 93 119 177***
B Shares (No Redemption) 18 56 96 177***
New Jersey Tax-Free Income
Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
Ohio Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares af-
ter seven years.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERAT-
ING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and, except for the period March
31, 1995 through August 31, 1995 with respect to the Interna-
tional Bond Portfolio and the New Jersey Tax-Free Income Portfo-
lio, has been audited by the Portfolios' independent accoun-
tants' (or former accountants with respect to the Short Govern-
ment Bond and Core Bond Portfolios). This financial information
should be read together with those financial statements. For the
periods shown, the Short Government Bond Portfolio and Core Bond
Portfolio offered only one class of shares to institutional in-
vestors, and the New Jersey Tax-Free Income Portfolio and Inter-
national Bond Portfolio offered one class of shares to both in-
stitutional and retail investors. Further information about the
performance of the Portfolios is available in the Fund's annual
shareholder reports. Both the Statement of Additional Informa-
tion and the annual shareholder reports may be obtained from the
Fund free of charge by calling (800) 441-7762. During the peri-
ods shown, no Investor B Shares of the Short Government Bond,
Intermediate Government Bond, Intermediate Bond, Core Bond, Man-
aged Income, International Bond, Tax-Free Income and New-Jersey
Tax-Free Income Portfolios were outstanding. The Intermediate
Bond and Managed Income Portfolios do not currently offer In-
vestor B Shares.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SHORT GOVERNMENT BOND PORTFOLIO+
(FORMERLY, THE SHORT-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
YEAR YEAR JULY 17, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.71 $ 9.96 $ 10.00
------- ------- -------
Net investment income (net of
$.014, $.011 and $.005
respectively, of interest
expense)(**) 0.58 0.48 0.51
Net realized and unrealized
loss on investments 0.13 (0.25) (0.06)
------- ------- -------
Net increase from investment
operations 0.71 0.23 0.45
------- ------- -------
Dividends from net investment
income (0.58) (0.48) (0.49)
Distributions from net realized
capital gains (0.01) - - - -
------- ------- -------
Total dividends and
distributions (0.59) (0.48) (0.49)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.71 $ 9.96
======= ======= =======
Total investment return(***) 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) 0.57% 0.57% 0.56%(****)
Net investment income(**) 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $34,236 $36,686 $67,540
Portfolio turnover 586% 455% 513%
Net assets, end of period (in
thousands) $44,486 $31,265 $51,611
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Short Govern-
ment Bond Portfolio") of The BFM Institutional Trust Inc., which was orga-
nized as a Maryland business corporation. On January 12, 1996, the assets
and liabilities of the Predecessor Short Government Bond Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-
existing portfolio investment maintained by the Fund.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Short Government Bond Portfolio
waived fees amounting to $102,707 and $110,232 and reimbursed expenses
amounting to $61,195 and $55,582, for the periods ended June 30, 1995 and
June 30, 1994, respectively. For the period July 17, 1992 through June 30,
1993, the administrator of the Predecessor Short Bond Portfolio waived
fees amounting to $64,580. If all expenses had been borne, the expense ra-
tios would have been 1.05%, 1.02% and 0.66% for the periods ended June 30,
1995, June 30, 1994 and June 30, 1993, respectively. The net investment
income ratios would have been 5.60%, 4.25% and 5.22% for the periods ended
June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The net in-
vestment income on a per share basis would have been $0.53, $0.43 and
$0.49 for the periods ended June 30, 1995, June 30, 1994 and June 30,
1993, respectively.
(***) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset
value per share on the last day of the period reported. Dividends are as-
sumed, for purposes of this calculation, to be reinvested at the net as-
set value per share on the payment date. Total investment return does not
reflect sales load on Investor Shares.
(****) Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 5/11/92/1/
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 9.64 $10.60 $10.46 $10.05
------ ------ ------ ------
Income from investment
operations
Net investment income 0.55 0.53 0.54 0.24
Net gain (loss) on
investments (both realized
and unrealized) 0.39 (0.87) 0.16 0.41
------ ------ ------ ------
Total from investment
operations 0.94 (0.34) 0.70 0.65
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.52) (0.54) (0.24)
Distributions from net
realized capital gains - - (0.10) (0.02) - -
------ ------ ------ ------
Total distributions (0.55) (0.62) (0.56) (0.24)
------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.03 $ 9.64 $10.60 $10.46
====== ====== ====== ======
Total return 9.98%/3/ (3.36)%/3/ 6.84%/3/ 6.64%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $9,802 $8,508 $7,666 $1,484
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.70% 0.65% 0.76% 0.80%/2/
Before
advisory/administration fee
waivers 1.07% 1.05% 0.84% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 5.67% 5.24% 5.19% 5.28%/2/
Before
advisory/administration fee
waivers 5.30% 4.84% 5.11% 5.28%/2/
PORTFOLIO TURNOVER RATE 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR 5/20/94/1/
ENDED THROUGH
9/30/95 9/30/94
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.05 $ 9.23
------ ------
Income from investment operations
Net investment income 0.54 0.20
Net gain (loss) on investments (both realized and
unrealized) 0.38 (0.17)
------ ------
Total from investment operations 0.92 0.03
------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.54) (0.21)
Distributions from net realized capital gains - - - -
------ ------
Total distributions (0.54) (0.21)
------ ------
NET ASSET VALUE AT END OF PERIOD $ 9.43 $ 9.05
====== ======
Total return 10.35%/3/ 0.31%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 647 $ 87
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.84% 0.85%/2/
Before advisory/administration fee waivers 1.19% 1.28%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 5.89% 5.35%/2/
Before advisory/administration fee waivers 5.55% 4.92%/2/
PORTFOLIO TURNOVER RATE 262% 92%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
YEAR YEAR DECEMBER 9, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.36 $ 10.37 $10.00
------- ------- ------
Net investment income (net of
$.004, $.003 and $.001,
respectively, of interest
expense)(**) 0.62 0.55 0.32
Net realized and unrealized
gains on investments 0.50 (0.60) 0.37
------- ------- ------
Net (decrease) increase from
investment operations 1.12 (0.05) 0.69
------- ------- ------
Dividends from net investment
income (0.62) (0.55) (0.32)
Distributions from net realized
capital gains (0.01) (0.41)
Total dividends and
distributions (0.63) (0.96) (0.32)
------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.36 $10.37
======= ======= ======
Total investment return (***) 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses (*) 0.55% 0.55% 0.55%(****)
Net investment income (**) 6.62% 5.61% 5.57%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $16,247 $ 9,702 $6,622
Portfolio turnover 435% 722% 354%
Net assets, end of period (in
thousands) $32,191 $12,507 $7,803
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 12, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Core Bond Portfolio waived fees
amounting to $56,894, $34,010 and $24,761 and reimbursed expenses amount-
ing to $137,364, $137,179 and $0 for the periods ended June 30, 1995, June
30, 1994 and June 30, 1993, respectively. The administrator of the Prede-
cessor Core Bond Portfolio waived fees amounting to $32,500 and $3,701 for
the periods ended June 30, 1994 and June 30, 1993, respectively. For the
period ended June 30, 1993, the custodian and transfer agent of the Prede-
cessor Core Bond Portfolio waived fees amounting to $24,272 and $17,283,
respectively. If the Predecessor Core Bond Portfolio had borne all ex-
penses for the periods ended June 30, 1995, 1994 and 1993, the expense ra-
tios would have been 1.75%, 2.65% and 2.44%, respectively; the net invest-
ment income ratios would have been 5.43%, 3.51% and 3.68%, respectively;
and the net investment income on a per share basis would have been $0.51,
$0.34 and $0.22, respectively.
(***) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset
value per share on the last day of the period reported. Dividends are as-
sumed, for purposes of this calculation, to be reinvested at the net as-
set value per share on the payment date. Total investment return does not
reflect sales load on Investor Shares.
(****) Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
10/03/94/1/ 10/03/94
THROUGH THROUGH
9/30/95 9/30/95
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $10.00 $ 10.00
------ -------
Income from investment operations
Net investment income 0.55 0.50
Net gain (loss) on investments (both
realized and unrealized) 0.68 0.68
------ -------
Total from investment operations 1.23 1.18
------ -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.55) (0.50)
Distribution in excess of net investment
income
Distributions from net realized capital
gains - - - -
Distributions in excess of net realized
gains - - - -
------ -------
Total distributions (0.55) (0.50)
------ -------
NET ASSET VALUE AT END OF PERIOD $10.68 $ 10.68
====== =======
Total return 14.27%/3/ 13.52%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $2,990 $10,188
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.37%/2/ 1.05%/2/
Before advisory/administration fee waivers 1.81%/2/ 2.50%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 6.89%/2/ 6.17%/2/
Before advisory/administration fee waivers 5.44%/2/ 4.72%/2/
PORTFOLIO TURNOVER RATE 258% 258%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 2/05/92/1/
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 9.79 $ 11.18 $10.74 $10.40
------- ------- ------ ------
Income from investment
operations
Net investment income 0.60 0.57 0.66 0.46
Net gain (loss) on
investments (both realized
and unrealized) 0.60 (1.19) 0.57 0.34
------- ------- ------ ------
Total from investment
operations 1.20 (0.62) 1.23 0.80
------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.60) (0.66) (0.46)
Distribution in excess of
net investment income (0.01) (0.02) - - - -
Distributions from net
realized capital gains - - (0.14) (0.13) - -
Distributions in excess of
net realized gains - - (0.01) - - - -
------- ------- ------ ------
Total distributions (0.61) (0.77) (0.79) (0.46)
------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.38 $ 9.79 $11.18 $10.74
======= ======= ====== ======
Total return 12.74%/3/ (5.76)%/3/ 12.13%/3/ 7.86%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $11,977 $10,921 $7,252 $1,417
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 1.05% 1.00% 0.84% 0.80%/2/
Before
advisory/administration fee
waivers 1.25% 1.22% 0.88% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 5.96% 5.66% 6.09% 6.28%/2/
Before
advisory/administration fee
waivers 5.76% 5.44% 6.05% 6.28%/2/
PORTFOLIO TURNOVER RATE 203% 61% 72% 56%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR YEAR YEAR PERIOD
8/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.39 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both realized
and unrealized) 0.55 (0.48) 0.46 0.47 0.26
------- ------- ------- ------- -------
Total from investment
operations 0.94 (0.14) 1.11 0.99 0.57
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.04) (0.13) (0.90) (0.30) - -
Distributions from net
realized capital gains - - (0.24) (0.22) (0.14) (0.06)
------- ------- ------- ------- -------
In Excess of Net Realized
Gains - - - - - - - - (0.30)
Total distributions (0.04) (0.37) 1.12 (0.44) (0.36)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.42 $ 10.52 $ 10.75 $ 10.76 $ 10.21
======= ======= ======= ======= =======
Total return*** 8.96%* 1.50% 10.24% 9.55% 8.92%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $45,242 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.18%* 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.18%* 1.24% 1.38% 1.30% 1.37%*
Ratios of net investment
income to average net
assets 5.75%* 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 5.75%* 5.96% 6.00% 6.31% 6.75%*
PORTFOLIO TURNOVER RATE 59% 131% 128% 115% 110%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. It is expected that the assets and liabil-
ities of the Predecessor International Bond Portfolio will be transferred to
this Portfolio, which has no prior operating history, on or about February
10, 1996.
* Annualized.
** Commenced operations on July 1, 1991.
***Total return does not reflect sales load.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 5/14/90/1/
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.04 $11.31 $10.60 $10.33 $ 9.91 $10.00
------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.48 0.48 0.55 0.58 0.64 0.25
Net gain (loss) on
investments (both
realized and
unrealized) 0.59 (0.93) 0.83 0.49 0.46 (0.11)
------ ------ ------ ------ ------ ------
Total from investment
operations 1.07 (0.45) 1.38 1.07 1.10 0.14
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.48) (0.55) (0.59) (0.66) (0.23)
Distributions from net
realized capital gains (0.02) (0.34) (0.12) (0.21) (0.02) - -
------ ------ ------ ------ ------ ------
Total distributions (0.50) (0.82) (0.67) (0.80) (0.68) (0.23)
------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91
====== ====== ====== ====== ====== ======
Total return 10.99%/3/ (4.19)%/3/ 13.48%/3/ 10.67%/3/ 11.40%/3/ 1.40%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $6,591 $6,972 $7,831 $7,349 $3,510 $4,044
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.00% 0.95% 0.57% 0.53% 1.00% 1.00%/2/
Before
advisory/administration
fee waivers 1.78% 2.18% 1.36% 1.67% 1.89% 1.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.74% 4.53% 5.06% 5.56% 6.23% 6.56%/2/
Before
advisory/administration
fee waivers 3.96% 3.30% 4.27% 4.42% 5.34% 5.86%/2/
PORTFOLIO TURNOVER RATE 92% 40% 71% 38% 95% 18%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 12/1/92/1/ 10/03/94/1/
ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/95
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.82 $ 10.70 $ 10.00 $ 9.82
------- ------- ------- ------
Income from investment
operations
Net investment income 0.48 0.52 0.42 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.51 (0.85) 0.73 0.51
------- ------- ------- ------
Total from investment
operations 0.99 (0.33) 1.15 0.93
------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.52) (0.42) (0.42)
Distributions from net
realized capital gains - - (0.03) (0.03) - -
------- ------- ------- ------
Total distributions (0.48) (0.55) (0.45) (0.42)
------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 10.33 $ 9.82 $ 10.70 $10.33
======= ======= ======= ======
Total return 10.30%/3/ (3.06)%/3/ 11.69%/3/ 9.69%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $42,775 $46,563 $35,934 $4,008
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.98% 0.41% 0.07%/2/ 1.57%/2/
Before
advisory/administration
fee waivers 1.30% 1.01% 0.95%/2/ 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.88% 5.06% 5.19%/2/ 4.07%/2/
Before
advisory/administration
fee waivers 4.56% 4.46% 4.31%/2/ 3.75%/2/
PORTFOLIO TURNOVER RATE 66% 30% 40% 66%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
20
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR YEAR YEAR PERIOD
8/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.94 $ 11.31 $ 11.30 $ 10.46 $ 10.00
------- ------- -------- ------- -------
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both realized
and unrealized) 0.28 (0.36) 0.04 0.85 0.45
------- ------- -------- ------- -------
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - (0.01) (0.03) - - - -
------- ------- -------- ------- -------
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
------- ------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.22 $ 10.94 $ 11.31 $ 11.30 $ 10.46
======= ======= ======== ======= =======
Total return*** 4.90% 1.49% 5.18% 13.48% 12.33%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
PORTFOLIO TURNOVER RATE 18% 28% 12% 16% 0%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 12, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
* Annualized.
** Commenced operations on July 1, 1991.
*** Total return does not reflect sales load.
21
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 12/1/92/1/ 10/13/94/1/
ENDED ENDED THROUGH THROUGH
9/30/95 9/30/94 9/30/93 9/30/95
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.60 $ 10.53 $10.00 $ 9.58
-------- -------- ------ ------
Income from investment
operations
Net investment income 0.52 0.53 0.36 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.45 (0.91) 0.53 0.47
-------- -------- ------ ------
Total from investment
operations 0.97 (0.38) 0.89 0.89
-------- -------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.52) (0.53) (0.36) (0.42)
Distributions from net
realized capital gains - - (0.02) - - - -
-------- -------- ------ ------
Total distributions (0.52) (0.55) (0.36) (0.42)
-------- -------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.05 $ 9.60 $10.53 $10.05
======== ======== ====== ======
Total return 10.46%/3/ (3.75)%/3/ 9.10%/3/ 9.33%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 3,303 $ 3,825 $2,386 $ 106
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.38% 0.10% 0.07%/2/ 1.17%/2/
Before
advisory/administration
fee waivers 1.45% 1.49% 2.58%/2/ 2.25%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.42% 5.18% 4.90%/2/ 4.48%/2/
Before
advisory/administration
fee waivers 4.35% 3.79% 2.39%/2/ 3.41%/2/
PORTFOLIO TURNOVER RATE 63% 61% 36% 63%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
/3/Sales load not reflected in total return.
22
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 28 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eleven
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Seven of these Portfolios invest solely in taxable bonds and
four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods, a
fund that invests in any one of these styles may perform above
or below the market. An investment program that combines these
multiple disciplines allows investors to select from among these
various product options in the way that most closely fits the
individual's investment goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Short Government Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Government Income,
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio Tax- State-Specific Tax-Free Portfolio,
Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
23
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Short Gov't Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Gov't Income Lehman Mortgage/10 10-15 Years Gov't/Agency AAA
Year Treasury
Managed Salomon BIG 5-10 Years Investment Grade BBB
Income Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
OH Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
24
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
25
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securities
and related repurchase agreements) 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 Portfo-
lio's total assets may be invested without regard to this limitation so long as
no more than 25% of the Portfolio's total assets are invested in any one issuer
(except U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any such commitment is
no longer in the best interests of a Portfolio, it will revoke the commitment
by terminating sales of shares of the Portfolio in the state involved.
26
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Short Government Bond Portfolio,
Intermediate Government Bond Portfolio and Government Income Portfolio (the
"Government Portfolios") will be rated in the highest rating category at the
time of purchase or, if unrated, of comparable quality as determined by the
Portfolios' sub-adviser. Securities acquired by the other Portfolios will be
rated investment grade at the time of purchase (within the four highest voting
categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Serv-
ice, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services,
Inc.) or, if unrated, of comparable quality as determined by a Portfolio's sub-
adviser. Securities rated "Baa" on "BBB" are generally considered to be invest-
ment grade although they have speculative characteristics. If a security's rat-
ing is reduced below the minimum rating that is permitted for a Portfolio, the
Portfolio's sub-adviser will consider whether the Portfolio should continue to
hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Government Portfolios
will invest at least 65% of their net assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its net as-
sets in the debt obligations of foreign issuers located in at least three dif-
ferent foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jer-
sey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-
Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (together with
the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfolios") will in-
vest, during normal market conditions, at least 80% of their net assets in ob-
ligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their political sub-divisions,
agencies, instrumentalities and authorities and related tax-exempt derivative
securities ("Municipal Obligations") the interest on which is exempt from regu-
lar Federal income tax and is not an item of tax preference for purposes of the
Federal alternative minimum tax. In addition, each State-Specific Tax-Free
Portfolio intends to invest at least 65% of its net assets in Municipal Obliga-
tions of issuers located in the particular state indicated by its name. The
Tax-Free Income Portfolio intends to invest no more than 25% of its net assets
in Municipal Obligations of issuers located in the same state. During temporary
defensive periods each Tax-Free Portfolio may invest without limitation in se-
curities that are not Municipal Obligations and may hold without limitation
uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. The Managed Income Portfolio may invest up
to 10% of its total assets in debt securities of foreign issuers and may hold
from time to time various foreign currencies pending their investment or con-
version into U.S. dollars. Investing in securities of foreign issuers involves
considerations not typically associated with investing in securities of compa-
nies organized and operated in the United States. Because foreign securities
generally are denominated and pay dividends or interest in foreign currencies,
the value of a Portfolio that invests in foreign securities will be affected
favorably or unfavorably by changes in currency exchange rates.
27
<PAGE>
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions
effected on foreign stock exchanges has increased in recent years, it remains
appreciably below that of the New York Stock Exchange. Accordingly, a Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. Such instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer.
28
<PAGE>
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 nor-
mally issued by special purpose public authorities. If the issuer of moral ob-
ligation bonds is unable to meet its debt service obligations from current rev-
enues, it may draw on a reserve fund the restoration of which is a moral com-
mitment but not a legal obligation of the state or municipality which created
the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its net assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects. To the ex-
tent a Portfolio's assets are invested in Municipal Obligations payable from
the revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. Each Tax-Free Portfolio will acquire stand-by commitments solely
to facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
29
<PAGE>
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. The amount of information
regarding the financial condition of issuers of Municipal Obligations may not
be as extensive as that which is made available by public corporations and the
secondary market for Municipal Obligations may be less liquid than that for
taxable fixed-income securities. Accordingly, the ability of a Tax-Free Portfo-
lio to buy and sell tax-exempt securities may, at any particular time and with
respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its investment adviser and sub-adviser will rely on such
opinions and will not review independently the underlying proceedings relating
to the issuance of Municipal Obligations, the creation of any tax-exempt deriv-
ative securities, or the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may purchase securities that are secured or backed by mort-
gages as well as other assets (e.g., automobile loans and credit card receiv-
ables). Issuers of these mortgage-related and asset-backed securities include
the U.S. Government, the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), and private issuers such as commercial banks, financial
companies, finance subsidiaries of industrial companies, savings and loan asso-
ciations, mortgage banks and investment banks.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are not pre-
sented by mortgage-related securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws, many of which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of ve-
hicles involved in a typical issuance and technical requirements under state
laws, the trustee for the
30
<PAGE>
holders of the automobile receivables may not have an effective security inter-
est in all of the obligations backing such receivables. Therefore, there is a
possibility that recoveries on repossessed collateral may not, in some cases,
be able to support payments on these securities.
The yield characteristics of mortgage-related and asset-backed securities dif-
fer from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying as-
sets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-related or asset-backed security is purchased at a premium, a prepay-
ment rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if one of these securities is pur-
chased at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will decrease, yield to maturity. In calculat-
ing the average weighted maturity of a Portfolio, the maturity of mortgage-re-
lated and asset-backed securities will be based on estimates of average life
which take prepayments into account.
Prepayments on mortgage-related and asset-backed securities generally increase
with falling interest rates and decrease with rising interest rates; further-
more, prepayment rates are influenced by a variety of economic and social fac-
tors. In general, the collateral supporting non-mortgage asset-backed securi-
ties is of shorter maturity than mortgage loans and is less likely to experi-
ence substantial prepayments. Like other fixed income securities, when interest
rates rise the value of a mortgage-related or asset-backed security generally
will decline; however, when interest rates decline, the value of these securi-
ties that have prepayment features may not increase as much as that of other
fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can
31
<PAGE>
be extremely volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest are generally higher
than prevailing market yields on other mortgage-related obligations because
their cash flow patterns are also volatile and there is a greater risk that the
initial investment will not be fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or instrumen-
tality) may be considered liquid under guidelines established by the Fund's
Board of Trustees if they can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of a Port-
folio's per share net asset value.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios (except the Tax-Free Portfolios) may in-
vest in debt obligations of domestic or foreign corporations and banks, and may
acquire commercial obligations issued by Canadian corporations and Canadian
counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-
denominated commercial paper of a foreign issuer. Bank obligations may include
certificates of deposit, notes, bankers' acceptances and fixed time deposits.
These obligations may be general obligations of the parent bank or may be lim-
ited to the issuing branch or subsidiary by the terms of a specific obligation
or by government regulation. The Portfolios may also make interest-bearing sav-
ings deposits in commercial and savings banks in amounts not in excess of 5% of
their respective total assets. For purposes of determining the permissibility
of an investment in bank obligations, the total assets of a bank are determined
on the basis of the bank's most recent annual financial statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA and the
Student Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government would provide financial support to
U.S. Government-sponsored agencies or instrumentalities if it is not obligated
to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their holdings, as a duration
management technique or to protect against an increase in the price of securi-
ties a Portfolio anticipates purchasing at a later date. The Portfolios intend
to use these transactions as a hedge and not as a speculative investment.
32
<PAGE>
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, financial instruments, foreign currencies, securities indi-
ces or the yield differential between two securities, and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options where
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corporation,
which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of the Fund's total assets, although a Portfolio will not pur-
chase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options is 5% or less of its net assets.
33
<PAGE>
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities in
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid high grade assets or will
otherwise cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
34
<PAGE>
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for the Portfo-
lio to dispose of a variable or floating rate instrument if the issuer de-
faulted on its payment obligation or during periods when the Portfolio is not
entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to make limited borrowings. If the securities held by a Portfolio should
decline in value while borrowings are outstanding, the net asset value of the
Portfolio's outstanding shares will decline in value by proportionately more
than the decline in value suffered by the Portfolio's securities. Borrowings
may be made through reverse repurchase agreements under which a Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolios
may use the proceeds of reverse repurchase agreements to purchase other securi-
ties either maturing, or under an agreement to resell, on a date simultaneous
with or prior to the expiration of the reverse repurchase agreement. The Port-
folios (except the Tax-Free Portfolios) may use reverse repurchase agreements
when it is anticipated that the interest income to be earned from the invest-
ment 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 maintain a segregated account with the Fund's custodian contain-
ing cash, U.S. Government or other appropriate liquid high-grade debt securi-
ties having a value at least equal to the repurchase price. A Portfolio's re-
verse repurchase agreements, together with any other borrowings, will not ex-
ceed, in the aggregate,
35
<PAGE>
33 1/3% of the value of its total assets. In addition, a Portfolio (except the
Tax-Free Portfolios) may borrow up to an additional 5% of its total assets for
temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. Any such security will not be considered illiquid so long as it is deter-
mined by a Portfolio's sub-adviser, acting under guidelines approved and moni-
tored by the Board, that an adequate trading market exists for that security.
This investment practice could have the effect of increasing the level of il-
liquidity 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 se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and for-
ward commitment transactions involve the risk, however, that the price or
yield obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. Each Portfo-
lio's when-issued purchases and forward commitments are not expected to exceed
25% of the value of its total assets absent unusual market conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing such securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and
36
<PAGE>
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 perfor-
mance of a Portfolio compared with what the performance would have been without
the use of dollar rolls. At the time that a Portfolio enters into a dollar roll
transaction, it will place in a segregated account maintained with its custo-
dian cash, U.S. Government securities or other liquid high grade debt obliga-
tions having a value equal to the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure that its value is main-
tained. A Portfolio's dollar rolls, together with its reverse repurchase agree-
ments and other borrowings, will not exceed, in the aggregate, 33 1/3% of the
value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted and the instruments which the Portfolio is
required to repurchase may be worth less than an instrument which the Portfolio
originally held when the Portfolio is able to complete the purchase. Successful
use of mortgage dollar rolls may depend upon a sub-adviser's ability to cor-
rectly predict interest rates and prepayments. There is no assurance that dol-
lar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is expected that
the annual portfolio turnover rate for the Government Income Portfolio will not
exceed 300%. The past portfolio turnover rates of the other Portfolios are set
forth above under "What Are the Portfolios' Financial Highlights?" A Portfo-
lio's annual portfolio turnover rate will not, however, be a factor preventing
a sale or purchase when the sub-adviser believes investment considerations war-
rant such sale or purchase. Portfolio turnover may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates will
generally result in higher transaction costs to a Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the Portfolios can
be expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
37
<PAGE>
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/ undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture is an im-
portant segment of the Ohio economy with over half the State's area devoted to
farming and
38
<PAGE>
approximately 15% of total employment in agribusiness. In prior years, the
State's overall unemployment rate was commonly somewhat higher than the na-
tional figure. For example, the reported 1990 average monthly State rate was
5.7%, compared to the 5.5% national figure. However, for the last four years
the State rates were below the national rates (5.5% versus 6.1% in 1994). The
unemployment rate and its effects vary among particular geographic areas of the
State. There can be no assurance that future national, regional or state-wide
economic difficulties and the resulting impact on State or local government fi-
nances generally will not adversely affect the market value of Ohio Municipal
Obligations held in the Portfolio or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those obli-
gations.
39
<PAGE>
Who Manages The Fund?
- -------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of its Board of Trustees. The following individuals
were elected by shareholders on January 4, 1996 to serve as
trustees of Compass Capital 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 Of-
ficer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Manage-
SUB-ADVISERS ment Group ("PAMG"). Each of the Portfolios within the Com-
pass Capital Fund family, except the International Bond Port-
folio, is managed by a specialized portfolio manager who is a
member of PAMG's fixed income portfolio management subsidi-
ary, BlackRock Financial Management, Inc. ("BlackRock"). The
sub-adviser of the International Bond Portfolio is Morgan
Grenfell Investment Services Limited ("Morgan Grenfell").
The eleven portfolios and their investment sub-advisers and
portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Short Government Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Intermediate Bond BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Core Bond BlackRock(/1/) Scott Amero (see above); Mr. Amero
has been Portfolio manager since its
inception.
Government Income BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Managed Income BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
International Bond Morgan Grenfell(/2/) Martin A. Hall; Director of Morgan
Grenfell since 1991; Portfolio
manager since 1991.
Tax-Free Income BlackRock(/1/) Kevin Klingert; portfolio manager at
BlackRock since 1991; prior to
joining BlackRock, Assistant Vice
President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager
since 1995.
Pennsylvania Tax-Free BlackRock(/1/) Kevin Klingert (see above);
Income Portfolio manager since 1995.
New Jersey Tax-Free In- BlackRock(/1/) Kevin Klingert (see above);
come Portfolio manager since 1995.
Ohio Tax-Free Income BlackRock(/1/) Kevin Klingert (see above);
Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
41
<PAGE>
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1835
Market Street, Philadelphia, Pennsylvania 19103. PAMG is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
bank holding company. Morgan Grenfell is an indirect wholly-
owned subsidiary of Deutsche Bank, A.G., a German financial
services conglomerate.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, com-
puted daily on a Portfolio-by-Portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are The Expenses Of The Portfolios?" PAMG
and the sub-advisers intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For their last fiscal years, the Portfolios paid investment
advisory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee
waivers: Short Government Bond Portfolio, .30%; Intermediate
Government Bond Portfolio, .20%; Intermediate Bond Portfolio,
.25%; Core Bond Portfolio, .35%; Government Income Portfolio,
0%; Managed Income Portfolio, .35%; International Bond Port-
folio, .80%; Tax-Free Income Portfolio, 0%; Pennsylvania Tax-
Free Income Portfolio, .27%; New Jersey Tax-Free Income Port-
folio, .60%; and Ohio Tax-Free Income Portfolio, 0%.
The sub-advisers to each Portfolio strive to achieve best ex-
ecution on all transactions. Infrequently, brokerage transac-
tions for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements of
best execution.
42
<PAGE>
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .20% of the first $500
million of each Portfolio's average daily net assets, .18% of
the next $500 million of each Portfolio's average daily net as-
sets, .16% of the next $1 billion of each Portfolio's average
daily net assets and .15% of each Portfolio's average daily net
assets in excess of $2 billion. From time to time the Adminis-
trators may waive some or all of their administration fees from
a Portfolio.
For information about the operating expenses the Portfolios ex-
pect to pay for the current fiscal year, see "What Are the Ex-
penses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION Under the Fund's Distribution and Service Plan (the "Plan"), In-
AND SERVICE vestor Shares of the Portfolios bear the expense of payments
PLAN ("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank, National Associ-
ation ("PNC Bank") for distribution and sales support services.
The distribution fees will be used primarily to compensate the
Distributor for distribution services and to compensate the Dis-
tributor and PNC Bank affiliates for sales support services pro-
vided in connection with the offering and sale of Investor
Shares. The distribution fees may also be used to reimburse the
Distributor and PNC Bank affiliates for related expenses, in-
cluding payments to brokers, dealers, financial institutions and
industry professionals ("Service Organizations") for sales sup-
port services and related expenses. Distribution fees payable
under the Plan will not exceed .10%
43
<PAGE>
(annualized) of the average daily net asset value of each
Portfolio's outstanding Investor A Shares and .75%
(annualized) of the average daily net asset value of each
Portfolio's outstanding Investor B Shares. Payments under the
Plan are not tied directly to out-of-pocket expenses and
therefore may be used by the recipients as they choose (for
example, to defray their overhead expenses).
Under the Plan, the Fund intends to enter into service agree-
ments with Service Organizations (including PNC Bank and its
affiliates) with respect to each class of Investor Shares
pursuant to which Service Organizations will render certain
support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder
servicing fee of up to .25% (annualized) of the average daily
net asset value of Investor Shares owned by their customers,
Service Organizations may provide one or more of the follow-
ing services: responding to customer inquiries relating to
the services performed by the Service Organization and to
customer inquiries concerning their investments in Investor
Shares; providing information periodically to customers show-
ing their positions in Investor Shares; and other similar
shareholder liaison services. In consideration for a separate
shareholder processing fee of up to .15% (annualized) of the
average daily net asset value of Investor Shares owned by
their customers, Service Organizations may provide one or
more of these additional services to such customers: process-
ing purchase and redemption requests from customers and plac-
ing orders with the Fund's transfer agent or the Distributor;
processing dividend payments from the Fund on behalf of cus-
tomers; providing sub-accounting with respect to Investor
Shares beneficially owned by customers or the information
necessary for sub-accounting; and other similar services.
Service Organizations may charge their clients additional
fees for account services. Customers who are beneficial own-
ers of Investor Shares should read this Prospectus in light
of the terms and fees governing their accounts with Service
Organizations.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of un-
derwriting securities. It is intended that the services pro-
vided by Service Organizations under their service agreements
will not be prohibited under these laws. However, state secu-
rities laws may differ from the interpretations of Federal
law on this issue, and banks and financial institutions may
be required to register as dealers pursuant to state law.
44
<PAGE>
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and other
expenses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
45
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Bond Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes+. These options are described below:
A SHARES (FRONT-END LOAD)
. One time, front-end sales charge at time of purchase
. No charges or fees at any time for redeeming shares
. Lower ongoing expenses
. Free exchanges with other A Shares in the Compass Capital
Funds family
A Shares may make sense for investors with a long-term in-
vestment horizon who prefer to pay a one-time front-end sales
charge and have reduced ongoing fees.
B SHARES (BACK-END LOAD)
. No front-end sales charge at time of purchase
. Contingent deferred sales charge (CDSC) if shares are re-
deemed, declining over 6 years from a high of 4.50%
. Automatically convert to A Shares seven years from purchase
B Shares may make sense for investors who prefer to pay for
professional investment advice on an ongoing basis (asset-
based sales charge) rather than with a traditional, one-time
front-end sales charge.
+The Intermediate Bond and Managed Income Portfolios do not currently offer In-
vestor B Shares.
46
<PAGE>
THE PRICING OPTIONS FOR EACH PORTFOLIO ARE DESCRIBED IN THE TABLES BELOW:
Intermediate Government Bond, Intermediate Bond, Core Bond, Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-Free
Income Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 4.00% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
Government Income and Managed Income Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge 4.50% 0.00%
12b-1 Fee 0.00%* 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
Short Government Bond Portfolio:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge.................. 3.00% 0.00%
12b-1 Fee....................................... 0.00%* 0.75%
CDSC (Redemption Charge)........................ 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
International Bond Portfolio:
<TABLE>
<CAPTION>
A SHARES B SHARES
<S> <C> <C>
Maximum Front-End Sales Charge.................. 5.00% 0.00%
12b-1 Fee....................................... 0.00%* 0.75%
CDSC (Redemption Charge)........................ 0.00% 4.50%-0.00%
(Depends on when
shares are redeemed)
</TABLE>
*The Portfolios do not expect to incur any 12b-1 fees with respect to Investor
A Shares during the current fiscal year.
Investors wishing to purchase shares of the Portfolios may do so either by
mailing the investment application attached to this Prospectus along with a
check or by wiring money as specified below under "How Are Shares Purchased?"
47
<PAGE>
What Are The Key Considerations In Selecting A Pricing Option?
- -------------------------------------------------------------------------------
In deciding which class of Investor Shares to purchase, investors should con-
sider the following:
Intended Holding Period. Over time, the cumulative distribution fees on a
Portfolio's Investor B Shares will exceed the expense of the maximum initial
sales charge on Investor A Shares. For example, if net asset value remains
constant, the Investor B Shares' aggregate distribution fees would be equal to
the Investor A Shares' initial maximum sales charge from four to seven years
after purchase (depending on the Portfolio). Thereafter, Investor B Shares
would bear higher aggregate expenses. Investor B shareholders, however, enjoy
the benefit of permitting all their dollars to work from the time the invest-
ments are made. Any positive investment return on the additional invested
amount would partially or wholly offset the higher annual expenses borne by
Investor B Shares.
Because the Portfolios' future returns cannot be predicted, however, there can
be no assurance that such a positive return will be achieved.
At the end of seven years after the date of purchase, Investor B Shares will
convert automatically to Investor A Shares, based on the relative net asset
values of shares of each class. Investor B Shares acquired through reinvest-
ment of dividends or distributions are also converted at the earlier of these
dates--seven years after the reinvestment date or the date of conversion of
the most recently purchased Investor B Shares that were not acquired through
reinvestment.
Investor B Shares of the Portfolios purchased on or before January 12, 1996
are subject to a CDSC of 4.50% of the lesser of the original purchase price or
the net asset value of Investor B Shares at the time of redemption. This de-
ferred sales charge is reduced for shares held more than one year. Investor B
Shares of a Portfolio purchased on or before January 12, 1996 convert to In-
vestor A Shares of the Portfolio at the end of six years after purchase. For
more information about Investor B Shares purchased before January 12, 1996 and
the deferred sales charge payable on their redemption, call PFPC at (800) 441-
7762.
Investor B shareholders also pay a contingent deferred sales charge if they
redeem during the first six years after purchase, unless a sales charge waiver
applies. Investors expecting to redeem during this period should consider the
cost of the applicable contingent deferred sales charge in addition to the ag-
gregate annual Investor B distribution fees, as compared with the cost of the
applicable initial sales charges applicable to the Investor A Shares.
Reduced Sales Charges. Because of reductions in the front-end sales charge
for purchases of Investor A Shares aggregating $25,000 or more, it may be ad-
vantageous for investors purchasing large quantities of Investor Shares to
purchase Investor A Shares. In any event, the Fund will not accept any pur-
chase order for $1,000,000 or more of Investor B Shares.
Waiver of Sales Charges. The entire initial sales charge on Investor A Shares
of a Portfolio may be waived for certain eligible purchasers allowing their
entire purchase price to be immediately invested in a Portfolio. The contin-
gent deferred sales charge may be waived upon redemption of certain Investor B
Shares.
48
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor Shares through a
broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$100 minimum for subsequent investments. Purchases through the Automatic In-
vestment Plan described below are subject to a lower initial purchase minimum.
In addition, the minimum initial investment for employees of the Fund, the
Fund's investment adviser, sub-advisers, Distributor or transfer agent or em-
ployees of their affiliates is $100.
When placing purchase orders, investors should specify whether the order is for
Investor A or Investor B Shares of a Portfolio. All share purchase orders that
fail to specify a class will automatically be invested in Investor A Shares.
PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through
brokers which have entered into dealer agreements with the Distributor. Pur-
chase orders received by a broker and transmitted to the transfer agent before
the close of regular trading on the New York Stock Exchange (currently 4:00
p.m. Eastern time) on a Business Day will be effected at the net asset value
determined that day, plus any applicable sales charge. Payment for an order may
be made by the broker in Federal funds or other funds immediately available to
the Portfolios' custodian no later than 4:00 p.m. (Eastern time) on the third
Business Day following receipt of the purchase order.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described above,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to which shares are purchased must also appear on the check or Federal Reserve
Draft. Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, specify
the class of Investor Shares, and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East-
ern time) on any Business Day (as defined below) are priced at the applicable
net asset value next determined on that day, plus any applicable sales charge.
49
<PAGE>
OTHER PURCHASE INFORMATION. Shares of each Portfolio are sold on a continuous
basis by CDI as the Distributor. CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Purchases may be
effected on weekdays on which both the New York Stock Exchange and the Federal
Reserve Bank of Philadelphia are open for business (a "Business Day"). Payment
for orders which are not received or accepted will be returned after prompt in-
quiry. The issuance of shares is recorded on the books of the Fund. No certifi-
cates will be issued for shares. Payments for shares of a Portfolio may, in the
discretion of the Fund's investment adviser, be made in the form of securities
that are permissible investments for that Portfolio. Compass Capital reserves
the right to reject any purchase order or to waive the minimum initial invest-
ment requirement.
50
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge that may be charged with respect to Investor B
Shares, there is no charge for a redemption. Shareholders may also place re-
demption requests through a broker or other institution, which may charge a fee
for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES OR INVESTOR B SHARES. If a redeem-
ing shareholder owns both Investor A Shares and Investor B Shares in the same
Portfolio, the Investor A Shares will be redeemed first unless the shareholder
indicates otherwise.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding Investor A Share certificates
must send their certificates with the redemption request. Additional documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by Federal wire transfer to a single previously desig-
nated bank account. Once authorization is on file, PFPC will honor requests by
any person by telephone at (800) 441-7762 (in Delaware call collect (302) 791-
1194) or other means. The minimum amount that may be sent by check is $500,
while the minimum amount that may be wired is $10,000. The Fund reserves the
right to change these minimums or to terminate these redemption privileges. If
the proceeds of a redemption would exceed $25,000, the redemption request must
be in writing and will be subject to the signature guarantee requirement de-
scribed above. This privilege may not be used to redeem Investor A Shares in
certificated form. During periods of substantial economic or market change,
telephone redemptions may be difficult to complete. Redemption requests may
also be mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Fund does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written re-
51
<PAGE>
quest (with a guaranteed signature as described above) to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account
in such Portfolio falls below the minimum initial investment requirement
amount as the result of a redemption or an exchange request. A shareholder
will be notified in writing that the value of the shareholder's account in a
Portfolio is less than the required amount and will be allowed 30 days to make
additional investments before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by the Compass Capital Funds c/o PFPC, P.O. Box 8907,
Wilmington, Delaware 19899-8907. Proceeds from the redemption of Investor B
Shares will be reduced by the amount of any applicable contingent deferred
sales charge. Unless another payment option is used as described above, pay-
ment for redeemed shares is normally made by check mailed within seven days
after acceptance by PFPC of the request and any other necessary documents in
proper order. Payment may, however, be postponed or the right of redemption
suspended as provided by the rules of the SEC. If the shares to be redeemed
have been recently purchased by check, the Fund's transfer agent may delay the
payment of redemption proceeds, which may be a period of up to 15 days after
the purchase date, pending a determination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's responsi-
bilities under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
52
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
Compass Capital Funds offers shareholders many special features which enable an
investor to have greater investment flexibility as well as greater access to
information about the Fund throughout the investment period.
Additional information on each of these features is available from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor A and Investor B Shares of each Portfolio may be
exchanged for shares of the same class of other portfolios of the Fund which
offer that class of shares, based on their respective net asset values. Ex-
changes of Investor A Shares may be subject to the difference between the sales
charge previously paid on the exchanged shares and the higher sales charge (if
any) payable with respect to the shares acquired in the exchange.
Investor A Shares of money market portfolios of the Fund that were (1) acquired
through the use of the exchange privilege and (2) can be traced back to a pur-
chase of shares in one or more investment portfolios of the Fund for which a
sales charge was paid, can be exchanged for Investor A Shares of a portfolio
subject to differential sales charges as applicable.
The exchange of Investor B Shares will not be subject to a CDSC, which will
continue to be measured from the date of the original purchase and will not be
affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide for this option, a Telephone Exchange Authorization Form must be filed
with PFPC. This form is available from PFPC. Once this election has been made,
the shareholder may simply contact PFPC by telephone at (800) 441-7762 (in Del-
aware call collect (302) 791-1194) to request the exchange. During periods of
substantial economic or market change, telephone exchanges may be difficult to
complete and shareholders may have to submit exchange requests to PFPC in writ-
ing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For
53
<PAGE>
Federal income tax purposes, a share exchange is a taxable event and, accord-
ingly, a capital gain or loss may be realized. Before making an exchange re-
quest, shareholders should consult a tax or other financial adviser and should
consider the investment objective, policies and restrictions of the investment
portfolio into which the shareholder is making an exchange, as set forth in the
applicable Prospectus. Brokers may charge a fee for handling exchanges.
The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request. Telephone
exchanges may be subject to limitations as to amount or frequency, and to other
restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may
arrange for periodic investments in that Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts. Upon commencement of the SWP, the account must have a cur-
rent value of $10,000 or more in a Portfolio. Shareholders may elect to receive
automatic cash payments of $100 or more either monthly, every other month,
quarterly, three times a year, semi-annually, or annually. Automatic withdraw-
als are normally processed on the 25th day of the applicable month or, if such
day is not a Business Day, on the next Business Day and are paid promptly
thereafter. An investor may utilize the SWP by completing the SWP Application
Form which may be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested and may not
hold share certificates. Shareholders may change or cancel the SWP at any time,
upon written notice to PFPC. Purchases of additional Investor A Shares of the
Fund concurrently with withdrawals may be disadvantageous to invest-
54
<PAGE>
ors because of the sales charges involved and, therefore, is discouraged. No
contingent deferred sales charge will be assessed on redemptions of Investor B
Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor B Shares will not be subject to the CDSC if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. SWP redemptions of Investor B Shares in excess of this limit
are still subject to the applicable CDSC.
55
<PAGE>
What Is The Schedule Of Sales Charges And Exemptions?
- --------------------------------------------------------------------------------
INVESTOR A Investor A Shares are subject to a front-end sales charge de-
SHARES termined in accordance with the following schedules:
Short Government Bond Portfolio:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 3.00% 3.09% 2.50%
$25,000 but less than $50,000 2.75 2.83 2.25
$50,000 but less than $100,000 2.50 2.56 2.00
$100,000 but less than $250,000 2.00 2.04 1.75
$250,000 but less than $500,000 1.50 1.52 1.25
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
Intermediate Government Bond, Intermediate Bond, Core Bond, Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-Free
Income Portfolios:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 but less than $50,000 3.75 3.90 3.25
$50,000 but less than $100,000 3.50 3.63 3.00
$100,000 but less than $250,000 3.00 3.09 2.50
$250,000 but less than $500,000 2.00 2.04 1.50
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the net asset value of the shares on the purchase or
redemption date for shares redeemed within 18 months after purchase.
** The Distributor may pay placement fees to dealers of up to 0.75% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
56
<PAGE>
Government Income and Managed Income Portfolios:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.00%
$25,000 but less than $50,000 4.25 4.70 3.75
$50,000 but less than $100,000 4.00 4.17 3.50
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
International Bond Portfolio:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000 but less than $50,000 4.75 4.99 4.25
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 4.00 4.17 3.50
$250,000 but less than $500,000 3.00 3.09 2.50
$500,000 but less than $1,000,000 2.00 2.04 1.50
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the net asset value of the shares on the purchase or
redemption date for shares redeemed within 18 months after purchase.
** The Distributor may pay placement fees to dealers of up to 1.00% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
57
<PAGE>
During special promotions, the entire sales charge may be reallowed to dealers.
In addition, certain dealers who enter into an agreement to provide extra
training and information on products, or marketing and related services, and
who increase sales of shares may also receive additional payments from the Dis-
tributor. Dealers who receive 90% or more of the sales charge may be deemed to
be "underwriters" under the 1933 Act. The amount of the sales charge not
reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp.
who provide sales support services.
SALES CHARGE WAIVERS--INVESTOR A SHARES. The following persons associated with
the Fund, the Distributor, the Fund's investment adviser, sub-advisers or
transfer agent and their affiliates may buy Investor A Shares without paying a
sales charge to the extent permitted by these firms: (a) officers, directors
and partners (and their spouses and minor children); (b) full-time employees
and retirees (and their spouses and minor children); (c) registered representa-
tives of brokers who have entered into selling agreements with the Distributor;
(d) spouses or children of such persons; and (e) any trust, pension, profit-
sharing or other benefit plan for any of the persons set forth in (a) through
(c). The following persons may also buy Investor A Shares without paying a
sales charge: (a) persons investing through an authorized payroll deduction
plan; (b) persons investing through an authorized investment plan for organiza-
tions which operate under Section 501(c)(3) of the Internal Revenue Code; (c)
registered investment advisers, trust companies and bank trust departments ex-
ercising discretionary investment authority with respect to amounts to be in-
vested in a Portfolio, provided that the aggregate amount invested pursuant to
this exemption equals at least $250,000; and (d) persons participating in a
"wrap account" or similar program under which they pay advisory fees to a bro-
ker-dealer or other financial institution. INVESTORS WHO QUALIFY FOR ANY OF
THESE EXEMPTIONS FROM THE SALES CHARGE MUST PURCHASE INVESTOR A SHARES.
QUALIFIED PLANS. The sales charge (as a percentage of the offering price) pay-
able by qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate on purchases of Investor A Investor Shares of
the Portfolios aggregating less than $500,000 will be 1.00%. No sales charge
will apply to purchases by Qualified Plans of Investor A Shares aggregating
$500,000 and above. The sales charge payable by Qualified Plans having less
than 20 employees eligible to participate on purchases of Investor A Shares of
the Portfolios aggregating less than $500,000 will be 2.50% (1.50% with respect
to shares of the Short Government Bond Portfolio.) The above schedules will ap-
ply to purchases by such Qualified Plans of Investor A Shares aggregating
$500,000 and above.
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the sales
charge price. Upon notice to the investor's broker or the transfer agent, pur-
chases of Investor A Shares made at any one time by the following persons may
be considered when calculating the sales charge: (a) an individual, his or her
spouse, and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized
for the purpose of buying redeemable securities of a registered investment com-
pany, and if the purchase is made through a central administrator, or through a
single dealer, or by other means which result in economy of sales effort or ex-
pense. An organized group does not include a group of
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<PAGE>
individuals whose sole organizational connection is participation as credit
card holders of a company, policyholders of an insurance company, customers of
either a bank or broker/dealer or clients of an investment adviser. Purchases
made by an organized group may include, for example, a trustee or other fidu-
ciary purchasing for a single fiduciary account or other employee benefit plan
purchases made through a payroll deduction plan.
REDUCED SALES CHARGES--INVESTOR A SHARES
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value of an
investor's existing Investor A Shares in any of the Portfolios that are subject
to a front-end sales charge may be combined with the amount of the investor's
current purchase in determining the applicable sales charge. IN ORDER TO RE-
CEIVE THE CUMULATIVE QUANTITY REDUCTION, PREVIOUS PURCHASES OF INVESTOR A
SHARES MUST BE CALLED TO THE ATTENTION OF PFPC BY THE INVESTOR AT THE TIME OF
THE CURRENT PURCHASE.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a Portfolio (or
Investor A Shares of another non-money market portfolio of the Fund), a share-
holder has a one-time right, to be exercised within 45 days, to reinvest the
redemption proceeds without any sales charges. PFPC must be notified of the re-
investment in writing by the purchaser, or by his or her broker, at the time
the purchase is made in order to eliminate a sales charge. An investor should
consult a tax adviser concerning the tax consequences of use of the reinvest-
ment privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Investor A Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of any other investment company
which were sold with a sales charge or commission. This does not include shares
of an affiliated mutual fund which were or would be subject to a contingent de-
ferred sales charge upon redemption. Such purchases must be made within 60 days
of the redemption, and the Fund must be notified by the investor in writing, or
by his or her financial institution, at the time the purchase of Investor A
Shares is made.
LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a non-binding Letter of Intent stating the investor's inten-
tion to invest during the next 13 months a specified amount in Investor A
Shares which, if made at one time, would qualify for a reduced sales charge.
The Letter of Intent may be signed at any time within 90 days after the first
investment to be included in the Letter of Intent. The initial investment must
meet the minimum initial investment requirement and represent at least 5% of
the total intended investment. THE INVESTOR MUST INSTRUCT PFPC UPON MAKING SUB-
SEQUENT PURCHASES THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF INTENT. All
dividends and capital gains of a Portfolio that are invested in additional In-
vestor A Shares of the same Portfolio are applied to the Letter of Intent.
During the term of a Letter of Intent, the Fund's transfer agent will hold In-
vestor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full amount indicated in the Letter of Intent is
not purchased. The escrowed Investor A Shares will
59
<PAGE>
be released when the full amount indicated has been purchased. Any redemptions
made during the 13-month period will be subtracted from the amount of purchases
in determining whether the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month period, the
investor will be required to pay an amount equal to the difference between the
sales charge actually paid and the sales charge the investor would have had to
pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the ex-
piration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.
PURCHASES OF INVESTOR B SHARES. Investor B Shares are subject to a deferred
sales charge at the rates set forth in the chart below if they are redeemed
within six years of purchase. The deferred sales charge on Investor B Shares is
based on the lesser of the net asset value of the Investor B Shares on the pur-
chase date or redemption date. Brokers will receive commissions from the Dis-
tributor in connection with sales of Investor B Shares. These commissions may
be different than the reallowances or placement fees paid to dealers in connec-
tion with sales of Investor A Shares.
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
</TABLE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor B Shares is not charged in connection with: (1) ex-
changes described in "What Are the Shareholder Features of the Fund?--Exchange
Privilege"; (2) redemptions made
60
<PAGE>
in connection with minimum required distributions from IRA, 403(b)(7) and Qual-
ified Plan accounts due to the shareholder reaching age 70 1/2; (3) redemptions
in connection with a shareholder's death or disability (as defined in the In-
ternal Revenue Code) subsequent to the purchase of Investor B Shares; (4) in-
voluntary redemptions of Investor B Shares in accounts with low balances as de-
scribed in "How Are Shares Redeemed?"; and (5) redemptions made pursuant to the
Systematic Withdrawal Plan, subject to the limitations set forth above under
"What Are the Shareholder Features of the Fund?--Systematic Withdrawal Plan."
In addition, no contingent deferred sales charge is charged on Investor B
Shares acquired through the reinvestment of dividends or distributions.
When an investor redeems Investor B Shares, the redemption order is processed
to minimize the amount of the contingent deferred sales charge that will be
charged. Investor B Shares are redeemed first from those shares that are not
subject to the deferred sales load (i.e., shares that were acquired through re-
investment of dividends or distributions) and after that from the shares that
have been held the longest.
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How Is Net Asset Value Calculated?
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The net asset value is calculated separately for each class of Investor Shares
of each Portfolio as of the close of regular trading hours on the NYSE (cur-
rently 4:00 p.m. Eastern Time) on each Business Day by dividing the value of
all securities and other assets owned by a Portfolio that are allocated to a
particular class of shares, less the liabilities charged to that class, by the
number of shares of the class that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices or the mean between their bid and asked
prices. Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such securi-
ties on their respective exchanges, except when an occurrence subsequent to the
time a value was so established is likely to have changed such value. Securi-
ties 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 re-
spect to debt obligations with sixty days or less remaining to maturity unless
a Portfolio's sub-adviser under the supervision of the Board of Trustees deter-
mines such method does not represent fair value.
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How Frequently Are Dividends And Distributions Made To Investors?
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Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of the same class of shares of the relevant Portfolio unless a share-
holder elects otherwise. Such election, or any revocation thereof, must be made
in writing to PFPC, and will become effective with respect to dividends paid
after its receipt by PFPC. The net investment income of the Managed Income,
Tax-Free Income, Intermediate Government Bond, Intermediate Bond and Interna-
tional Bond Portfolios is declared monthly as a dividend to investors who are
shareholders of such Portfolio at the close of business on the day of declara-
tion. The net investment income of the Pennsylvania Tax-Free Income, New Jersey
Tax-Free Income, Ohio Tax-Free Income, Government Income, Core Bond and Short
Government Bond Portfolios is declared daily as a dividend to investors who are
shareholders of such Portfolio at, and whose payment for share purchases are
available to the particular Portfolio in Federal funds by, the close of busi-
ness on the day of declaration. All dividends are paid within ten days after
the end of each month and, in the case of the Pennsylvania Tax-Free Income, New
Jersey Tax-Free Income, Ohio Tax-Free Income, Government Income, Core Bond and
Short Government Bond Portfolios, within seven days after redemption of all of
a shareholder's shares in a Portfolio. Net realized capital gains (including
net short-term capital gains), if any, will be distributed by each Portfolio at
least annually.
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<PAGE>
How Are Fund Distributions Taxed?
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Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), 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.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. Shareholders
who are recipients of Social Security Act or Railroad Retirement Act benefits
should note that "exempt interest dividends" will be taken into account in de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
Compass Capital will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer.
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<PAGE>
Generally, shareholders may include sales charges paid on the purchase of
Shares in their tax basis for the purposes of determining gain or loss on a re-
demption, transfer or exchange of such Shares. However, if a shareholder ex-
changes the Shares for Shares of another Portfolio within 90 days of purchase
and is able to reduce the sales charges applicable to the new Shares (by virtue
of the Fund's exchange privilege), the amount equal to such reduction may not
be included in the tax basis of the shareholder's exchanged Shares for the pur-
pose of determining gain or loss but may be included (subject to the same limi-
tation) in the tax basis of the new Shares.
Any loss upon the sale or exchange of shares held for six months or less will
be disallowed for Federal income tax purposes to the extent of any exempt in-
terest dividends received by the shareholder. For the Ohio Tax-Free Income
Portfolio, the loss will be disallowed for Ohio income tax purposes to the same
extent, even though, for Ohio income tax purposes, some portion of such divi-
dends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of the taxable year in question consists
of stock or securities of foreign corporations, the Portfolio may elect, for
U.S. Federal income tax purposes, to treat certain foreign taxes paid by it,
including generally any withholding taxes and other foreign income taxes, as
paid by its shareholders. The Portfolio intends to make this election. As a re-
sult, the amount of such foreign taxes paid by the Portfolio will be included
in its shareholders' income pro rata (in addition to taxable distributions ac-
tually received by them), and each shareholder generally will be entitled ei-
ther (a) to credit a proportionate amount of such taxes against U.S. Federal
income tax liabilities, or (b) if a shareholder itemizes deductions, to deduct
such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania Municipal Obligations or attributable to insurance proceeds on account
of such interest, is not taxable to individuals, estates or trusts under the
Personal Income Tax (in the case of insurance proceeds, to the extent they are
exempt for Federal Income Tax purposes); to corporations under the Corporate
Net Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal Income Tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
65
<PAGE>
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free Income
Portfolio, such gain may be subject to the Personal Income Tax and Corporate
Net Income Tax. Such gain may also be subject to the School District Tax, ex-
cept that gain realized with respect to a share held for more than six months
is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or inter-
est and gain thereon, is subject to, or included in the measure of, the special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax).
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania Municipal Obligations and Federal obligations (if
the interest on such obligations is exempt from state and local taxation under
the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey personal
income tax. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions or direct U.S. Government obligations; it must have no investments other
than interest-bearing obligations, obligations issued at a discount, and cash
and cash items (including receivables); and it must satisfy certain reporting
obligations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
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<PAGE>
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Tax-Free Income Portfolio in
their net income base for purposes of calculating their Ohio corporation fran-
chise tax liability to the extent that such distributions either constitute ex-
empt-interest dividends for Federal income tax purposes or are properly attrib-
utable to interest on Ohio Municipal Obligations or U.S. Obligations. However,
Shares of the Ohio Tax-Free Income Portfolio will be included in a corpora-
tion's net worth base for purposes of calculating the Ohio corporation fran-
chise tax. Distributions properly attributable to gain on the sale, exchange or
other disposition of Ohio Municipal Obligations will not be subject to the Ohio
personal income tax, or municipal or school district income taxes in Ohio and
will not be included in the net income base of the Ohio corporation franchise
tax. Distributions attributable to other sources will be subject to the Ohio
personal income tax and the Ohio corporation franchise tax.
67
<PAGE>
How Is The Fund Organized?
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The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio, other than the Government Income, Intermediate Bond, Managed Income
and Ohio Tax-Free Income Portfolios, offers five separate classes of shares--
Institutional Shares, Service Shares, Investor A Shares, Investor B Shares. The
Government Income Portfolio offers Investor A Shares, Investor B Shares and In-
vestor C Shares; the Intermediate Bond, Managed Income and Ohio Tax-Free Income
Portfolios each offer Investor A Shares, Institutional Shares and Service
Shares and, in addition, the Ohio Tax-Free Income Portfolio offers Investor B
Shares. This prospectus relates only to Investor A Shares and Investor B Shares
of the eleven Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. In addition, each class of Investor
Shares is sold with different sales charges. Because of these "class expenses"
and sales charges, the performance of a Portfolio's Institutional Shares is ex-
pected to be higher than the performance of the Portfolio's Service Shares, and
the performance of both the Institutional Shares and Service Shares of a Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan, automatic withdrawal plan and checkwriting. For further information
regarding the Fund's Institutional and Service Share classes, contact PFPC at
(800) 441-7764.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
68
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How Is Performance Calculated?
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Performance information for each class of Investor Shares of the Portfolios may
be quoted in advertisements and communications to shareholders. Total return
will be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Investor Shares of a Portfolio over the measuring pe-
riod. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to a class of
shares are reinvested in shares of the same class, and also reflect the maximum
sales load charged by the Portfolio with respect to a class of shares. When,
however, a Portfolio compares the total return of a share class to that of
other funds or relevant indices, total return may also be computed without re-
flecting the sales load.
The yield of a class of shares is computed by dividing the Portfolio's net in-
come per share allocated to that class during a 30-day (or one month) period by
the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to a Portfolio's tax-free yield. This
is done by increasing the Portfolio's yield (calculated above) by the amount
necessary to reflect the payment of Federal and/or state income tax at a stated
tax rate.
The performance of a class of a Portfolio's Investor Shares may be compared to
the performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a class of a Portfolio's
Investor Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Lehman GMNA Index, the T-Bill Index
and the "stocks, bonds and inflation index" published annually by Ibbotson As-
sociates and the Lehman Government Corporate Bond Index, as well as the bench-
marks attached to this Prospectus. Performance information may also include
evaluations of the Portfolios and their share classes published by nationally
recognized ranking services, and information as reported in financial publica-
tions such as Business Week, Fortune, Institutional Investor, Money Magazine,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in publi-
cations of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of a class of shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of a dividend in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
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Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Investor Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for In-
vestor Shares of a Portfolio cannot necessarily be used to compare an invest-
ment in such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in In-
vestor Shares will not be included in the Portfolio performance calculations.
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How Can I Get More Information?
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We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
71
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Short Government Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Lehman Brothers Aggregate Index is:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
Government Income Lehman Mortgage/10 Year 50% allocation to the mortgage component of
Treasury the Lehman Aggregate Index and a 50%
allocation to the Merrill Lynch 10 Year
Index
Managed Income Salomon BIG Very similar to the Lehman Aggregate, the
Salomon BIG is a market-weighted index
comprised of U.S. Treasury, government-
sponsored, investment grade corporate (Baa-
3/BBB- or better), mortgage- and asset-
backed securities.
. Issues comprising the index have an
average life of at least 1 year, with no
maximum maturity
. Corporate and government-sponsored issues
have a minimum face amount of $100
million to qualify for entry, and a
minimum of $75 million face amount to
exit
. Treasury and mortgage issues have a
minimum face amount of $1 billion for
both entry and exit
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Index is:
53% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
72
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
SHORT GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
MANAGED INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
THE BOND
PORTFOLIOS
INVESTOR SHARES
Prospectus
January 16, 1996
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Investor C Shares of the
Short Government Portfolio,
Intermediate Government Portfolio,
Core Bond Portfolio,
Government Income Portfolio
International Bond Portfolio,
Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio and
New Jersey Tax-Free Income Portfolio)
Cross Reference Sheet
<TABLE>
<S> <C>
Form N-1A Item ................................. Location
- -------------- --------
PART A ..................................... PROSPECTUS
1. Cover Page ................................. Cover Page
2. Synopsis ................................... What Are The Expenses of
The Portfolios?
3. Condensed Financial Information ............ What Are The Portfolios'
Financial Highlights?
4. General Description of Registrant .......... Cover Page; What are The
Portfolios?; What
Additional Investment
Policies Apply?; What Are
The Portfolios' Fundamental
Investment Limitations?
5. Management of the Fund ..................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance .............................. Inapplicable
6. Capital Stock and Other Securities ......... How Frequently Are
Dividends And Distributions
Made To Investors?; How Are
Fund Distributions Taxed?;
How Is The Fund Organized?
7. Purchase of Securities Being Offered ....... How Are Shares Purchased
And Redeemed?; How Is Net
Asset Value Calculated?;
How Is The Fund Organized?
8. Redemption or Repurchase ................... How Are Shares Purchased
and Redeemed?
9. Legal Proceedings .......................... Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS/SM/
THE BOND PORTFOLIOS/INVESTOR C SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following paragraph has been inserted after the last paragraph in the
section entitled "What Additional Investment Policies And Risks Apply? --
Foreign Investments":
As of this date, the International Bond Portfolio has invested more than
25% of its total assets in the securities of issuers located in Germany.
Investments of 25% or more of the Portfolio's total assets in this or any
other country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries.
The fifth paragraph in the section entitled "Who Manages The Fund? -- Adviser
and Sub-Advisers" has been replaced with the following:
For their last fiscal year, the Intermediate Government Bond, Government
Income, Tax-Free Income and Pennsylvania Tax-Free Income Portfolios paid
investment advisory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee waivers:
Intermediate Government Bond Portfolio, .20%; Government Income Portfolio,
0%; Tax-Free Income Portfolio, 0%; and Pennsylvania Tax-Free Income
Portfolio, .27%. For the period from July 1, 1995 through March 31, 1996,
the Core Bond and Short Government Bond Portfolios paid investment advisory
fees at the following annual rates (expressed as a percentage of average
daily net assets) after voluntary fee waivers: Core Bond Portfolio, .39%;
and Short Government Bond Portfolio, .28%. For the period from March 1,
1995 through January 31, 1996, the New Jersey Tax-Free Income and
International Bond Portfolios paid investment advisory fees at the
following annual rates (expressed as a percentage of average daily net
assets) after voluntary fee waivers: New Jersey Tax-Free Income Portfolio,
.56%; and International Bond Portfolio, .80%.
The fourth, fifth and sixth sentences of the section entitled "How Frequently
Are Dividends and Distributions Made To Shareholders?" have been replaced with
the following:
Each Portfolio will declare a dividend each day on "settled" shares (i.e.,
shares for which the particular Portfolio has received payment in Federal
funds) on the first Business Day
<PAGE>
after a purchase order is placed with the Fund. Payments by check are
normally converted to Federal funds within two Business Days of receipt.
Over the course of a year, substantially all of the Portfolios' net
investment income will be declared as dividends. The amount of the daily
dividend for each Portfolio will be based on periodic projections of its
net investment income. All dividends are paid within ten days after the
end of each month.
This Supplement is dated May 31, 1996 and relates to the Prospectus originally
dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Bond Portfolios Investor C Shares January 16, 1996
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This Prospectus
describes the Investor Shares of eight of those portfolios
(the "Portfolios"):
Short Government Bond Portfolio
Intermediate Government Bond Portfolio
Core Bond Portfolio
Government Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by
calling (800) 441-7762. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
Shares of the Portfolios are not deposits or obligations of,
or guaranteed or endorsed by, PNC Bank, National Association
or any other bank and are not insured by, guaranteed by, obli-
gations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other governmental agency. Investments in the
Portfolios involve investment risks, including possible loss
of principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS ARE INTENDED
ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2
<PAGE>
The Bond Portfolios of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eight
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Five of these Portfolios invest in taxable bonds, and three of
these Portfolios invest in tax-exempt bonds. A detailed descrip-
tion of each Portfolio begins on page 11.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Short Government Bond Merrill 1-3 Year Short U.S. Government
Treasury Index
Intermediate Govern- Lehman Brothers Intermediate
ment Bond Intermediate U.S. Government
Government
Core Bond Lehman Aggregate Intermediate
Investment Grade Debt
Government Income Lehman Mortgage/10 General U.S. Government
Year Treasury
International Bond Salomon Non-U.S. General World Income
Hedged World
Government Bond
Index
Tax-Free Income Lehman Municipal Bond General Municipal Debt
Index
PA Tax-Free Income Lehman Local GO Index PA Municipal Debt
NJ Tax-Free Income Lehman Local GO Index NJ Municipal Debt
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc.
("BlackRock") serves as sub-adviser to each Portfolio except the
International Bond Portfolio, which is sub-advised by Morgan
Grenfell Investment Services Limited ("Morgan Grenfell").
3
<PAGE>
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfo-
CAPITAL BOND lios. We intend this document to be an effective tool as you
PORTFOLIOS explore different directions in fixed income investing. You
may wish to use the table of contents on page 5 to find de-
scriptions of the Portfolios, including the investment objec-
tives, portfolio management styles, risks and charges and ex-
penses.
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND purchase mortgage- related, asset-backed, foreign and illiquid
INVESTING securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfolio
securities to third parties; and enter into futures contracts
and options. Each of the Pennsylvania and New Jersey Tax-Free
Income Portfolios (the "State-Specific Tax-Free Portfolios")
concentrates in the securities of issuers located in a partic-
ular state, and is non-diversified, which means that its per-
formance may be dependent upon the performance of a smaller
number of securities than the other Portfolios, which are con-
sidered diversified. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased?" and "How Are
CAPITAL FUNDS Shares Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are the Expenses of the Portfolios?..................... 6
What Are the Portfolios?..................................... 11
What Are the Differences Among the Portfolios?............... 12
What Types of Securities Are in the Portfolios?.............. 13
What Are the Portfolios' Fundamental Investment
Limitations?................................................ 14
What Additional Investment Policies and Risks Apply?......... 15
Who Manages the Fund?........................................ 27
What Pricing Options Are Available to Investors?............. 32
How Are Shares Purchased?.................................... 33
How Are Shares Redeemed?..................................... 35
What Are the Shareholder Features of the Fund?............... 37
What Sales Charge and Exemptions Apply to Investor C Shares.. 39
How Is Net Asset Value Calculated?........................... 40
How Frequently Are Dividends and Distributions Made to
Investors?.................................................. 41
How Are Fund Distributions Taxed?............................ 42
How Is the Fund Organized?................................... 46
How Is Performance Calculated?............................... 47
How Can I Get More Information?.............................. 49
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Investor C Shares of the Portfolios for the current fiscal year ending Septem-
ber 30, 1996 as a percentage of average daily net assets. An example based on
the summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
GOVERNMENT BOND GOVERNMENT BOND
PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering
price) None None
Sales Charge on Reinvested
Dividends None None
Deferred Sales Charge(/1/)
(as a percentage of original
purchase price or redemption
proceeds, whichever is lower) 1.0% 1.0%
ANNUAL PORTFOLIO OPERATING EXPENSES
(AFTER FEE WAIVERS AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/2/) .30% .30%
12b-1 fees(/3/) .75 .75
Other operating expenses (after fee
waivers)(/2/) .72 .72
----- ---------
Shareholder servicing fee .25 .25
Shareholder processing fee .15 .15
Other expenses .32 .32
--- -------
Total Portfolio operating expenses
(after fee waivers)(/2/) 1.77% 1.77%
===== =========
</TABLE>
(1) This amount applies to redemptions during the first 18 months. No deferred
sales charge is charged after the first 18 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the
Portfolios. Without waivers, advisory fees would be .50% and administration
fees would be .23% for each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse
expenses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. The information in the table is based on the advisory and
administration fees and other expenses payable after fee waivers for the
fiscal year ended September 30, 1995, as restated to reflect current
expenses and fee waivers. Without waivers, "Other operating expenses" would
be .80% and .80%, respectively, and "Total Portfolio operating expenses"
would be 2.06% and 2.05%, respectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the National Association of Securities Dealers, Inc. ("NASD").
6
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CORE BOND GOVERNMENT INCOME
PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None None
Sales Charge on Reinvested Dividends None None
Deferred Sales Charge(/1/)
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower) 1.0% 1.0%
ANNUAL PORTFOLIO OPERATING EXPENSES
(AFTER FEE WAIVERS AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/2/) .30% .30%
12b-1 fees(/3/) .75 .75
Other operating expenses (after fee
waivers)(/2/) .72 .72
----- ---------
Shareholder servicing fee .25 .25
Shareholder processing fee .15 .15
Other expenses .32 .32
--- -------
Total Portfolio operating expenses
(after fee waivers)(/2/) 1.77% 1.77%
===== =========
</TABLE>
(1) This amount applies to redemptions during the first 18 months. No deferred
sales charge is charged after the first 18 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfolio.
Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. The
information in the table is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended Sep-
tember 30, 1995, as restated to reflect current expenses and fee waivers.
Without waivers, "Other operating expenses" would be .80% and .80%, respec-
tively, and "Total Portfolio operating expenses" would be 2.05% and 2.05%,
respectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
7
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR C INVESTOR C INVESTOR C
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Charge
(as a percentage of
offering price) None None None
Sales Charge on
Reinvested Dividends None None None
Deferred Sales
Charge(/1/)
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower) 1.0% 1.0% 1.0%
ANNUAL PORTOLIO
OPERATING EXPENSES
(AFTER FEE WAIVERS AS A
PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/2/) .55% .30% .30%
12b-1 fees(/3/) .75 .75 .75
Other operating expenses
(after fee waivers and
expense
reimbursements)(/2/) .90 .72 .72
---------- ----- -----
Shareholder servicing
fee .25 .25 .25
Shareholder processing
fee .15 .15 .15
Other expenses .50 .32 .32
-------- --- ---
Total Portfolio
operating expenses
(after fee waivers and
expense
reimbursements)(/2/) 2.20% 1.77% 1.77%
========== ===== =====
</TABLE>
(1) This amount applies to redemptions during the first 18 months. No deferred
sales charge is charged after the first 18 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .50% and .50%, respec-
tively, and administration fees would be .23% for each Portfolio. In addi-
tion, the Expense Summary reflects reimbursements made to the Tax-Free In-
come Portfolio by the adviser. PAMG and the Portfolios' administrators are
under no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. The
information in the table is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended Sep-
tember 30, 1995, as restated to reflect current expenses and fee waivers.
Without waivers, "Other operating expenses" would be .98%, .82% and .82%,
respectively, and "Total Portfolio operating expenses" would be 2.27%,
2.07% and 2.07%, respectively, for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
8
<PAGE>
<TABLE>
<CAPTION>
NEW JERSEY
TAX-FREE INCOME
PORTFOLIO
INVESTOR C
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge
(as a percentage of offering price) None
Sales Charge on Reinvested Dividends None
Deferred Sales Charge(/1/)
(as a percentage of original purchase price or redemption
proceeds, whichever is lower) 1.0%
ANNUAL PORTFOLIO OPERATING EXPENSES (AFTER FEE WAIVERS
AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/2/) .30%
12b-1 fees(/3/) .75
Other operating expenses (after fee waivers)(/2/) .72
-----
Shareholder servicing fee .25
Shareholder processing fee .15
Other expenses .32
---
Total Portfolio operating expenses (after fee waivers)(/2/) 1.77%
=====
</TABLE>
(1) This amount applies to redemptions during the first 18 months. No deferred
sales charge is charged after the first 18 months on Investor C Shares. See
"What Sales Charge and Exemptions Apply to Investor C Shares?"
(2) "Other expenses" includes the administration fees payable by the Portfolio.
Without waivers, advisory fees would be .50% and administration fees would
be .23% for the Portfolio. PAMG and the Portfolio's administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lio's total operating expenses at the level set forth in the table. The in-
formation in the table is based on the advisory and administration fees and
other expenses payable after fee waivers for the fiscal year ended Septem-
ber 30, 1995, as restated to reflect current expenses and fee waivers.
Without waivers, "Other operating expenses" would be .85% and "Total Port-
folio operating expenses" would be 2.07% for Investor C Shares.
(3) Long-term investors in Investor C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of
the NASD.
9
<PAGE>
EXAMPLE
An investor in Investor C Shares would pay the following expenses on a $1,000
investment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Short Government Bond Portfolio
C Shares (Redemption)* $28 $56 $ 96 $208
C Shares (No Redemption) 18 56 96 208
Intermediate Government Bond
Portfolio
C Shares (Redemption)* 28 56 96 208
C Shares (No Redemption) 18 56 96 208
Core Bond Portfolio
C Shares (Redemption)* 28 56 96 208
C Shares (No Redemption) 18 56 96 208
Government Income Portfolio
C Shares (Redemption)* 28 56 96 208
C Shares (No Redemption) 18 56 96 208
International Bond Portfolio
C Shares (Redemption)* 32 69 118 253
C Shares (No Redemption) 22 69 118 253
Tax-Free Income Portfolio
C Shares (Redemption)* 28 56 96 208
C Shares (No Redemption) 18 56 96 208
Pennsylvania Tax-Free Income
Portfolio
C Shares (Redemption)* 28 56 96 208
C Shares (No Redemption) 18 56 96 208
New Jersey Tax-Free Income
Portfolio
C Shares (Redemption)* 28 56 96 208
C Shares (No Redemption) 18 56 96 208
</TABLE>
* Reflects the deduction of the deferred sales charge.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
THE COMPASS CAPITAL FUND family consists of 28 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eight
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Five of these Portfolios invest solely in taxable bonds and
three of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods, a
fund that invests in any one of these styles may perform above
or below the market. An investment program that combines these
multiple disciplines allows investors to select from among these
various product options in the way that most closely fits the
individual's investment goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Short Government Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Government Income the preservation of capital.
and International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income and New Jersey and, to the extent possible for each
Tax-Free Income State-Specific Tax-Free Portfolio,
income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
11
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MINIMUM
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Short Gov't Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Gov't Income Lehman Mortgage/10 10-15 Years Gov't/Agency AAA
Year Treasury
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
12
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securities at
all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under normal
market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
</TABLE>
/1/ MBS = mortgage-backed securities
/2/ ABS = asset-backed securities
13
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securities
and related repurchase agreements) 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 Portfo-
lio's total assets may be invested without regard to this limitation so long as
no more than 25% of the Portfolio's total assets are invested in any one issuer
(except U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any such commitment is
no longer in the best interests of a Portfolio, it will revoke the commitment
by terminating sales of shares of the Portfolio in the state involved.
14
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Short Government Bond Portfolio,
Intermediate Government Bond Portfolio and Government Income Portfolio (the
"Government Portfolios") will be rated in the highest rating category at the
time of purchase or, if unrated, of comparable quality as determined by the
Portfolios' sub-adviser. Securities acquired by the other Portfolios will be
rated investment grade at the time of purchase (within the four highest voting
categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Serv-
ice, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services,
Inc.) or, if unrated, of comparable quality as determined by a Portfolio's sub-
adviser. Securities rated "Baa" on "BBB" are generally considered to be invest-
ment grade although they have speculative characteristics. If a security's rat-
ing is reduced below the minimum rating that is permitted for a Portfolio, the
Portfolio's sub-adviser will consider whether the Portfolio should continue to
hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Government Portfolios
will invest at least 65% of their net assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its net as-
sets in the debt obligations of foreign issuers located in at least three dif-
ferent foreign countries. The Pennsylvania Tax-Free Income Portfolio and New
Jersey Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and
the Tax-Free Income Portfolio (together with the "State-Specific Tax-Free Port-
folios," the "Tax-Free Portfolios") will invest, during normal market condi-
tions, at least 80% of their net assets in obligations issued by or on behalf
of states, territories and possessions of the United States, the District of
Columbia and their political sub-divisions, agencies, instrumentalities and au-
thorities and related tax-exempt derivative securities the interest on which is
exempt from regular Federal income tax and is not an item of tax preference for
purposes of the Federal alternative minimum tax ("Municipal Obligations"). In
addition, each State-Specific Tax-Free Portfolio intends to invest at least 65%
of its net assets in Municipal Obligations of issuers located in the particular
state indicated by its name. The Tax-Free Income Portfolio intends to invest no
more than 25% of its net assets in Municipal Obligations of issuers located in
the same state. During temporary defensive periods each Tax-Free Portfolio may
invest without limitation in securities that are not Municipal Obligations and
may hold without limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. Investing in securities of foreign issuers
involves considerations not typically associated with investing in securities
of companies organized and operated in the United States. Because foreign secu-
rities generally are denominated and pay dividends or interest in foreign cur-
rencies, the value of a Portfolio that invests in foreign securities will be
affected favorably or unfavorably by changes in currency exchange rates.
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,
15
<PAGE>
limitations on the removal of funds or assets, or imposition of (or change in)
exchange control regulations. In addition, changes in government administra-
tions or economic or monetary policies in the U.S. or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or ad-
versely affect a Portfolio's operations. In general, less information is pub-
licly available with respect to foreign issuers than is available with respect
to U.S. companies. Most foreign companies are also not subject to the uniform
accounting and financial reporting requirements applicable to issuers in the
United States. While the volume of transactions effected on foreign stock ex-
changes has increased in recent years, it remains appreciably below that of the
New York Stock Exchange. Accordingly, a Portfolio's foreign investments may be
less liquid and their prices may be more volatile than comparable investments
in securities in U.S. companies. In addition, there is generally less govern-
ment supervision and regulation of securities exchanges, brokers and issuers in
foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. Such instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude
16
<PAGE>
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of moral obligation bonds is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its net assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects. To the ex-
tent a Portfolio's assets are invested in Municipal Obligations payable from
the revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. Each Tax-Free Portfolio will acquire stand-by commitments solely
to facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. The amount of information
regarding the financial condition of issuers of
17
<PAGE>
Municipal Obligations may not be as extensive as that which is made available
by public corporations and the secondary market for Municipal Obligations may
be less liquid than that for taxable fixed-income securities. Accordingly, the
ability of a Tax-Free Portfolio to buy and sell tax-exempt securities may, at
any particular time and with respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its investment adviser and sub-adviser will rely on such
opinions and will not review independently the underlying proceedings relating
to the issuance of Municipal Obligations, the creation of any tax-exempt deriv-
ative securities, or the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may purchase securities that are secured or backed by mort-
gages as well as other assets (e.g., automobile loans and credit card receiv-
ables). Issuers of these mortgage-related and asset-backed securities include
the U.S. Government, the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), and private issuers such as commercial banks, financial
companies, finance subsidiaries of industrial companies, savings and loan asso-
ciations, mortgage banks and investment banks.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are not pre-
sented by mortgage-related securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws, many of which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of ve-
hicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
18
<PAGE>
The yield characteristics of mortgage-related and asset-backed securities dif-
fer from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying as-
sets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-related or asset-backed security is purchased at a premium, a prepay-
ment rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if one of these securities is pur-
chased at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will decrease, yield to maturity. In calculat-
ing the average weighted maturity of a Portfolio, the maturity of mortgage-re-
lated and asset-backed securities will be based on estimates of average life
which take prepayments into account.
Prepayments on mortgage-related and asset-backed securities generally increase
with falling interest rates and decrease with rising interest rates; further-
more, prepayment rates are influenced by a variety of economic and social fac-
tors. In general, the collateral supporting non-mortgage asset-backed securi-
ties is of shorter maturity than mortgage loans and is less likely to experi-
ence substantial prepayments. Like other fixed income securities, when interest
rates rise the value of a mortgage-related or asset-backed security generally
will decline; however, when interest rates decline, the value of these securi-
ties that have prepayment features may not increase as much as that of other
fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
19
<PAGE>
SMBS issued by the U.S. Government (or a U.S. Government agency or instrumen-
tality) may be considered liquid under guidelines established by the Fund's
Board of Trustees if they can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of a Port-
folio's per share net asset value.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios (except the Tax-Free Portfolios) may in-
vest in debt obligations of domestic or foreign corporations and banks, and may
acquire commercial obligations issued by Canadian corporations and Canadian
counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-
denominated commercial paper of a foreign issuer. Bank obligations may include
certificates of deposit, notes, bankers' acceptances and fixed time deposits.
These obligations may be general obligations of the parent bank or may be lim-
ited to the issuing branch or subsidiary by the terms of a specific obligation
or by government regulation. The Portfolios may also make interest-bearing sav-
ings deposits in commercial and savings banks in amounts not in excess of 5% of
their respective total assets. For purposes of determining the permissibility
of an investment in bank obligations, the total assets of a bank are determined
on the basis of the bank's most recent annual financial statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA and the
Student Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government would provide financial support to
U.S. Government-sponsored agencies or instrumentalities if it is not obligated
to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their holdings, as a duration
management technique or to protect against an increase in the price of securi-
ties a Portfolio anticipates purchasing at a later date. The Portfolios intend
to use these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a prede-
20
<PAGE>
termined interest rate, to receive payments of interest on a notional principal
amount from the party selling such interest rate floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, financial instruments, foreign currencies, securities indi-
ces or the yield differential between two securities, and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options where
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corporation,
which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of the Fund's total assets, although a Portfolio will not pur-
chase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect
21
<PAGE>
against declines occurring prior to sales of securities in the value of the se-
curities to be sold. In addition, a Portfolio may utilize futures contracts in
anticipation of changes in the composition of its holdings or in currency ex-
change rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid high grade assets or will
otherwise cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets
22
<PAGE>
in leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be con-
sidered to be leveraged to the extent that its interest rate varies by a magni-
tude that exceeds the magnitude of the change in the index rate of interest.
The higher degree of leverage inherent in inverse floaters is associated with
greater volatility in their market values. Issuers of unrated variable and
floating rate instruments must satisfy the same criteria as set forth above for
a Portfolio. The absence of an active secondary market with respect to particu-
lar variable and floating rate instruments, however, could make it difficult
for the Portfolio to dispose of a variable or floating rate instrument if the
issuer defaulted on its payment obligation or during periods when the Portfolio
is not entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to make limited borrowings. If the securities held by a Portfolio should
decline in value while borrowings are outstanding, the net asset value of the
Portfolio's outstanding shares will decline in value by proportionately more
than the decline in value suffered by the Portfolio's securities. Borrowings
may be made through reverse repurchase agreements under which a Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolios
may use the proceeds of reverse repurchase agreements to purchase other securi-
ties either maturing, or under an agreement to resell, on a date simultaneous
with or prior to the expiration of the reverse repurchase agreement. The Port-
folios (except the Tax-Free Portfolios) may use reverse repurchase agreements
when it is anticipated that the interest income to be earned from the invest-
ment 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 maintain a segregated account with the Fund's custodian contain-
ing cash, U.S. Government or other appropriate liquid high-grade debt securi-
ties having a value at least equal to the repurchase price. A Portfolio's re-
verse repurchase agreements, together with any other borrowings, will not ex-
ceed, in the aggregate, 33 1/3% of the value of its total assets. In addition,
a Portfolio (except the Tax-Free Portfolios) may borrow up to an additional 5%
of its total assets for temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of
23
<PAGE>
the other investment company's expenses, including advisory fees. These ex-
penses would be in addition to the advisory and other expenses that each Port-
folio bears directly in connection with its own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and re-
purchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified institutional buyers" in accordance with Rule 144A under the 1933 Act.
Any such security will not be considered illiquid so long as it is determined
by a Portfolio's sub-adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and for-
ward commitment transactions involve the risk, however, that the price or yield
obtained in a transaction may be less favorable than the price or yield avail-
able in the market when the securities delivery takes place. Each Portfolio's
when-issued purchases and forward commitments are not expected to exceed 25% of
the value of its total assets absent unusual market conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing such securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time that a
Portfolio enters into a dollar roll transaction, it will place in a segregated
account maintained with its custodian cash, U.S. Government securities or other
liquid high grade debt obligations having
24
<PAGE>
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.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted and the instruments which the Portfolio is
required to repurchase may be worth less than an instrument which the Portfolio
originally held when the Portfolio is able to complete the purchase. Successful
use of mortgage dollar rolls may depend upon a sub-adviser's ability to cor-
rectly predict interest rates and prepayments. There is no assurance that dol-
lar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. Under normal market conditions it is expected that
the annual portfolio turnover rate for the Government Income Portfolio will not
exceed 300%. The past portfolio turnover rates of the other Portfolios are set
forth above under "What Are the Portfolios' Financial Highlights?" A Portfo-
lio's annual portfolio turnover rate will not, however, be a factor preventing
a sale or purchase when the sub-adviser believes investment considerations war-
rant such sale or purchase. Portfolio turnover may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates will
generally result in higher transaction costs to a Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the Portfolios can
be expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in state-spe-
cific Municipal Obligations raises special investment considerations. In par-
ticular, changes in the economic condition and governmental policies of a state
and its political subdivisions could adversely affect the value of a Portfo-
lio's shares. Certain matters relating to the states in which the State-Spe-
cific Tax-Free Portfolios invest are described below. For further information,
see "Special Considerations Regarding State-Specific Municipal Obligations" in
the Statement of Additional Information.
25
<PAGE>
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/ undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
26
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the di-
rection of its Board of Trustees. The following individuals were
elected by shareholders on January 4, 1996 to serve as trustees
of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Management
SUB-ADVISERS Group ("PAMG"). Each of the Portfolios within the Compass Capi-
tal Fund family, except the International Bond Portfolio, is
managed by a specialized portfolio manager who is a member of
PAMG's fixed income portfolio management subsidiary, BlackRock
Financial Management, Inc. ("BlackRock"). The sub-adviser of the
International Bond Portfolio is Morgan Grenfell Investment Serv-
ices Limited ("Morgan Grenfell").
The eight portfolios and their investment sub-advisers and port-
folio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Short Government Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Core Bond BlackRock(/1/) Scott Amero (see above); Mr. Amero
has been Portfolio manager since its
inception.
Government Income BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
International Bond Morgan Grenfell(/2/) Martin A. Hall; Director of Morgan
Grenfell since 1991; Portfolio
manager since 1991.
Tax-Free Income BlackRock(/1/) Kevin Klingert; portfolio manager at
BlackRock since 1991; prior to
joining BlackRock, Assistant Vice
President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager
since 1995.
Pennsylvania Tax-Free BlackRock(/1/) Kevin Klingert (see above);
Income Portfolio manager since 1995.
New Jersey Tax-Free BlackRock(/1/) Kevin Klingert (see above);
Income Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1835
Market Street, Philadelphia, Pennsylvania 19103. PAMG is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
bank holding company. Morgan
Grenfell is an indirect wholly-owned subsidiary of Deutsche
Bank, A.G., a German financial services conglomerate.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, com-
puted daily on a Portfolio-by-Portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are The Expenses Of The Portfolios?" PAMG
and the sub-advisers intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are paid
by PAMG, and do not represent an extra charge to the Portfo-
lios.
28
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For their last fiscal years, the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Short Government Bond Portfolio, .30%; Intermediate Govern-
ment Bond Portfolio, .20%; Core Bond Portfolio, .35%; Government
Income Portfolio, 0%; International Bond Portfolio, .80%; Tax-
Free Income Portfolio, 0%; Pennsylvania Tax-Free Income Portfo-
lio, .27%; and New Jersey Tax-Free Income Portfolio, .60%.
The sub-advisors to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements of
best execution.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .20% of the first $500
million of each Portfolio's average daily net assets, .18% of
the next $500 million of each Portfolio's average daily net as-
sets, .16% of the next $1 billion of each Portfolio's average
daily net assets and .15% of each Portfolio's average daily net
assets in excess of $2 billion. From
29
<PAGE>
time to time the Administrators may waive some or all of their
administration fees from a Portfolio.
For information about the operating expenses the Portfolios
expect to pay for the current fiscal year, see "What Are the
Expenses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE
PLAN
Under the Fund's Distribution and Service Plan (the "Plan"),
Investor C Shares of the Portfolios bear the expense of pay-
ments ("distribution fees") made to CDI, as the Fund's dis-
tributor (the "Distributor"), or affiliates of PNC Bank, Na-
tional Association ("PNC Bank") for distribution and sales
support services. The distribution fees will be used primarily
to compensate the Distributor for distribution services and to
compensate the Distributor and PNC Bank affiliates for sales
support services provided in connection with the offering and
sale of Investor C Shares. The distribution fees may also be
used to reimburse the Distributor and PNC Bank affiliates for
related expenses, including payments to brokers, dealers, fi-
nancial institutions and industry professionals ("Service Or-
ganizations") for sales support services and related expenses.
Distribution fees payable under the Plan will not exceed .75%
(annualized) of the average daily net asset value of each
Portfolio's outstanding Investor C Shares. Payments under the
Plan are not tied directly to out-of-pocket expenses and
therefore may be used by the recipients as they choose (for
example, to defray their overhead expenses).
Under the Plan, the Fund intends to enter into service agree-
ments with Service Organizations (including PNC Bank and its
affiliates) with respect to Investor C Shares pursuant to
which Service Organizations will render certain support serv-
ices to their customers who are the beneficial owners of In-
vestor C Shares. In consideration for a shareholder servicing
fee of up to .25% (annualized) of the average daily net asset
value of Investor C Shares owned by their customers, Service
Organizations may provide one or more of the following servic-
es: responding to customer inquiries relating to the services
performed by the Service Organization and to customer inqui-
ries concerning their investments in Investor C Shares; pro-
viding information periodically to customers showing their po-
sitions in Investor C Shares; and other similar shareholder
liaison services. In consideration for a separate shareholder
processing
30
<PAGE>
fee of up to .15% (annualized) of the average daily net asset
value of Investor C Shares owned by their customers, Service Or-
ganizations may provide one or more of these additional services
to such customers: processing purchase and redemption requests
from customers and placing orders with the Fund's transfer agent
or the Distributor; processing dividend payments from the Fund
on behalf of customers; providing sub-accounting with respect to
Investor C Shares beneficially owned by customers or the infor-
mation necessary for sub-accounting; and other similar services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of In-
vestor C Shares should read this Prospectus in light of the
terms and fees governing their accounts with Service Organiza-
tions.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. However, state securities laws may
differ from the interpretations of Federal law on this issue,
and banks and financial institutions may be required to register
as dealers pursuant to state law.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and other
expenses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
31
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Bond Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes. The Investor C Share pricing option is described be-
low:
C SHARES (LEVEL LOAD)
Contingent deferred sales charge (CDSC) of 1.00% if shares
are redeemed within 18 months of purchase
Investor C Shares of all Portfolios:
<TABLE>
<S> <C>
Maximum Front-End Sales Charge 0.00%
12b-1 Fee 0.75%
CDSC (Redemption Charge) 1.00%
(If redeemed within 18
months of purchase)
</TABLE>
The Fund also offers two additional pricing options for shares
of the Portfolios--Investor A Shares (which are sold with a
front-end load) and Investor B Shares (which are subject to a
back-end load if redeemed within six years of purchase). C
Shares may make sense for shorter term (relative to both B
Shares and A Shares) investors who prefer to pay for profes-
sional investment advice on an ongoing basis (asset-based
sales charge) rather than with a traditional, one-time front-
end sales charge. Such investors may plan to make substantial
redemptions within 6 years of purchase. For more information
on A Shares and B Shares of the Portfolios, call (800) 441-
7762.
Investors wishing to purchase shares of the Portfolios may do
so either by mailing the investment application attached to
this Prospectus along with a check or by wiring money as spec-
ified below under "How Are Shares Purchased?"
32
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor C Shares through
a broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$100 minimum for subsequent investments. Purchases through the Automatic In-
vestment Plan described below are subject to a lower initial purchase minimum.
In addition, the minimum initial investment for employees of the Fund, the
Fund's investment adviser, sub-advisers, Distributor or transfer agent or em-
ployees of their affiliates is $100.
PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through
brokers which have entered into dealer agreements with the Distributor. Pur-
chase orders received by a broker and transmitted to the transfer agent before
the close of regular trading on the New York Stock Exchange (currently 4:00
p.m. Eastern time) on a Business Day will be effected at the net asset value
determined that day. Payment for an order may be made by the broker in Federal
funds or other funds immediately available to the Portfolios' custodian no
later than 4:00 p.m. (Eastern time) on the third Business Day following receipt
of the purchase order.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described above,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor C
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to which shares are purchased must also appear on the check or Federal Reserve
Draft. Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, specify
the class of Investor Shares, and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East-
ern time) on any Business Day (as defined below) are priced at the applicable
net asset value next determined on that day.
33
<PAGE>
OTHER PURCHASE INFORMATION. Shares of each Portfolio are sold on a continuous
basis by CDI as the Distributor. CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Purchases may be
effected on weekdays on which both the New York Stock Exchange and the Federal
Reserve Bank of Philadelphia are open for business (a "Business Day"). Payment
for orders which are not received or accepted will be returned after prompt in-
quiry. The issuance of shares is recorded on the books of the Fund. No certifi-
cates will be issued for shares. Payments for shares of a Portfolio may, in the
discretion of the Fund's investment adviser, be made in the form of securities
that are permissible investments for that Portfolio. Compass Capital reserves
the right to reject any purchase order or to waive the minimum initial invest-
ment requirement.
34
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge that may be charged with respect to Investor C
Shares, there is no charge for a redemption. Shareholders may also place re-
demption requests through a broker or other institution, which may charge a fee
for this service.
WHEN REDEEMING SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE THAT THEY
ARE REDEEMING INVESTOR C SHARES. If a redeeming shareholder owns both Investor
A Shares and Investor B or Investor C Shares in the same Portfolio, the
Investor A Shares will be redeemed first unless the shareholder indicates
otherwise.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Additional documentary evidence of authority is re-
quired by PFPC in the event redemption is requested by a corporation, partner-
ship, trust, fiduciary, executor or administrator.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by Federal wire transfer to a single previously desig-
nated bank account. Once authorization is on file, PFPC will honor requests by
any person by telephone at (800) 441-7762 (in Delaware call collect (302) 791-
1194) or other means. The minimum amount that may be sent by check is $500,
while the minimum amount that may be wired is $10,000. The Fund reserves the
right to change these minimums or to terminate these redemption privileges. If
the proceeds of a redemption would exceed $25,000, the redemption request must
be in writing and will be subject to the signature guarantee requirement de-
scribed above. During periods of substantial economic or market change, tele-
phone redemptions may be difficult to complete. Redemption requests may also be
mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Fund does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written re-
35
<PAGE>
quest (with a guaranteed signature as described above) to Compass Capital Funds
c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the minimum initial investment requirement amount as
the result of a redemption or an exchange request. A shareholder will be noti-
fied in writing that the value of the shareholder's account in a Portfolio is
less than the required amount and will be allowed 30 days to make additional
investments before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of Investor C Shares
will be reduced by the amount of any applicable contingent deferred sales
charge. Unless another payment option is used as described above, payment for
redeemed shares is normally made by check mailed within seven days after ac-
ceptance by PFPC of the request and any other necessary documents in proper or-
der. Payment may, however, be postponed or the right of redemption suspended as
provided by the rules of the SEC. If the shares to be redeemed have been re-
cently purchased by check, the Fund's transfer agent may delay the payment of
redemption proceeds, which may be a period of up to 15 days after the purchase
date, pending a determination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
36
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
COMPASS CAPITAL FUNDS offers shareholders many special features which enable an
investor to have greater investment flexibility as well as greater access to
information about the Fund throughout the investment period.
Additional information on each of these features is available from PFPC by
calling (800) 441-7762 (in Delaware call collect (302) 791-1194).
EXCHANGE PRIVILEGE. Investor C Shares of each Portfolio may be exchanged for
Investor C Shares of other portfolios of the Fund which offer that class of
shares, based on their respective net asset values.
The exchange of Investor C Shares will not be subject to a CDSC, which will
continue to be measured from the date of the original purchase and will not be
affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. To add
this feature to an existing account that previously did not provide for this
option, a Telephone Exchange Authorization Form must be filed with PFPC. This
form is available from PFPC. Once this election has been made, the shareholder
may simply contact PFPC by telephone at (800) 441-7762 (in Delaware call col-
lect (302) 791-1194) to request the exchange. During periods of substantial
economic or market change, telephone exchanges may be difficult to complete and
shareholders may have to submit exchange requests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. Before making an exchange request, shareholders should consult a tax or
other financial adviser and should consider the investment objective, policies
and restrictions of the investment portfolio into which the shareholder is mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
37
<PAGE>
The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request. Telephone
exchanges may be subject to limitations as to amount or frequency, and to other
restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may
arrange for periodic investments in that Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts. Upon commencement of the SWP, the account must have a cur-
rent value of $10,000 or more in a Portfolio. Shareholders may elect to receive
automatic cash payments of $100 or more either monthly, every other month,
quarterly, three times a year, semi-annually, or annually. Automatic withdraw-
als are normally processed on the 25th day of the applicable month or, if such
day is not a Business Day, on the next Business Day and are paid promptly
thereafter. An investor may utilize the SWP by completing the SWP Application
Form which may be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC. No con-
tingent deferred sales charge will be assessed on redemptions of Investor C
Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor C Shares will not be subject to the CDSC if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. SWP redemptions of Investor C Shares in excess of this limit
are still subject to the applicable CDSC.
38
<PAGE>
What Sales Charge And Exemptions Apply To Investor C Shares?
- --------------------------------------------------------------------------------
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the net asset value of the In-
vestor C Shares on the purchase date or redemption date if redeemed within
eighteen months after purchase. Brokers will receive commissions from the Dis-
tributor in connection with sales of Investor C Shares. These commissions may
be different than the reallowances or placement fees paid to dealers in connec-
tion with sales of Investor A Shares and Investor B Shares.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor C Shares is not charged in connection with: (1) ex-
changes described in "What Are the Shareholder Features of the Fund?--Exchange
Privilege"; (2) redemptions made in connection with minimum required distribu-
tions from IRA, 403(b)(7) and qualified employee benefit plan accounts due to
the shareholder reaching age 70 1/2; (3) redemptions in connection with a
shareholder's death or disability (as defined in the Internal Revenue Code)
subsequent to the purchase of Investor C Shares; (4) involuntary redemptions of
Investor C Shares in accounts with low balances as described in "How Are Shares
Redeemed?"; and (5) redemptions made pursuant to the Systematic Withdrawal
Plan, subject to the limitations set forth above under "What Are the Share-
holder Features of the Fund?--Systematic Withdrawal Plan." In addition, no con-
tingent deferred sales charge is charged on Investor C Shares acquired through
the reinvestment of dividends or distributions.
When an investor redeems Investor C Shares, the redemption order is processed
to minimize the amount of the contingent deferred sales charge that will be
charged. Investor C Shares are redeemed first from those shares that are not
subject to the deferred sales load (i.e., shares that were acquired through re-
investment of dividends or distributions) and after that from the shares that
have been held the longest.
39
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
The net asset value is calculated separately for Investor C Shares of each
Portfolio as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by dividing the value of all securities
and other assets owned by a Portfolio that are allocated to its Investor C
Shares, less the liabilities charged to its Investor C Shares, by the number of
its Investor C Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices or the mean between their bid and asked
prices. Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such securi-
ties on their respective exchanges, except when an occurrence subsequent to the
time a value was so established is likely to have changed such value. Securi-
ties 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 re-
spect to debt obligations with sixty days or less remaining to maturity unless
a Portfolio's sub-adviser under the supervision of the Board of Trustees deter-
mines such method does not represent fair value.
40
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of Investor C Shares of the relevant Portfolio unless a shareholder
elects otherwise. Such election, or any revocation thereof, must be made in
writing to PFPC, and will become effective with respect to dividends paid after
its receipt by PFPC. The net investment income of the Tax-Free Income, Interme-
diate Government Bond and International Bond Portfolios is declared monthly as
a dividend to investors who are shareholders of such Portfolio at the close of
business on the day of declaration. The net investment income of the Pennsylva-
nia Tax-Free Income, New Jersey Tax-Free Income, Government Income, Core Bond
and Short Government Bond Portfolios is declared daily as a dividend to invest-
ors who are shareholders of such Portfolio at, and whose payment for share pur-
chases are available to the particular Portfolio in Federal funds by, the close
of business on the day of declaration. All dividends are paid within ten days
after the end of each month and, in the case of the Pennsylvania Tax-Free In-
come, New Jersey Tax-Free Income, Government Income, Core Bond and Short Gov-
ernment Bond Portfolios, within seven days after redemption of all of a share-
holder's shares in a Portfolio. Net realized capital gains (including net
short-term capital gains), if any, will be distributed by each Portfolio at
least annually.
41
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), 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.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. Shareholders
who are recipients of Social Security Act or Railroad Retirement Act benefits
should note that "exempt interest dividends" will be taken into account in de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
Compass Capital will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
42
<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer. Generally, shareholders may include sales charges
paid on the purchase of Shares in their tax basis for the purposes of determin-
ing gain or loss on a redemption, transfer or exchange of such Shares. However,
if a shareholder exchanges the Shares for Shares of another Portfolio within 90
days of purchase and is able to reduce the sales charges applicable to the new
Shares (by virtue of the Fund's exchange privilege), the amount equal to such
reduction may not be included in the tax basis of the shareholder's exchanged
Shares for the purpose of determining gain or loss but may be included (subject
to the same limitation) in the tax basis of the new Shares.
Any loss upon the sale or exchange of shares held for six months or less will
be disallowed for Federal income tax purposes to the extent of any exempt in-
terest dividends received by the shareholder. For the Ohio Tax-Free Income
Portfolio, the loss will be disallowed for Ohio income tax purposes to the same
extent, even though, for Ohio income tax purposes, some portion of such divi-
dends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of the taxable year in question consists
of stock or securities of foreign corporations, the Portfolio may elect, for
U.S. Federal income tax purposes, to treat certain foreign taxes paid by it,
including generally any withholding taxes and other foreign income taxes, as
paid by its shareholders. The Portfolio intends to make this election. As a re-
sult, the amount of such foreign taxes paid by the Portfolio will be included
in its shareholders' income pro rata (in addition to taxable distributions ac-
tually received by them), and each shareholder generally will be entitled ei-
ther (a) to credit a proportionate amount of such taxes against U.S. Federal
income tax liabilities, or (b) if a shareholder itemizes deductions, to deduct
such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania Municipal Obligations or attributable to insurance proceeds on account
of such interest, is not taxable to individuals, estates or trusts under the
Personal Income Tax (in the case of insurance proceeds, to
43
<PAGE>
the extent they are exempt for Federal Income Tax purposes); to corporations
under the Corporate Net Income Tax (in the case of insurance proceeds, to the
extent they are exempt for Federal Income Tax purposes); nor to individuals un-
der the Philadelphia School District Net Investment Income Tax ("School Dis-
trict Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free Income
Portfolio, such gain may be subject to the Personal Income Tax and Corporate
Net Income Tax. Such gain may also be subject to the School District Tax, ex-
cept that gain realized with respect to a share held for more than six months
is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or inter-
est and gain thereon, is subject to, or included in the measure of, the special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania Municipal Obligations and Federal obligations (if
the interest on such obligations is exempt from state and local taxation under
the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey personal
income tax. If the New Jersey Tax-Free Income Portfolio qualifies as a quali-
fied investment fund under New Jersey law, any gain on the redemption or sale
of the Portfolio's shares will not be subject to the New Jersey personal income
tax. To be classified as a qualified investment fund, at least 80% of the Port-
folio's investments must consist of New Jersey State-Specific Obligations or
direct U.S. Government obligations; it must have no investments other than in-
terest-bearing obligations, obligations issued at a discount, and cash and cash
items (including receivables); and it must satisfy certain report-
44
<PAGE>
ing obligations and provide certain information to its shareholders. Shares of
the Portfolio are not subject to property taxation by New Jersey or its politi-
cal subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
45
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio, other than the Government Income Portfolio, offers five separate
classes of shares--Institutional Shares, Service Shares, Investor A Shares, In-
vestor B Shares and Investor C Shares. The Government Income Portfolio offers
Investor A Shares, Investor B Shares and Investor C Shares. This prospectus re-
lates only to Investor C Shares of the eight Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. In addition, each class of Investor
Shares is sold with different sales charges. Because of these "class expenses"
and sales charges, the performance of a Portfolio's Institutional Shares is ex-
pected to be higher than the performance of the Portfolio's Service Shares, and
the performance of both the Institutional Shares and Service Shares of a Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan, automatic withdrawal plan and checkwriting. For further information
regarding the Fund's Institutional and Service Share classes, contact PFPC at
(800) 441-7764.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
46
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Investor C Shares of the Portfolios may be quoted
in advertisements and communications to shareholders. Total return will be cal-
culated on an average annual total return basis for various periods. Average
annual total return reflects the average annual percentage change in value of
an investment in Investor C Shares of a Portfolio over the measuring period.
Total return may also be calculated on an aggregate total return basis. Aggre-
gate total return reflects the total percentage change in value over the mea-
suring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to Investor C
Shares are reinvested in Investor C Shares, and also reflect the maximum sales
load charged by the Portfolio with respect to Investor C Shares. When, however,
a Portfolio compares the total return of Investor C Shares to that of other
funds or relevant indices, total return may also be computed without reflecting
the sales load.
The yield of Investor C Shares is computed by dividing the Portfolio's net in-
come per share allocated to Investor C Shares during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to a Portfolio's tax-free yield. This
is done by increasing the Portfolio's yield (calculated above) by the amount
necessary to reflect the payment of Federal and/or state income tax at a stated
tax rate.
The performance of a Portfolio's Investor C Shares may be compared to the per-
formance of other mutual funds with similar investment objectives and to rele-
vant indices, as well as to ratings or rankings prepared by independent serv-
ices or other financial or industry publications that monitor the performance
of mutual funds. For example, the performance of a Portfolio's Investor C
Shares may be compared to data prepared by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. and Weisenberger Investment Company Service,
and with the performance of the Lehman GMNA Index, the T-Bill Index and the
"stocks, bonds and inflation index" published annually by Ibbotson Associates
and the Lehman Government Corporate Bond Index, as well as the benchmarks at-
tached to this Prospectus. Performance information may also include evaluations
of the Portfolios and their Investor C Shares published by nationally recog-
nized ranking services, and information as reported in financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Investor C Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of a dividend in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an in-
47
<PAGE>
vestment in a Portfolio will fluctuate so that an investor's Investor C Shares,
when redeemed, may be worth more or less than their original cost. Since per-
formance will fluctuate, performance data for Investor C Shares of a Portfolio
cannot necessarily be used to compare an investment in such shares with bank
deposits, savings accounts and similar investment alternatives which often pro-
vide an agreed or guaranteed fixed yield for a stated period of time. Perfor-
mance is generally a function of the kind and quality of the instruments held
in a portfolio, portfolio maturity, operating expenses and market conditions.
Any fees charged by brokers or other institutions directly to their customer
accounts in connection with investments in Investor C Shares will not be in-
cluded in the Portfolio performance calculations.
48
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current
dividend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call your investment
adviser or COMPASS CAPITAL FUNDS at (800) 441-7762.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7762.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
49
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Short Government Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Lehman Brothers Aggregate Index is:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
Government Income Lehman Mortgage/10 Year 50% allocation to the mortgage component of
Treasury the Lehman Aggregate Index and a 50%
allocation to the Merrill Lynch 10 Year
Index
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
</TABLE>
50
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR
IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------
SHORT GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
CORE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[ART]
THE BOND
PORTFOLIOS
INVESTOR C SHARES
PROSPECTUS
January 16, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
COMPASS CAPITAL FUNDS(R)
(Formerly, THE PNC(R) FUND)
(Institutional Shares of the
Short Government Bond Portfolio,
Intermediate Government Portfolio,
Intermediate Bond Portfolio,
Core Bond Portfolio,
Managed Income Portfolio,
International Bond Portfolio,
Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and
Ohio Tax-Free Income Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Location
- -------------- --------
<S> <C>
PART A PROSPECTUS
1. Cover page................................... Cover Page
2. Synopsis..................................... What Are The Expenses Of
The Portfolios?
3. Condensed Financial Information.............. What Are The Portfolios'
Financial Highlights?
4. General Description of Registrant............ Cover Page; What Are The
Portfolios?; What
Additional Investment
Policies Apply?; What
Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund....................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance................................ Inapplicable
6. Capital Stock and Other Securities........... How Frequently Are
Dividends And
Distributions Made To
Investors?; How Are Fund
Distributions Taxed?;
How Is The Fund
Organized?
7. Purchase of Securities Being Offered......... How Are Shares Purchased
And Redeemed?; How Is
Net Asset Value
Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase..................... How Are Shares Purchased
and Redeemed?
9. Legal Proceedings............................ Inapplicable
</TABLE>
<PAGE>
COMPASS CAPITAL FUNDS(SM)
THE BOND PORTFOLIOS/INSTITUTIONAL SHARES
SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996
The following information has been added to the section entitled "What Are The
Portfolios' Financial Highlights?":
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolios' independent
accountants. This financial information should be read together with those
financial statements. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder reports may
be obtained from the Fund free of charge by calling (800) 441-7762.
<TABLE>
<CAPTION>
Short Core Bond New Jersey
Government Portfolio/+/ Tax-Free
Bond Income International
Portfolio/+/ Port- Bond
folio+ Portfolio/+/
----------- ----------
For the For the For the For the
Period Period Period Period
7/1/95 7/1/95 3/1/95 3/1/95
through through through through
3/31/96/1/ 3/31/96/1/ 1/31/96/1/ 1/31/96/1/
<S> <C> <C> <C> <C>
Net asset value at beginning
of period....................... $9.83 $9.85 $10.94 $10.52
----- ----- ------ ------
Income from investment
operations
Net investment income.......... 0.42 0.47 0.46 0.62
Net gain (loss) on
investments and foreign
currency related
transactions
(both realized and
unrealized)................ -- (0.07) 0.65 1.13
----- ----- ----- -----
Total from investment
operations................... 0.42 0.40 1.11 1.75
----- ----- ----- -----
Less distributions
Distributions from net
investment income..........
Distributions in excess of (0.41) (0.47) (0.44) (0.88)
net investment income......
Distributions from net (0.04) -- -- --
realized capital gains.....
(0.01) (0.17) -- --
----- ----- ------ ------
Total distributions.......... (0.46) (0.64) (0.44) (0.88)
----- ----- ------ ------
Net asset value at end of $9.79 $9.61 $11.61 $11.39
period......................... ===== ===== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
New Jersey
Short Tax-Free
Government Income International
Bond Core Bond Port- Bond
Portfolio/+/ Portfolio/+/ folio+ Portfolio/+/
----------- ----------- ----------- ----------
For the For the For the For the
Period Period Period Period
7/1/95 7/1/95 3/1/95 3/1/95
through through through through
3/31/96/1/ 3/31/96/1/ 1/31/96/1/ 1/31/96/1/
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total return..................... 4.25%/4/ 3.93%/4/ 10.35%/4/ 16.79%/4/
Ratios/Supplemental data
Net assets at end of period
(in thousands)............... $ 52,843 $ 64,707 $ 97,976 $ 37,627
Ratios of operating expenses
to average net assets
After advisory/
administration fee
waivers...................... 0.63%/2,3/ 0.66%/2,3/ 0.88%/2/ 1.23%/2/
Before advisory/
administration fee
waivers...................... 0.83%/2/ 0.91%/2/ 0.90%/2/ 1.23%/2/
Ratios of net investment
income to average net assets
After advisory/
administration fee
waivers...................... 5.25%/2/ 5.89%/2/ 4.43%/2/ 5.62%/2/
Before advisory/
administration fee
waivers...................... 5.05%/2/ 5.64%/2/ 4.41%/2/ 5.62%/2/
Portfolio turnover rate.......... 185% 723% 26% 159.00%
</TABLE>
- -----------------------
/+/ For information about the initial commencement of operations of these
Portfolios and their merger into the Fund in 1996, see the footnotes to
the Financial Highlights tables in the Prospectus. Prior to their
merger, the Short Government Bond Portfolio and Core Bond Portfolio each
offered one class of shares to institutional investors (now called
Institutional Shares), and the New Jersey Tax-Free Income Portfolio and
International Bond Portfolio each offered one class of shares to both
institutional and retail investors (now called Service Shares).
/1/ The financial information shown for this Portfolio includes all activity
of the prior class of shares before January 13, 1996 (February 13, 1996
for International Bond Portfolio), the date of the Portfolio's merger.
Beginning January 13, 1996, the information is for Institutional Shares
of the Short Government Bond and Core Bond Portfolios and, because no
Institutional Shares were then outstanding, Service Shares of the New
Jersey Tax-Free Income Portfolio.
/2/ Annualized.
/3/ Including interest expense, ratios for Short Government Bond and Core
Bond Portfolio would have been 0.96% and 0.75%, respectively, for the
period ended March 31, 1996. For the period prior to March 31, 1996,
interest income was presented net of interest expense.
/4/ Not annualized.
--------------------------------------
<PAGE>
The following paragraph has been inserted after the last paragraph in the
section entitled "What Additional Investment Policies And Risks Apply?--
Foreign Investments":
As of this date, the International Bond Portfolio has invested more than
25% of its total assets in the securities of issuers located in Germany.
Investments of 25% or more of the Portfolio's total assets in this or any
other country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries.
The fifth paragraph in the section entitled "Who Manages The Fund?--Adviser
and Sub-Advisers" has been replaced with the following:
For their last fiscal year, the Intermediate Government Bond, Intermediate
Bond, Managed Income, Tax-Free Income, Pennsylvania Tax-Free Income and
Ohio Tax-Free Income Portfolios paid investment advisory fees at the
following annual rates (expressed as a percentage of average daily net
assets) after voluntary fee waivers: Intermediate Government Bond
Portfolio, .20%; Intermediate Bond Portfolio, .25%; Managed Income
Portfolio, .35%; Tax-Free Income Portfolio, 0%; Pennsylvania Tax-Free
Income Portfolio, .27%; and Ohio Tax-Free Income Portfolio, 0%. For the
period from July 1, 1995 through March 31, 1996, the Core Bond and Short
Government Bond Portfolios paid investment advisory fees at the following
annual rates (expressed as a percentage of average daily net assets) after
voluntary fee waivers: Core Bond Portfolio, .39%; and Short Government Bond
Portfolio, .28%. For the period from March 1, 1995 through January 31,
1996, the New Jersey Tax-Free Income and International Bond Portfolios paid
investment advisory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee waviers: New
Jersey Tax-Free Income Portfolio, 0.56%; and International Bond Portfolio,
.80%.
The fourth, fifth and sixth sentences of the section entitled "How Frequently
Are Dividends and Distributions Made To Shareholders?" have been replaced with
the following:
Each Portfolio will declare a dividend each day on "settled" shares (i.e.,
shares for which the particular Portfolio has received payment in Federal
funds) on the first Business Day after a purchase order is placed with the
Fund. Payments by check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year, substantially all of
the Portfolios' net investment income will be declared as dividends. The
amount of the daily dividend for each Portfolio will be based on periodic
projections of its net investment income. All dividends are paid within ten
days after the end of each month.
This Supplement is dated May 30, 1996 and relates to the Prospectus originally
dated January 16, 1996 and thereby redated May 30, 1996.
<PAGE>
will be declared as dividends. The amount of the daily dividend for each
Portfolio will be based on periodic projections of its net investment
income. All dividends are paid within ten days after the end of each
month.
This Supplement is dated May 31, 1996 and relates to the Prospectus originally
dated January 16, 1996 and hereby redated May 31, 1996.
<PAGE>
The Bond Portfolios Institutional Shares January 16, 1996
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of twenty-eight investment portfolios. This Prospec-
tus describes the Institutional Shares of ten of those port-
folios (the "Portfolios"):
Short Government Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond Portfolio
Managed Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
Ohio Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
January 16, 1996 has been filed with the Securities and Ex-
change Commission (the "SEC"). The Statement of Additional
Information may be obtained free of charge from the Fund by
calling (800) 441-7764. The Statement of Additional Informa-
tion, as supplemented from time to time, is incorporated by
reference into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN
THE PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest in taxable bonds, and four of these
Portfolios invest in tax-exempt bonds. A detailed description of
each Portfolio begins on page 20.
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
Short Government Bond Merrill 1-3 Year Short U.S. Government
Treasury Index
Intermediate Government Lehman Brothers
Bond Intermediate Government Intermediate U.S.
Government
Intermediate Bond Lehman Brothers Intermediate
Intermediate Government/Corporate
Government/Corporate
Core Bond Lehman Aggregate Intermediate Investment
Grade Debt
Managed Income Salomon BIG Corporate Debt A-Rated
International Bond Salomon Non-U.S. Hedged General World Income
World Government Bond
Index
Tax-Free Income Lehman Municipal Bond General Municipal Debt
Index
PA Tax-Free Income Lehman Local GO Index PA Municipal Debt
NJ Tax-Free Income Lehman Local GO Index NJ Municipal Debt
OH Tax Free Income Lehman Local GO Index OH Municipal Debt
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc.
("BlackRock") serves as sub-adviser to each Portfolio except the
International Bond Portfolio, which is sub-advised by Morgan
Grenfell Investment Services Limited ("Morgan Grenfell").
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
BOND different directions in fixed income investing. You may wish to
PORTFOLIOS use the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?"
CAPITAL FUNDS
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 9
What Are The Portfolios?..................................... 20
What Are The Differences Among The Portfolios?............... 21
What Types Of Securities Are In The Portfolios?.............. 22
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 23
What Additional Investment Policies and Risks Apply?......... 24
Who Manages The Fund?........................................ 37
How Are Shares Purchased And Redeemed?....................... 41
How Is Net Asset Value Calculated?........................... 43
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 44
How Are Fund Distributions Taxed?............................ 45
How Is The Fund Organized?................................... 49
How Is Performance Calculated?............................... 50
How Can I Get More Information?.............................. 52
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Institutional Shares of the Portfolios after fee waivers for the current fis-
cal year ending September 30, 1996 as a percentage of average daily net as-
sets. An example based on the summary is also shown.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
GOVERNMENT GOVERNMENT INTERMEDIATE
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .30% .30%
Other operating expenses .25 .25 .25
----- ------ ------
Administration fees
(after fee waivers)(/1/) .15 .15 .13
Other expenses .10 .10 .12
---- ----- -----
Total Portfolio operating expenses (after
fee waivers)(/1/) .55% .55% .55%
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CORE BOND MANAGED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees
(after fee waivers)(/1/) .30% .35%
Other operating expenses .25 .23
----- -------
Administration fees (after fee waivers)(/1/) .15 .12
Other expenses .10 .11
---- ------
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .58%
===== =======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are
under no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. The
information in the table is based on the advisory and administration fees
and other expenses payable after fee waivers for the fiscal year ended
September 30, 1995, as restated to reflect current expenses and fee waiv-
ers. Without waivers, "Other operating expenses" would be .33%, .33%,
.35%, .33% and .34%, respectively, and "Total Portfolio operating ex-
penses" would be .83%, .83%, .85%, .83% and .84%, respectively.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .55% .30% .30%
Other operating expenses .43 .25 .25
--------- -------- ---------
Administration fees
(after fee
waivers)(/1/) .15 .13 .13
Other expenses .28 .12 .12
-------- ------- --------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .98% .55% .55%
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX- TAX-
FREE INCOME FREE INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)(/1/) .30% .30%
Other operating expenses .25 .25
------ ------
Administration fees (after fee waivers)(/1/) .10 .10
Other expenses .15 .15
----- -----
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .55%
====== ======
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50%, .50%, .50% and .50%,
respectively, and administration fees would be .23% for each Portfolio. In
addition, the Expense Summary reflects reimbursements made to the Tax-Free
Income Portfolio by the adviser. PAMG and the Portfolios' administrators
are under no obligation to waive fees or reimburse expenses, but have in-
formed the Fund that they expect to waive fees and reimburse expenses dur-
ing the remainder of the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the table.
The information in the table is based on the advisory and administration
fees and other expenses payable after fee waivers for the fiscal year ended
September 30, 1995, as restated to reflect current expenses and fee waiv-
ers. Without waivers, "Other operating expenses" would be .51%, .51%, .35%,
.38% and .38%, respectively, and "Total Portfolio operating expenses" would
be 1.06%, .85%, .85%, .88% and .88% respectively.
7
<PAGE>
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Short Government Bond Portfolio $ 6 $18 $31 $ 69
Intermediate Government Bond
Portfolio 6 18 31 69
Core Bond Portfolio 6 18 31 69
Intermediate Bond Portfolio 6 18 31 69
Managed Income Portfolio 6 19 32 73
International Bond Portfolio 10 31 54 120
Tax-Free Income Portfolio 6 18 31 69
Pennsylvania Tax-Free Income
Portfolio 6 18 31 69
New Jersey Tax-Free Income Portfolio 6 18 31 69
Ohio Tax-Free Income Portfolio 6 18 31 69
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERAT-
ING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
8
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and, except for the period March
1, 1995 through August 31, 1995 with respect to the Interna-
tional Bond Portfolio and the New Jersey Tax-Free Income Portfo-
lio, has been audited by the Portfolios' independent accountant
(or former accountant with respect to the Short Government Bond
and Core Bond Portfolios). This financial information should be
read together with those financial statements. For the periods
shown, the Short Government Bond Portfolio and Core Bond Portfo-
lio offered only one class of shares to institutional investors,
and the New Jersey Tax-Free Income and International Bond Port-
folio offered one class of shares to both institutional and re-
tail investors. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder re-
ports. Both the Statement of Additional Information and the an-
nual shareholder reports may be obtained from the Fund free of
charge by calling (800) 441-7764.
9
<PAGE>
Financial Highlights
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SHORT GOVERNMENT BOND PORTFOLIO+
(FORMERLY, THE SHORT-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
YEAR YEAR JULY 17, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.71 $ 9.96 $ 10.00
------- ------- -------
Net investment income (net of
$.014, $.011 and $.005
respectively, of interest
expense)(**) 0.58 0.48 0.51
Net realized and unrealized
loss on investments 0.13 (0.25) (0.06)
------- ------- -------
Net increase from investment
operations 0.71 0.23 0.45
------- ------- -------
Dividends from net investment
income (0.58) (0.48) (0.49)
Distributions from net realized
capital gains (0.01) - - - -
------- ------- -------
Total dividends and
distributions (0.59) (0.48) (0.49)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.71 $ 9.96
======= ======= =======
Total investment return(***) 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) 0.57% 0.57% 0.56%(****)
Net investment income(**) 6.08% 4.70% 5.32%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $34,236 $36,686 $67,540
Portfolio turnover 586% 455% 513%
Net assets, end of period (in
thousands) $44,486 $31,265 $51,611
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Short Govern-
ment Bond Portfolio") of The BFM Institutional Trust Inc., which was orga-
nized as a Maryland business corporation. On January 12, 1996, the assets
and liabilities of the Predecessor Short Government Bond Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-
existing portfolio investment maintained by the Fund.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Short Government Bond Portfolio
waived fees amounting to $102,707 and $110,232 and reimbursed expenses
amounting to $61,195 and $55,582, for the periods ended June 30, 1995 and
June 30, 1994, respectively. For the period July 17, 1992 through June
30, 1993, the administrator of the Predecessor Short Bond Portfolio
waived fees amounting to $64,580. If all expenses had been borne, the ex-
pense ratios would have been 1.05%, 1.02% and 0.66% for the periods ended
June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The net in-
vestment income ratios would have been 5.60%, 4.25% and 5.22% for the pe-
riods ended June 30, 1995, June 30, 1994 and June 30, 1993, respectively.
The net investment income on a per share basis would have been $0.53,
$0.43 and $0.49 for the periods ended June 30, 1995, June 30, 1994 and
June 30, 1993, respectively.
(***) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported. Dividends
are assumed, for purposes of this calculation, to be reinvested at the
net asset value per share on the payment date.
(****) Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 9.64 $ 10.60 $ 10.46 $ 10.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.58 0.55 0.54 0.24
Net gain (loss) on investments
(both realized and unrealized) 0.38 (0.86) 0.16 0.46
-------- -------- -------- --------
Total from investment operations 0.96 (0.31) 0.70 0.70
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.58) (0.55) (0.54) (0.24)
Distributions from net realized
capital gains - - (0.10) (0.02) - -
-------- -------- -------- --------
Total distributions (0.58) (0.65) (0.56) (0.24)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 10.02 $ 9.64 $ 10.60 $ 10.46
======== ======== ======== ========
Total return 10.28% (3.08)% 6.88% 7.14%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $134,835 $128,974 $137,065 $105,620
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.42% 0.40% 0.73% 0.80%/2/
Before advisory/administration
fee waivers 0.79% 0.80% 0.81% 0.80%/2/
Ratios of net investment income
to average net assets
After advisory/administration fee
waivers 5.94% 5.48% 5.23% 5.28%/2/
Before advisory/administration
fee waivers 5.57% 5.08% 5.15% 5.28%/2/
PORTFOLIO TURNOVER RATE 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 9/17/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.05 $ 10.01 $ 10.00
-------- ------- -------
Income from investment operations
Net investment income 0.56 0.54 0.02
Net gain (loss) on investments (both realized
and unrealized) 0.38 (0.88) (0.01)
-------- ------- -------
Total from investment operations 0.94 (0.34) 0.01
-------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.56) (0.56) - -
Distributions from net realized capital gains - - (0.06) - -
-------- ------- -------
Total distributions (0.56) (0.62) - -
-------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 9.43 $ 9.05 $ 10.01
======== ======= =======
Total return 10.76% (3.52)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $124,979 $71,896 $56,713
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.55% 0.45% 0.45%/2/
Before advisory/administration fee waivers 0.89% 0.88% 0.84%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 6.18% 5.54% 4.72%/2/
Before advisory/administration fee waivers 5.84% 5.11% 4.33%/2/
PORTFOLIO TURNOVER RATE 262% 92% 4%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
YEAR YEAR DECEMBER 9, 1992(*)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.36 $ 10.37 $10.00
------- ------- ------
Net investment income (net of
$.004, $.003 and $.001,
respectively, of interest
expense)(**) 0.62 0.55 0.32
Net realized and unrealized
gains on investments 0.50 (0.60) 0.37
------- ------- ------
Net (decrease) increase from
investment operations 1.12 (0.05) 0.69
------- ------- ------
Dividends from net investment
income (0.62) (0.55) (0.32)
Distributions from net realized
capital gains (0.01) (0.41)
------- -------
Total dividends and
distributions (0.63) (0.96) (0.32)
------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.36 $10.37
======= ======= ======
Total investment return(***) 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses(*) 0.55% 0.55% 0.55%(****)
Net investment income(**) 6.62% 5.61% 5.57%(****)
SUPPLEMENTAL DATA:
Average net assets (in
thousands) $16,247 $ 9,702 $6,622
Portfolio turnover 435% 722% 354%
Net assets, end of period (in
thousands) $32,191 $12,507 $7,803
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 12, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations.
(**) The investment adviser of the Predecessor Core Bond Portfolio waived fees
amounting to $56,894, $34,010 and $24,761 and reimbursed expenses amount-
ing to $137,364, $137,179 and $0 for the periods ended June 30, 1995, June
30, 1994 and June 30, 1993, respectively. The administrator of the Prede-
cessor Core Bond Portfolio waived fees amounting to $32,500 and $3,701 for
the periods ended June 30, 1994 and June 30, 1993, respectively. For the
period ended June 30, 1993, the custodian and transfer agent of the Prede-
cessor Core Bond Portfolio waived fees amounting to $24,272 and $17,283,
respectively. If the Predecessor Core Bond Portfolio had borne all ex-
penses for the periods ended June 30, 1995, 1994 and 1993, the expense ra-
tios would have been 1.75%, 2.65% and 2.44%, respectively; the net invest-
ment income ratios would have been 5.43%, 3.51% and 3.68%, respectively;
and the net investment income on a per share basis would have been $0.51,
$0.34 and $0.22, respectively.
(***) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset
value per share on the last day of the period reported. Dividends are as-
sumed, for purposes of this calculation, to be reinvested at the net as-
set value per share on the payment date.
(****) Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
-------- -------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.65 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on
investments (both
realized and
unrealized) 0.60 (1.21) 0.56 0.48 0.63 (0.29)
-------- -------- -------- -------- ------- -------
Total from investment
operations 1.25 (0.57) 1.23 1.17 1.37 0.37
-------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.65) (0.64) (0.67) (0.69) (0.73) (0.66)
Distribution in excess
of net investment
income (0.01) (0.02) - - - - (0.08) (0.01)
Distributions from net
realized capital gains - - (0.14) (0.13) - - - - - -
Distributions in excess
of net realized gains - - (0.01) - - - - - - - -
-------- -------- -------- -------- ------- -------
Total distributions (0.66) (0.81) (0.80) (0.69) (0.81) (0.67)
-------- -------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
======== ======== ======== ======== ======= =======
Total return 13.27% (5.27)% 12.13% 11.80% 14.74% 3.80%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $443,148 $395,060 $341,791 $314,075 $52,802 $38,328
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.57% 0.55% 0.74% 0.80% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers 0.77% 0.77% 0.78% 0.80% 0.84% 0.82%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.44% 6.11% 6.25% 6.28% 7.36% 7.31%/2/
Before
advisory/administration
fee waivers 6.24% 5.89% 6.21% 6.28% 7.32% 7.29%/2/
PORTFOLIO TURNOVER RATE 203% 61% 72% 56% 38% 18%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR YEAR YEAR PERIOD
8/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.39 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both realized
and unrealized) 0.55 (0.48) 0.46 0.47 0.26
------- ------- ------- ------- -------
Total from investment
operations 0.94 (0.14) 1.11 0.99 0.57
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.04) (0.13) (0.90) (0.30) - -
Distributions from net
realized capital gains - - (0.24) (0.22) (0.14) (0.06)
------- ------- ------- ------- -------
In Excess of Net Realized
Gains - - - - - - - - (0.30)
Total distributions (0.04) (0.37) 1.12 (0.44) (0.36)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.42 $ 10.52 $ 10.75 $ 10.76 $ 10.21
======= ======= ======= ======= =======
Total return 8.96%* 1.50% 10.24% 9.55% 8.92%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $45,242 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.18%* 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.18%* 1.24% 1.38% 1.30% 1.37%*
Ratios of net investment
income to average net
assets 5.75%* 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 5.75%* 5.96% 6.00% 6.31% 6.75%*
PORTFOLIO TURNOVER RATE 58.50% 130.64% 128.14% 115.25% 110.13%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. It is expected that the assets and liabil-
ities of the Predecessor International Bond Portfolio will be transferred to
this Portfolio, which has no prior operating history, on or about February
10, 1996.
* Annualized.
** Commenced operations on July 1, 1991.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 1/21/93/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $10.04 $11.31 $10.61
------ ------ ------
Income from investment operations
Net investment income 0.53 0.53 0.42
Net gain (loss) on investments (both realized
and unrealized) 0.59 (0.93) 0.70
------ ------ ------
Total from investment operations 1.12 (0.40) 1.12
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.53) (0.42)
Distributions from net realized capital gains (0.02) (0.34) - -
------ ------ ------
Total distributions (0.55) (0.87) (0.42)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.61 $10.04 $11.31
====== ====== ======
Total return 11.54% (3.77)% 10.72%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 271 $ 132 $ 675
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.52% 0.50% 0.50%/2/
Before advisory/administration fee waivers 1.30% 1.73% 1.28%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 5.19% 4.97% 5.14%/2/
Before advisory/administration fee waivers 4.41% 3.74% 4.36%/2/
PORTFOLIO TURNOVER RATE 92% 40% 71%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 12/1/92/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.82 $10.70 $10.00
------ ------ ------
Income from investment operations
Net investment income 0.52 0.53 0.39
Net gain (loss) on investments (both realized
and unrealized) 0.51 (0.85) 0.73
------ ------ ------
Total from investment operations 1.03 (0.32) 1.12
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.52) (0.53) (0.39)
Distributions from net realized capital gains - - (0.03) (0.03)
------ ------ ------
Total distributions (0.52) (0.56) (0.42)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.33 $ 9.82 $10.70
====== ====== ======
Total return 10.81% (2.96)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $2,092 $ 639 $ 256
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.52% 0.39% 0.09%/2/
Before advisory/administration fee waivers 0.84% 0.99% 0.97%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 5.23% 5.27% 5.19%/2/
Before advisory/administration fee waivers 4.91% 4.67% 4.31%/2/
PORTFOLIO TURNOVER RATE 66% 30% 40%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
17
<PAGE>
Financial Highlights (continued)
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR YEAR YEAR PERIOD
8/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.94 $ 11.31 $ 11.30 $ 10.46 $ 10.00
------- ------- -------- ------- -------
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both realized
and unrealized) 0.28 (0.36) 0.04 0.85 0.45
------- ------- -------- ------- -------
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - (0.01) (0.03) - - - -
------- ------- -------- ------- -------
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
------- ------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.22 $ 10.94 $ 11.31 $ 11.30 $ 10.46
======= ======= ======== ======= =======
Total return 4.90% 1.49% 5.18% 13.48% 12.33%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
PORTFOLIO TURNOVER RATE 18.47% 28.43% 12.05% 16.09% 0.00%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munic-
ipal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 12, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were trans-
ferred to this Portfolio, which had no prior operating history.
* Annualized.
** Commenced operations on July 1, 1991.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 12/1/92/1/
ENDED ENDED THROUGH
9/30/95 9/30/94 9/30/93
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.60 $10.53 $10.00
------ ------ ------
Income from investment operations
Net investment income 0.55 0.53 0.36
Net gain (loss) on investments (both realized
and unrealized) 0.45 (0.91) 0.53
------ ------ ------
Total from investment operations 1.00 (0.38) 0.89
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.55) (0.53) (0.36)
Distributions from net realized capital gains - - (0.02) - -
------ ------ ------
Total distributions (0.55) (0.55) (0.36)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.05 $ 9.60 $10.53
====== ====== ======
Total return 10.75% (3.75)% 9.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 200 $ 127 $1,676
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.12% 0.10% 0.08%/2/
Before advisory/administration fee waivers 1.19% 1.49% 2.59%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 5.61% 5.16% 4.99%/2/
Before advisory/administration fee waivers 4.54% 3.77% 2.48%/2/
PORTFOLIO TURNOVER RATE 63% 61% 36%
</TABLE>
/1/Commencement of operations.
/2/Annualized.
19
<PAGE>
What Are The Portfolios?
- -------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 28 portfolios and
has been structured to include many different investment
styles across the spectrum of fixed income investments so
that investors may participate across multiple disciplines in
order to seek their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Six of these Portfolios invest solely in taxable
bonds and four of these Portfolios invest in tax-exempt
bonds.
In certain investment cycles and over certain holding peri-
ods, a fund that invests in any one of these styles may per-
form above or below the market. An investment program that
combines these multiple disciplines allows investors to se-
lect from among these various product options in the way that
most closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Short Government Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
20
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Short Gov't Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Managed Salomon BIG 5-10 Years Investment Grade BBB
Income Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
OH Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios are structured to have comparable durations to the bench-
marks. Duration, which measures price sensitivity to interest rate changes,
is not necessarily equal to average maturity.
21
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio,
according to the following designations:
Yes:The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No:The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Gov't Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
22
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio, invest less than 80% of its net as-
sets in Municipal Obligations (as defined below), except during defensive
periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securities
and related repurchase agreements) 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 Portfo-
lio's total assets may be invested without regard to this limitation so long as
no more than 25% of the Portfolio's total assets are invested in any one issuer
(except U.S. Government securities and related repurchase agreements).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations de-
scribed in this Prospectus. If the Fund determines that any such commitment is
no longer in the best interests of a Portfolio, it will revoke the commitment
by terminating sales of shares of the Portfolio in the state involved.
23
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Short Government Bond Portfolio
and Intermediate Government Bond Portfolio (the "Government Portfolios") will
be rated in the highest rating category at the time of purchase or, if unrated,
of comparable quality as determined by the Portfolios' sub-adviser. Securities
acquired by the other Portfolios will be rated investment grade at the time of
purchase (within the four highest voting categories by Standard & Poor's Rat-
ings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable
quality as determined by a Portfolio's sub-adviser. Securities rated "Baa" on
"BBB" are generally considered to be investment grade although they have specu-
lative characteristics. If a security's rating is reduced below the minimum
rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con-
sider whether the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Government Portfolios
will invest at least 65% of their net assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its net as-
sets in the debt obligations of foreign issuers located in at least three dif-
ferent foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jer-
sey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-
Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (together with
the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfolios") will in-
vest, during normal market conditions, at least 80% of their net assets in ob-
ligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their political sub-divisions,
agencies, instrumentalities and authorities and related tax-exempt derivative
securities ("Municipal Obligations") the interest on which is exempt from regu-
lar Federal income tax and is not an item of tax preference for purposes of the
Federal alternative minimum tax. In addition, each State-Specific Tax-Free
Portfolio intends to invest at least 65% of its net assets in Municipal Obliga-
tions of issuers located in the particular state indicated by its name. The
Tax-Free Income Portfolio intends to invest no more than 25% of its net assets
in Municipal Obligations of issuers located in the same state. During temporary
defensive periods each Tax-Free Portfolio may invest without limitation in se-
curities that are not Municipal Obligations and may hold without limitation
uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. The Managed Income Portfolio may invest up
to 10% of its total assets in debt securities of foreign issuers and may hold
from time to time various foreign currencies pending their investment or con-
version into U.S. dollars. Investing in securities of foreign issuers involves
considerations not typically associated with investing in securities of compa-
nies organized and operated in the United States. Because foreign securities
generally are denominated and pay dividends or interest in foreign currencies,
the value of a Portfolio that invests in foreign securities will be affected
favorably or unfavorably by changes in currency exchange rates.
24
<PAGE>
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions
effected on foreign stock exchanges has increased in recent years, it remains
appreciably below that of the New York Stock Exchange. Accordingly, a Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. Such instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer.
25
<PAGE>
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 nor-
mally issued by special purpose public authorities. If the issuer of moral ob-
ligation bonds is unable to meet its debt service obligations from current rev-
enues, it may draw on a reserve fund the restoration of which is a moral com-
mitment but not a legal obligation of the state or municipality which created
the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its net assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects. To the ex-
tent a Portfolio's assets are invested in Municipal Obligations payable from
the revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. Each Tax-Free Portfolio will acquire stand-by commitments solely
to facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
26
<PAGE>
The Tax-Free Portfolios may invest in tax-exempt derivative securities relating
to Municipal Obligations, including tender option bonds, participations, bene-
ficial interests in trusts and partnership interests. The amount of information
regarding the financial condition of issuers of Municipal Obligations may not
be as extensive as that which is made available by public corporations and the
secondary market for Municipal Obligations may be less liquid than that for
taxable fixed-income securities. Accordingly, the ability of a Tax-Free Portfo-
lio to buy and sell tax-exempt securities may, at any particular time and with
respect to any particular securities, be limited.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its investment adviser and sub-adviser will rely on such
opinions and will not review independently the underlying proceedings relating
to the issuance of Municipal Obligations, the creation of any tax-exempt deriv-
ative securities, or the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may purchase securities that are secured or backed by mort-
gages as well as other assets (e.g., automobile loans and credit card receiv-
ables). Issuers of these mortgage-related and asset-backed securities include
the U.S. Government, the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), and private issuers such as commercial banks, financial
companies, finance subsidiaries of industrial companies, savings and loan asso-
ciations, mortgage banks and investment banks.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways.
Non-mortgage asset-backed securities involve certain risks that are not pre-
sented by mortgage-related securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws, many of which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of ve-
hicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of
27
<PAGE>
the automobile receivables may not have an effective security interest in all
of the obligations backing such receivables. Therefore, there is a possibility
that recoveries on repossessed collateral may not, in some cases, be able to
support payments on these securities.
The yield characteristics of mortgage-related and asset-backed securities dif-
fer from traditional debt securities. A major difference is that the principal
amount of the obligations may be prepaid at any time because the underlying as-
sets (i.e., loans) generally may be prepaid at any time. As a result, if a
mortgage-related or asset-backed security is purchased at a premium, a prepay-
ment rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if one of these securities is pur-
chased at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will decrease, yield to maturity. In calculat-
ing the average weighted maturity of a Portfolio, the maturity of mortgage-re-
lated and asset-backed securities will be based on estimates of average life
which take prepayments into account.
Prepayments on mortgage-related and asset-backed securities generally increase
with falling interest rates and decrease with rising interest rates; further-
more, prepayment rates are influenced by a variety of economic and social fac-
tors. In general, the collateral supporting non-mortgage asset-backed securi-
ties is of shorter maturity than mortgage loans and is less likely to experi-
ence substantial prepayments. Like other fixed income securities, when interest
rates rise the value of a mortgage-related or asset-backed security generally
will decline; however, when interest rates decline, the value of these securi-
ties that have prepayment features may not increase as much as that of other
fixed income securities.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS
28
<PAGE>
that receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-related obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial invest-
ment will not be fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or instrumen-
tality) may be considered liquid under guidelines established by the Fund's
Board of Trustees if they can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of a Port-
folio's per share net asset value.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Portfolios (except the Tax-Free Portfolios) may in-
vest in debt obligations of domestic or foreign corporations and banks, and may
acquire commercial obligations issued by Canadian corporations and Canadian
counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-
denominated commercial paper of a foreign issuer. Bank obligations may include
certificates of deposit, notes, bankers' acceptances and fixed time deposits.
These obligations may be general obligations of the parent bank or may be lim-
ited to the issuing branch or subsidiary by the terms of a specific obligation
or by government regulation. The Portfolios may also make interest-bearing sav-
ings deposits in commercial and savings banks in amounts not in excess of 5% of
their respective total assets. For purposes of determining the permissibility
of an investment in bank obligations, the total assets of a bank are determined
on the basis of the bank's most recent annual financial statements.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the GNMA are supported by the
United States' full faith and credit; others such as those of the FNMA and the
Student Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the FHLMC are supported only by the credit of the instrumentality. No assur-
ance can be given that the U.S. Government would provide financial support to
U.S. Government-sponsored agencies or instrumentalities if it is not obligated
to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their holdings, as a duration
management technique or to protect against an increase in the price of securi-
ties a Portfolio anticipates purchasing at a later date. The Portfolios intend
to use these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a
29
<PAGE>
specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to
the extent that a specified index falls below a predetermined interest rate,
to receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future
exchange rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (po-
sition hedging). The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with the set-
tlement of transactions in portfolio securities denominated in that foreign
currency, and may also enter into contracts to purchase or sell foreign cur-
rencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts (futures contracts). The Portfolio may also pur-
chase exchange-listed and over-the-counter call and put options on futures
contracts and on foreign currencies, and may write covered call options on up
to 100% of the currencies in its portfolio. In order to protect against cur-
rency fluctuations, the International Bond Portfolio may enter into currency
swaps. Currency swaps involve the exchange of the rights of the Portfolio and
another party to make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, financial instruments, foreign currencies, securities in-
dices or the yield differential between two securities, and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options where
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corpora-
tion, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may
also invest in futures contracts and options on futures contracts for hedging
purposes or to maintain liquidity. The value of a Portfolio's contracts may
equal or exceed 100% of the Fund's total assets, although a Portfolio will not
purchase or sell a futures contract unless immediately afterwards the aggre-
gate amount of margin deposits on its existing futures positions plus the
amount of premiums paid for related futures options is 5% or less of its net
assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may
30
<PAGE>
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 occur-
ring prior to sales of securities in the value of the securities to be sold. In
addition, a Portfolio may utilize futures contracts in anticipation of changes
in the composition of its holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid high grade assets or will
otherwise cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see Appendix B in the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master
31
<PAGE>
demand notes that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. The Portfolios may
invest up to 10% of their total assets in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater re-
sets in the opposite direction from the market rate of interest to which it is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent
in inverse floaters is associated with greater volatility in their market val-
ues. Issuers of unrated variable and floating rate instruments must satisfy
the same criteria as set forth above for a Portfolio. The absence of an active
secondary market with respect to particular variable and floating rate instru-
ments, however, could make it difficult for the Portfolio to dispose of a
variable or floating rate instrument if the issuer defaulted on its payment
obligation or during periods when the Portfolio is not entitled to exercise
its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller
would expose a Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to make limited borrowings. If the securities held by a Portfolio should
decline in value while borrowings are outstanding, the net asset value of the
Portfolio's outstanding shares will decline in value by proportionately more
than the decline in value suffered by the Portfolio's securities. Borrowings
may be made through reverse repurchase agreements under which a Portfolio
sells portfolio securities to financial institutions such as banks and broker-
dealers and agrees to repurchase them at a particular date and price. The
Portfolios may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase agree-
ment. The Portfolios (except the Tax-Free Portfolios) may use reverse repur-
chase 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 in-
terest 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 secu-
rities the Portfolio is obligated to repurchase and that the securities may
not be returned to the Portfolio. During the time a reverse repurchase agree-
ment is outstanding, a Portfolio will maintain a segregated account with the
Fund's custodian containing cash, U.S. Government or other appropriate liquid
high-grade debt securities having a value at least equal to the repurchase
price. A Portfolio's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its to-
tal assets. In addition, a Portfolio (except the Tax-Free Portfolios) may bor-
row up to an additional 5% of its total assets for temporary purposes.
32
<PAGE>
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and re-
purchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified institutional buyers" in accordance with Rule 144A under the 1933 Act.
Any such security will not be considered illiquid so long as it is determined
by a Portfolio's sub-adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and for-
ward commitment transactions involve the risk, however, that the price or yield
obtained in a transaction may be less favorable than the price or yield avail-
able in the market when the securities delivery takes place. Each Portfolio's
when-issued purchases and forward commitments are not expected to exceed 25% of
the value of its total assets absent unusual market conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing such securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time that a
Portfo-
33
<PAGE>
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid high grade debt obligations having a value equal to the repurchase
price (including accrued interest) and will subsequently monitor the account
to ensure that its value is maintained. 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.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or re-
purchase securities may be restricted and the instruments which the Portfolio
is required to repurchase may be worth less than an instrument which the Port-
folio originally held when the Portfolio is able to complete the purchase.
Successful use of mortgage dollar rolls may depend upon a sub-adviser's abil-
ity to correctly predict interest rates and prepayments. There is no assurance
that dollar rolls can be successfully employed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will
decline. The Portfolios may make short sales both as a form of hedging to off-
set potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to
acquire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not, however, be a factor pre-
venting a sale or purchase when the sub-adviser believes investment considera-
tions warrant such sale or purchase. Portfolio turnover may vary greatly from
year to year as well as within a particular year. High portfolio turnover
rates will generally result in higher transaction costs to a Portfolio.
INTEREST RATE RISK. The value of fixed income securities in the Portfolios can
be expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio securi-
ties, and the average maturity of a Portfolio's assets will vary within the
limits stated above under "What Are the Differences Among the Portfolios?"
based upon its sub-adviser's assessment of economic and market conditions.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Tax-Free Portfolios in state-
specific Municipal Obligations raises special investment considerations. In
particular, changes in the economic condition and governmental policies of a
state and its political subdivisions could adversely affect the value
34
<PAGE>
of a Portfolio's shares. Certain matters relating to the states in which the
State-Specific Tax-Free Portfolios invest are described below. For further in-
formation, see "Special Considerations Regarding State-Specific Municipal Obli-
gations" in the Statement of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following three
years; as of June 30, 1994, the General Fund had a surplus of $892.9 million.
The deficit in the Commonwealth's unreserved/undesignated funds also have been
eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris-
ing unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates
place increased pressures on the tax resources of the Commonwealth and its mu-
nicipalities. The Commonwealth has sold a substantial amount of bonds over the
past several years, but the debt burden remains moderate. The recession has af-
fected Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January, 1995, but the Commonwealth is likely to continue to
show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county, the
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture is an im-
portant segment of the Ohio economy with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness. In prior
years, the State's overall unemployment rate was commonly somewhat higher than
the national figure. For example, the reported 1990 average monthly State rate
was 5.7%, compared to the 5.5% national figure. However, for the last four
years the State rates were below the national rates (5.5% versus 6.1% in 1994).
The unemployment rate and its effects vary among particular geographic areas of
the
35
<PAGE>
State. There can be no assurance that future national, regional or state-wide
economic difficulties and the resulting impact on State or local government
finances generally will not adversely affect the market value of Ohio Munici-
pal Obligations held in the Portfolio or the ability of particular obligors to
make timely payments of debt service on (or lease payments relating to) those
obligations.
36
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the di-
TRUSTEES rection of its Board of Trustees. The following individuals were
elected by shareholders on January 4, 1996 to serve as trustees
of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Management
SUB- Group ("PAMG"). Each of the Portfolios within the Compass Capi-
ADVISERS tal Fund family, except the International Bond Portfolio, is
managed by a specialized portfolio manager who is a member of
PAMG's fixed income portfolio management subsidiary, BlackRock
Financial Management, Inc. ("BlackRock"). The sub-adviser of the
International Bond Portfolio is Morgan Grenfell Investment Serv-
ices Limited ("Morgan Grenfell").
The ten portfolios and their investment sub-advisers and portfo-
lio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------- ------------------------------------
<S> <C> <C>
Short Government Bond BlackRock(/1/) Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since its inception.
Michael P. Lustig; Vice President of
BlackRock since 1989; Portfolio co-
manager since 1994.
Scott Amero; Managing Director of
BlackRock since 1990; Portfolio co-
manager since its inception.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- ------------------------------------
<S> <C> <C>
Intermediate Government BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
Bond and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Intermediate Bond BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
Core Bond BlackRock(/1/) Scott Amero (see above); Mr. Amero
has been Portfolio manager since its
inception.
Managed Income BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
and Scott Amero (see above); Messrs.
Kapito, Lustig and Amero have been
Portfolio co-managers since 1995.
International Bond Morgan Grenfell(/2/) Martin A. Hall; Director of Morgan
Grenfell since 1991; Portfolio
manager since 1991.
Tax-Free Income BlackRock(/1/) Kevin Klingert; portfolio manager at
BlackRock since 1991; prior to
joining BlackRock, Assistant Vice
President, Merrill, Lynch, Pierce,
Fenner & Smith; Portfolio manager
since 1995.
Pennsylvania Tax-Free BlackRock(/1/) Kevin Klingert (see above);
Income Portfolio manager since 1995.
New Jersey Tax-Free In- BlackRock(/1/) Kevin Klingert (see above);
come Portfolio manager since 1995.
Ohio Tax-Free Income BlackRock(/1/) Kevin Klingert (see above);
Portfolio manager since 1995.
</TABLE>
(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York
10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM,
1NB England.
38
<PAGE>
PAMG was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1835 Market
Street, Philadelphia, Pennsylvania 19103. PAMG is an indirect
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding
company. Morgan Grenfell is an indirect wholly-owned subsidiary
of Deutsche Bank, A.G., a German financial services conglomer-
ate.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, computed
daily on a Portfolio-by-Portfolio basis and payable monthly, at
the maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For their last fiscal years, the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Short Government Bond Portfolio, .30%; Intermediate Govern-
ment Bond Portfolio, .20%; Intermediate Bond Portfolio, .25%;
Core Bond Portfolio, .35%; Managed Income Portfolio, .35%; In-
ternational Bond Portfolio, .80%; Tax-Free Income Portfolio, 0%;
Pennsylvania Tax-Free Income Portfolio, .27%; New Jersey Tax-
Free Income Portfolio, .60%; and Ohio Tax-Free Income Portfolio,
0%.
The sub-advisers to each Portfolio strive to achieve best execu-
tion on all transactions. Infrequently, brokerage transactions
for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with Com-
pass Capital's distributor, subject to the requirements of best
execution.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the
39
<PAGE>
Fund's 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"). A major-
ity of the outstanding stock of PDI is owned by its officers
and the remaining outstanding stock is owned by Pennsylvania
Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters relat-
ing to the maintenance of financial records and fund account-
ing. As compensation for these services, CCG is entitled to
receive a fee, computed daily and payable monthly, at an an-
nual rate of .03% of each Portfolio's average daily net as-
sets, and PFPC and CDI are entitled to receive a combined
fee, computed daily and payable monthly, at an annual rate of
.20% of the first $500 million of each Portfolio's average
daily net assets, .18% of the next $500 million of each Port-
folio's average daily net assets, .16% of the next $1 billion
of each Portfolio's average daily net assets and .15% of each
Portfolio's average daily net assets in excess of $2 billion.
From time to time the Administrators may waive some or all of
their administration fees from a Portfolio.
For information about the operating expenses the Portfolios
expect to pay for the current fiscal year, see "What Are The
Expenses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses in-
clude, but are not limited to, fees paid to PAMG and the Ad-
ministrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servic-
ing and processing fees, fees and expenses in registering and
qualifying the Portfolios and their shares for distribution
under Federal and state securities laws, expenses of prepar-
ing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of
additional information to existing shareholders, expenses re-
lating to shareholder reports, shareholder meetings and proxy
solicitations, insurance premiums, the expense of independent
pricing services, and other expenses which are not expressly
assumed by PAMG or the Fund's service providers under their
agreements with the Fund. Any general expenses of the Fund
that do not belong to a particular investment portfolio will
be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board de-
termines to be fair and equitable.
40
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Institutional Shares.
PURCHASE OF SHARES. Institutional Shares are offered to institutional invest-
ors, including registered investment advisers with a minimum investment of
$500,000 and individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per share next computed
after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East-
ern Time) on a Business Day are priced the same day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders re-
ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi-
ness Day.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also, in
the discretion of the Fund, be made in the form of securities that are permis-
sible investments for the respective Portfolios. For further information, see
the Statement of Additional Information. The minimum initial investment for in-
stitutions is $5,000. There is no minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for Institutional Shares.
REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed
by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. The Fund and its service providers will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeem-
41
<PAGE>
ing Institution on the next Business Day, provided that the Fund's custodian is
also open for business. Payment for redemption orders received after 4:00 p.m.
(Eastern Time) or on a day when the Fund's custodian is closed is normally
wired in Federal funds on the next Business Day following redemption on which
the Fund's custodian is open for business. The Fund reserves the right to wire
redemption proceeds within seven days after receiving a redemption order if, in
the judgment of PAMG, an earlier payment could adversely affect a Portfolio. No
charge for wiring redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count balance drops below $5,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000 on thirty days'
written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
42
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
The net asset value is calculated separately for Institutional Shares of each
Portfolio as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by dividing the value of all securities
and other assets owned by a Portfolio that are allocated to its Institutional
Shares, less the liabilities charged to its Institutional Shares, by the number
of its Institutional Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices or the mean between their bid and asked
prices. Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such securi-
ties on their respective exchanges, except when an occurrence subsequent to the
time a value was so established is likely to have changed such value. Securi-
ties 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 re-
spect to debt obligations with sixty days or less remaining to maturity unless
a Portfolio's sub-adviser under the supervision of the Board of Trustees deter-
mines such method does not represent fair value.
43
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of Institutional Shares of the relevant Portfolio unless a shareholder
elects otherwise. Such election, or any revocation thereof, must be made in
writing to PFPC, and will become effective with respect to dividends paid after
its receipt by PFPC. The net investment income of the Managed Income, Tax-Free
Income, Intermediate Government Bond, Intermediate Bond and International Bond
Portfolios is declared monthly as a dividend to investors who are shareholders
of such Portfolio at the close of business on the day of declaration. The net
investment income of the Pennsylvania Tax-Free Income, New Jersey Tax-Free In-
come, Ohio Tax-Free Income, Core Bond and Short Government Bond Portfolios is
declared daily as a dividend to investors who are shareholders of such Portfo-
lio at, and whose payment for share purchases are available to the particular
Portfolio in Federal funds by, the close of business on the day of declaration.
All dividends are paid within ten days after the end of each month and, in the
case of the Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-
Free Income, Core Bond and Short Government Bond Portfolios, within seven days
after redemption of all of a shareholder's shares in a Portfolio. Net realized
capital gains (including net short-term capital gains), if any, will be dis-
tributed by each Portfolio at least annually.
44
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), 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.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. Shareholders
who are recipients of Social Security Act or Railroad Retirement Act benefits
should note that "exempt interest dividends" will be taken into account in de-
termining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
Compass Capital will send written notices to shareholders annually regarding
the tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
45
<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time
of redemption, or transfer. Generally, shareholders may include sales charges
paid on the purchase of Shares in their tax basis for the purposes of determin-
ing gain or loss on a redemption, transfer or exchange of such Shares. However,
if a shareholder exchanges the Shares for Shares of another Portfolio within 90
days of purchase and is able to reduce the sales charges applicable to the new
Shares (by virtue of the Fund's exchange privilege), the amount equal to such
reduction may not be included in the tax basis of the shareholder's exchanged
Shares for the purpose of determining gain or loss but may be included (subject
to the same limitation) in the tax basis of the new Shares.
Any loss upon the sale or exchange of shares held for six months or less will
be disallowed for Federal income tax purposes to the extent of any exempt in-
terest dividends received by the shareholder. For the Ohio Tax-Free Income
Portfolio, the loss will be disallowed for Ohio income tax purposes to the same
extent, even though, for Ohio income tax purposes, some portion of such divi-
dends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of the taxable year in question consists
of stock or securities of foreign corporations, the Portfolio may elect, for
U.S. Federal income tax purposes, to treat certain foreign taxes paid by it,
including generally any withholding taxes and other foreign income taxes, as
paid by its shareholders. The Portfolio intends to make this election. As a re-
sult, the amount of such foreign taxes paid by the Portfolio will be included
in its shareholders' income pro rata (in addition to taxable distributions ac-
tually received by them), and each shareholder generally will be entitled ei-
ther (a) to credit a proportionate amount of such taxes against U.S. Federal
income tax liabilities, or (b) if a shareholder itemizes deductions, to deduct
such proportionate amounts from U.S. income.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, future legislative or administrative changes or court decisions may mate-
rially affect the tax consequences of investing in a Portfolio. Shareholders
who are non-resident alien individuals, foreign trusts or estates, foreign cor-
porations or foreign partnerships may be subject to different U.S. Federal in-
come tax treatment.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania Municipal Obligations or attributable to insurance proceeds on account
of such interest, is not taxable to individuals, estates or trusts under the
Personal Income Tax (in the case of insurance proceeds, to the extent they are
exempt for Federal Income Tax purposes); to corporations under the Corporate
Net Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for
46
<PAGE>
Federal Income Tax purposes); nor to individuals under the Philadelphia School
District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were held by the Pennsylvania Tax-Free In-
come Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free Income
Portfolio, such gain may be subject to the Personal Income Tax and Corporate
Net Income Tax. Such gain may also be subject to the School District Tax, ex-
cept that gain realized with respect to a share held for more than six months
is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or inter-
est and gain thereon, is subject to, or included in the measure of, the special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania Municipal Obligations and Federal obligations (if
the interest on such obligations is exempt from state and local taxation under
the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey personal
income tax. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey State-Specific Obliga-
tions or direct U.S. Government obligations; it must have no investments other
than interest-bearing obligations, obligations issued at a discount, and cash
and cash items (including receivables); and it must satisfy certain reporting
obligations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corpo-
47
<PAGE>
rate shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States)
("U.S. Obligations"), if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at
least 50% of the value of the total assets of the Portfolio consists of Ohio
Municipal Obligations or similar obligations of other states or their subdivi-
sions. Corporations that are subject to the Ohio corporation franchise tax will
not have to include distributions from the Ohio Tax-Free Income Portfolio in
their net income base for purposes of calculating their Ohio corporation fran-
chise tax liability to the extent that such distributions either constitute ex-
empt-interest dividends for Federal income tax purposes or are properly attrib-
utable to interest on Ohio Municipal Obligations or U.S. Obligations. However,
Shares of the Ohio Tax-Free Income Portfolio will be included in a corpora-
tion's net worth base for purposes of calculating the Ohio corporation fran-
chise tax. Distributions properly attributable to gain on the sale, exchange or
other disposition of Ohio Municipal Obligations will not be subject to the Ohio
personal income tax, or municipal or school district income taxes in Ohio and
will not be included in the net income base of the Ohio corporation franchise
tax. Distributions attributable to other sources will be subject to the Ohio
personal income tax and the Ohio corporation franchise tax.
48
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds. The Declaration of Trust authorizes the Board of Trust-
ees to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to this authority, the Trustees have authorized the issuance
of an unlimited number of shares in twenty-eight investment portfolios. Each
Portfolio, except the Intermediate Bond, Managed Income and Ohio Tax-Free In-
come Portfolios, offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. The
Intermediate Bond, Managed Income and Ohio Tax-Free Income Portfolios offer In-
stitutional Shares, Service Shares and Investor A Shares and, in addition, the
Ohio Tax-Free Income Portfolio offers Investor B Shares. This prospectus re-
lates only to Investor Shares of the ten Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. In addition, each class of Investor
Shares is sold with different sales charges. Because of these "class expenses"
and sales charges, the performance of a Portfolio's Institutional Shares is ex-
pected to be higher than the performance of the Portfolio's Service Shares, and
the performance of both the Institutional Shares and Service Shares of a Port-
folio is expected to be higher than the performance of the Portfolio's classes
of Investor Shares. The Fund offers various services and privileges in connec-
tion with its Investor Shares that are not generally offered in connection with
its Institutional and Service Shares, including an automatic investment plan,
automatic withdrawal plan and checkwriting. For further information regarding
the Fund's Service and Investor Share classes, contact PFPC at (800) 441-7764
(Service Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 18, 1995, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
49
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Institutional Shares of the Portfolios may be
quoted in advertisements and communications to shareholders. Total return will
be calculated on an average annual total return basis for various periods. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the measur-
ing period. Total return may also be calculated on an aggregate total return
basis. Aggregate total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total return assume that
dividend and capital gain distributions made by a Portfolio with respect to its
Institutional Shares are reinvested in Institutional Shares.
The yield of Institutional Shares is computed by dividing the Portfolio's net
income per share allocated to its Institutional Shares during a 30-day (or one
month) period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's
"tax-equivalent yield" may also be quoted, which shows the level of taxable
yield needed to produce an after-tax equivalent to a Portfolio's tax-free
yield. This is done by increasing the Portfolio's yield (calculated above) by
the amount necessary to reflect the payment of Federal and/or state income tax
at a stated tax rate.
The performance of a Portfolio's Institutional Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a Portfolio's Institu-
tional Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Lehman GMNA Index, the T-Bill Index
and the "stocks, bonds and inflation index" published annually by Ibbotson As-
sociates and the Lehman Government Corporate Bond Index, as well as the bench-
marks attached to this Prospectus. Performance information may also include
evaluations of the Portfolios and their Institutional Shares published by na-
tionally recognized ranking services, and information as reported in financial
publications such as Business Week, Fortune, Institutional Investor, Money Mag-
azine, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional Shares of a particular Portfolio, a Portfolio
may provide other information demonstrating hypothetical investment returns.
This information may include, but is not limited to, illustrating the com-
pounding effects of a dividend in a dividend reinvestment plan or the impact of
tax-deferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Institutional Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Institutional Shares of a Portfolio cannot necessarily be used to compare
an
50
<PAGE>
investment in such shares with bank deposits, savings accounts and similar in-
vestment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Performance is generally a function of the kind
and quality of the instruments held in a portfolio, portfolio maturity, operat-
ing expenses and market conditions. Any fees charged by brokers or other insti-
tutions directly to their customer accounts in connection with investments in
Institutional Shares will not be included in the Portfolio performance calcula-
tions.
51
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week.The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (800) FUTURE4.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
52
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Short Government Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Lehman Brothers Aggregate Index is:
54% allocation to Treasury and government
securities
28% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
Managed Income Salomon BIG Very similar to the Lehman Aggregate, the
Salomon BIG is a market-weighted index
comprised of U.S. Treasury, government-
sponsored, investment grade corporate (Baa-
3/BBB- or better), mortgage- and asset-
backed securities.
. Issues comprising the index have an
average life of at least 1 year, with no
maximum maturity
. Corporate and government-sponsored issues
have a minimum face amount of $100
million to qualify for entry, and a
minimum of $75 million face amount to
exit
. Treasury and mortgage issues have a
minimum face amount of $1 billion for
both entry and exit
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of June 1995, the composition of the
Index is:
53% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
18% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
53
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR
IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
SHORT GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND PORTFOLIO
MANAGED INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
THE BOND
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
January 16, 1996
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(formerly, The PNC(R) Fund)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to shares ("Shares") representing interests in the Money Market,
Municipal Money Market, U.S. Treasury Money Market (formerly, the Government
Money Market Portfolio), Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market, New Jersey Municipal Money Market, Value Equity, Growth Equity, Index
Equity, Small Cap Value Equity, International Equity, International Emerging
Markets, Balanced, Small Cap Growth Equity, Select Equity (formerly, the Core
Equity Portfolio), Managed Income, Tax-Free Income, Intermediate Government Bond
(formerly, the Intermediate Government Portfolio), Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short Government Bond (formerly, the Short-Term
Bond Portfolio), Intermediate Bond (formerly, the Intermediate-Term Bond
Portfolio), Government Income, International Bond (formerly, the International
Fixed Income Portfolio), New Jersey Tax-Free Income and Core Bond Portfolios
(collectively, the "Portfolios") of Compass Capital Funds (the "Fund"). The
Money Market, Municipal Money Market, U.S. Treasury Money Market, Ohio Municipal
Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal
Money Market, Virginia Municipal Money Market and New Jersey Municipal Money
Market Portfolios are hereinafter collectively called "Money Market Portfolios,"
and the other Portfolios are hereinafter collectively called "Non-Money Market
Portfolios." This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Prospectuses of the Fund relating to
the Portfolios dated January 16, 1996 (and redated May 30, 1996 with respect to
the Money Market Portfolios and the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed
Income, International Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New
Jersey Tax-Free Income and Ohio Tax-Free Income Portfolios), as amended from
time to time (the "Prospectuses"). Prospectuses may be obtained from the Fund's
distributor by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated May 30, 1996. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the
Prospectuses.
<PAGE>
CONTENTS
Page
----
Investment Policies ......................................
Trustees and Officers ....................................
Investment Advisory, Administration, .....................
Distribution and Servicing Arrangements .................
Portfolio Transactions ...................................
Purchase and Redemption Information ......................
Valuation of Portfolio Securities ........................
Performance Information ..................................
Taxes ....................................................
Additional Information Concerning Shares .................
Miscellaneous ............................................
Appendix A ............................................... A-1
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or the
Prospectuses in connection with the offering made by the Prospectuses and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. The Prospectuses do not
constitute an offering by the Fund or by the Fund's distributor in any
jurisdiction in which such offering may not lawfully be made.
-2-
<PAGE>
INVESTMENT POLICIES
The following supplements information contained in the Prospectuses
concerning the Portfolios' investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.
The Index Equity Portfolio is currently structured as most investment
companies and invests its assets directly. However, on June 2, 1996, the Index
Equity Portfolio expects to invest all of its investable assets in The U.S.
Large Company Series (the "Index Master Portfolio") of The DFA Investment Trust
Company (the "Trust"). Accordingly, the following discussion relates to:
(i) the investment policies of all the Portfolios including the Index Equity
Portfolio; and (ii) where indicated the investment policies of the Index Master
Portfolio.
Additional Information on Portfolio Investments.
Reverse Repurchase Agreements. Each Portfolio (including the Index
Master Portfolio) other than the Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market and New Jersey Municipal Money Market
Portfolios (the "Municipal Money Market Portfolios") and the Index Master
Portfolio may invest in reverse repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by a Portfolio pursuant to a
Portfolio's agreement to repurchase the securities at an agreed upon price, date
and interest rate. Such agreements are considered to be borrowings under the
Investment Company Act of 1940 (the "1940 Act"). While reverse repurchase
transactions are outstanding, a Portfolio will maintain in a segregated account
cash, U.S. Government securities or other liquid, high-grade debt securities in
an amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
Variable and Floating Rate Instruments. With respect to purchasable
variable and floating rate instruments, the adviser or sub-adviser will consider
the earning power, cash flows and liquidity ratios of the issuers and guarantors
of such instruments and, if the instruments are subject to a demand feature,
will monitor their financial status to meet payment on demand. Such instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The absence of an active secondary market with respect to
-3-
<PAGE>
particular variable and floating rate instruments could make it difficult for a
Portfolio to dispose of a variable or floating rate note if the issuer defaulted
on its payment obligation or during periods that the Portfolio is not entitled
to exercise its demand rights, and the Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments. In determining
average-weighted portfolio maturity, an instrument will be deemed to have a
maturity equal to either the period remaining until the next interest rate
adjustment or the time the Portfolio involved can recover payment of principal
as specified in the instrument, depending on the type of instrument involved.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign
Branches of U.S. Banks. Each Non-Money Market Portfolio may purchase bank
obligations, such as certificates of deposit, bankers' acceptances and time
deposits, including instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The assets of a bank or savings institution
will be deemed to include the assets of its domestic and foreign branches for
purposes of each Portfolio's investment policies. Investments in short-term
bank obligations may include obligations of foreign banks and domestic branches
of foreign banks, and also foreign branches of domestic banks.
The Index Master Portfolio may purchase obligations of U.S. banks and
savings and loan associations and dollar-denominated obligations of U.S.
subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Index
Master Portfolio if the bank has assets in excess of $1 billion.
Mortgage-Related Securities. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make 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
-4-
<PAGE>
United States and are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of principal and
interest by FNMA. Mortgage-related securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality
of the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
The Managed Income, Intermediate Government, Short Government Bond,
Intermediate Bond, Government Income, International Bond, Core Bond, Tax-Free
Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-
Free Income Portfolios (the "Bond Portfolios") may invest in multiple class
pass-through securities, including collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduit ("REMIC") pass-through or
participation certificates ("REMIC Certificates"). These multiple class
securities may be issued by U.S. Government agencies or instrumentalities,
including FNMA and FHLMC, or by trusts formed by private originators of, or
investors in, mortgage loans. In general, CMOs and REMICs are debt obligations
of a legal entity that are collateralized by, and multiple class pass-through
securities represent direct ownership interests in, a pool of residential
mortgage loans or mortgage pass-through securities (the "Mortgage Assets"), the
payments on which are used to make payments on the CMOs or multiple pass-through
securities. Investors may purchase beneficial interests in CMOs and REMICs,
which are known as "regular" interests or "residual" interests. The residual in
a CMO or REMIC structure generally represents the interest in any excess cash
flow remaining after making required payments of principal of and interest on
the CMOs or REMICs, as well as the related administrative expenses of the
issuer. Residual interests generally are junior to, and may be significantly
more volatile than, "regular" CMO and REMIC interests. The Portfolios do not
currently intend to purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed
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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 tend to have market prices and
yields that are much more volatile than the PAC classes.
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FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on PCs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain PCs, referred to as "Gold PCs."
Asset-Backed Securities. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
----
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
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U.S. Government Obligations. Examples of the types of U.S. Government
obligations which the Portfolios may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, the Farmers Home Administration, the Export-Import Bank of the
United States, the Small Business Administration, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the
Maritime Administration, the International Bank for Reconstruction and
Development (the "World Bank"), the Asian-American Development Bank and the
Inter-American Development Bank.
The Index Master Portfolio may purchase (i) debt securities issued by
the U.S. Treasury which are direct obligations of the U.S. Government, including
bills, notes and bonds, and (ii) obligations issued or guaranteed by U.S.
Government-sponsored instrumentalities and federal agencies, including FNMA,
Federal Home Loan Bank and the Federal Housing Administration.
Supranational Organization Obligations. The Index Master Portfolio may
purchase debt securities of supranational organizations such as the European
Coal and Steel Community, the European Economic Community and the World Bank,
which are charted to promote economic development .
Lease Obligations. The Municipal Money Market, Pennsylvania Municipal
Money Market, Ohio Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market, New Jersey Municipal Money Market,
Managed Income, Tax-Free Income, Pennsylvania Tax-Free Income, Ohio Tax-Free
Income, Short Government Bond, Intermediate Bond, International Bond and New
Jersey Tax-Free Income Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Adviser will monitor the credit standing of each municipal borrower and
each entity providing credit support and/or a put option. In determining whether
a lease obligation is liquid, the Adviser will consider, among other factors,
the following: (i) whether the lease can be cancelled; (ii) the degree of
assurance that assets represented by the lease could be sold; (iii) the strength
of the lessee's general credit (e.g., its debt, administrative, economic, and
financial characteristics); (iv) the likelihood that the municipality would
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (e.g., the
potential for an "event of nonappropriation"); (v) legal recourse in the event
of failure to appropriate; (vi) whether the security is backed by a credit
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enhancement such as insurance; and (vii) any limitations which are imposed on
the lease obligor's ability to utilize substitute property or services other
than those covered by the lease obligation.
The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios will
only invest in lease obligations with puts that (i) may be exercised at par on
not more than seven days notice, and (ii) are issued by institutions deemed by
the adviser to present minimal credit risks. Such obligations will be
considered liquid. However, a number of puts are not exercisable at the time
the put would otherwise be exercised if the municipal borrower is not
contractually obligated to make payments (e.g., an event of nonappropriation
with a "nonappropriation" lease obligation). Under such circumstances, the
lease obligation while previously considered liquid would become illiquid, and a
Portfolio might lose its entire investment in such obligation.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to a Portfolio, and could result in a reduction in the value of the
municipal lease experiencing non-payment and a potential decrease in the net
asset value of a Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, a Portfolio could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and a Portfolio
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund might take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase a Portfolio's
operating expenses and adversely affect the net asset value of a Portfolio. When
the lease contains a non-appropriation clause, however, the failure to pay would
not be a default and a Portfolio would not have the right to take possession of
the assets. Any income derived from a Portfolio's ownership or operation of such
assets may not be tax-exempt. In addition, a Portfolio's intention to qualify as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended, may limit the extent to which a Portfolio may exercise its rights by
taking possession of such assets, because as a regulated investment company a
Portfolio is subject to certain limitations on its investments and on the nature
of its income.
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Commercial Paper. The Money Market Portfolios may purchase commercial paper
rated in one of the two highest rating categories of a nationally recognized
statistical rating organization ("NRSRO"). The Non-Money Market Portfolios,
except the Index Master Portfolio, may purchase commercial paper rated (at the
time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed advisable
by a Portfolio's adviser or sub-adviser, "high quality" issues rated "A-2" or
"Prime-2" by S&P or Moody's, respectively. The Index Master Portfolio may
purchase commercial paper rated (at the time of purchase) "A-1" or better by
S&P or "Prime-1" by Moody's, or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated "Aaa" by Moody's or "AAA" by S&P, and
having a maximum maturity of nine months. These ratings symbols are described in
Appendix A.
Commercial paper purchasable by each Portfolio includes "Section 4(2)
paper," a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.
Repurchase Agreements. Each Portfolio may invest in repurchase agreements.
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Portfolio involved plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on securities underlying the repurchase agreement). The
financial institutions with which a Portfolio may enter into repurchase
agreements will be banks and non-bank dealers of U.S. Government securities that
are listed on the Federal Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed creditworthy by the Portfolio's
adviser or sub-adviser. A Portfolio's adviser or sub-adviser will continue to
monitor creditworthiness of the seller under a repurchase agreement, and will
require the seller to maintain during the term of the agreement the value of the
securities subject to the agreement to equal at least the repurchase price
(including accrued interest). In addition, the Portfolio's adviser or sub-
adviser will mark-to-market daily the value of the securities, and will, if
necessary, require the seller to maintain additional securities to ensure that
the value is not less than the repurchase price. Securities subject to
repurchase agreements will be held by the Fund's custodian (or sub-custodian) in
the Federal Reserve/Treasury book-entry system or
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by another authorized securities depository. Repurchase agreements are
considered to be loans by the Portfolios under the 1940 Act.
The Index Master Portfolio will not enter into a repurchase agreement
with a duration of more than seven days if, as a result, more than 10% of the
value of its total assets would be so invested. The Index Master Portfolio will
also only invest in repurchase agreements with a bank if the bank has at least
$1 billion in assets and is approved by the Investment Committee of DFA. DFA
will monitor the market value of transferred securities plus any accrued
interest thereon so that the value of such securities will at least equal the
repurchase price. The securities underlying the repurchase agreements will be
limited to U. S. Government and agency obligations described under "Government
Obligations" above.
Investment Grade Debt Obligations. Each of the Money Market
Portfolios may invest in securities in the two highest rating categories of
NRSROs. The Non-Money Market Portfolios, except the Index Master Portfolio,
invest in "investment grade securities," which are securities rated in the four
highest rating categories of an NRSRO. It should be noted that debt obligations
rated in the lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by
S&P) are considered to have some speculative characteristics and are more
sensitive to economic change than higher rated securities.
The Index Master Portfolio may invest in non-convertible corporate
debt securities which are issued by companies whose commercial paper is rated
"Prime-1" by Moody's or "A-1" by S&P and dollar-denominated obligations of
foreign issuers issued in the U.S. If the issuer's commercial paper is unrated,
then the debt security would have to be rated at least "AA" by S&P or "Aa2" by
Moody's. If there is neither a commercial paper rating nor a rating of the debt
security, then the Index Master Portfolio's investment adviser must determine
that the debt security is of comparable quality to equivalent issues of the same
issuer rated at least "AA" or "Aa2."
When-Issued Purchases and Forward Commitments. The Portfolios may enter
into "when-issued" and "forward" commitments, including "TBA" (to be announced)
purchase commitments, to purchase securities for a fixed price at a future date.
When a Portfolio agrees to purchase securities on this basis, the custodian will
set aside cash or liquid portfolio securities 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
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commitments. It may be expected that the market value of a Portfolio's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Portfolio's liquidity and ability to manage its portfolio might be
affected when it sets aside cash or portfolio securities to cover such purchase
commitments, each Portfolio expects that its commitments to purchase when-issued
or TBA securities and forward commitments will not exceed 25% of the value of
its total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, a Portfolio
may dispose of or renegotiate a commitment after it has been entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
Rights Offerings and Warrants to Purchase. As stated in their Prospectus,
the Value Equity, Growth Equity, Small Cap Growth Equity, Select Equity, Small
Cap Value Equity, International Equity, International Emerging Markets and
Balanced Portfolios may participate in rights offerings and may purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life span to expiration. The purchase of rights or warrants
involves the risk that the Portfolios could lose the purchase value of a right
or warrant if the right to subscribe to additional shares is not exercised prior
to the rights' and warrants' expiration. Also, the purchase of rights and/or
warrants involves the risk that the effective price paid for the right and/or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security. A Portfolio will not invest
more than 5% of its net assets, taken at market value, in warrants, or more than
2% of its net assets,
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taken at market value, in warrants not listed on the New York or American Stock
Exchanges. Warrants acquired by a Portfolio in units or attached to other
securities are not subject to this restriction.
Foreign Currency Transactions. Forward foreign currency exchange
contracts involve an obligation to purchase or sell a specified currency at a
future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow a Portfolio to establish a rate of exchange for a future point
in time. The Portfolio may use forward foreign currency exchange contracts to
hedge against movements in the value of foreign currencies (including the "ECU"
used in the European Community) relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. A
Portfolio may enter into forward foreign currency exchange contracts when deemed
advisable by its adviser or sub-adviser under two circumstances. First, when
entering into a contract for the purchase or sale of a security, the Portfolio
may enter into a forward foreign currency exchange contract for the amount of
the purchase or sale price to protect against variations, between the date the
security is purchased or sold and the date on which payment is made or received,
in the value of the foreign currency relative to the U.S. dollar or other
foreign currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. In
addition, while forward contracts may offer protection from losses resulting
from declines in the value of a particular foreign currency, they also limit
potential gains which might result from increases in the value of such currency.
A Portfolio will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
A separate account of a Portfolio consisting of cash or liquid
securities equal to the amount of the Portfolio's assets that could be required
to consummate forward contracts entered into under the second circumstance, as
set forth above, will be established with the Fund's custodian. For the purpose
of
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determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Portfolio.
Options. Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in the underlying securities themselves. A Portfolio will
write call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if a Portfolio owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as are held in a segregated account by
its custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Portfolio maintains with its
custodian cash or cash equivalents equal to the contract value. A call option is
also covered if a Portfolio holds a call on the same security or index as the
call written where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise
price of the call written provided the difference is maintained by the Portfolio
in cash or cash equivalents in a segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is
recorded as an asset of the Portfolio. When a Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio's statement
of assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded
option is the last sale price or, in the absence of a sale, the mean between the
last bid and asked 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
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by a Portfolio is exercised, the proceeds of the sale will be increased by the
net premium originally received and the Portfolio will realize a gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
Futures Contracts and Related Options. Each Non-Money Market Portfolio
(including the Index Master Portfolio) may invest in futures contracts and
options thereon (interest rate futures contracts or index futures contracts, as
applicable). Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, a Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to effectively hedge.
Successful use of futures by a Portfolio is also subject to the
adviser's ability to correctly predict movements in the
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direction of the market. For example, if a Portfolio has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Portfolio will lose part or all of
the benefit to the increased value of its securities which it has hedged because
it will have approximately equal offsetting losses in its futures positions. In
addition, in some situations, if a Portfolio has insufficient cash, it may have
to sell securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio also involves the risk
of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
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The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Stand-by Commitments. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Portfolio at any time before the maturity of
the underlying Municipal Obligations and may be sold, transferred or assigned
only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Portfolio may pay
for such a stand-by commitment either separately in cash or by paying a higher
price for Municipal Obligations which are acquired subject to the commitment for
Municipal Obligations (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments for Municipal Obligations held by a Portfolio will not
exceed 1/2 of 1% of the value of such Portfolio's total assets calculated
immediately after each stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in the adviser's or sub-adviser's opinion, present minimal
credit risks. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and not to exercise its rights thereunder for
trading purposes. Stand-by commitments will be valued at zero in determining
net asset value. Accordingly, where a Portfolio pays directly or indirectly for
a stand-by commitment, its cost will be reflected as an unrealized loss for the
period during which the commitment is held by such Portfolio and will be
reflected as a realized gain or loss when the commitment is exercised or
expires.
Tax-Exempt Derivatives. The Municipal Money Market Portfolios and the
Tax-Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and New
Jersey Tax-Free Income Portfolios (collectively, the "Money and Non-Money Market
Municipal Portfolios") may hold tax-exempt derivatives which may be in the form
of tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have
been used. For example, interests in long-term fixed-rate municipal debt
obligations, held by a bank as trustee or custodian, are coupled with tender
option, demand and other features when the tax-exempt derivatives are created.
Together, these features entitle the holder of the
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interest to tender (or put) the underlying municipal debt obligation to a third
party at periodic intervals and to receive the principal amount thereof. In
some cases, municipal debt obligations are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying securities held by the custodian. Under
such arrangements, the holder of the custodial receipt has the option to tender
the underlying securities at their face value to the sponsor (usually a bank or
broker dealer or other financial institution), which is paid periodic fees equal
to the difference between the securities' fixed coupon rate and the rate that
would cause the securities, coupled with the tender option, to trade at par on
the date of a rate adjustment. The Money and Non-Money Market Municipal
Portfolios may hold tax-exempt derivatives, such as participation interests and
custodial receipts, for municipal debt obligations which give the holder the
right to receive payment of principal subject to the conditions described above.
The Internal Revenue Service has not ruled on whether the interest received on
tax-exempt derivatives in the form of participation interests or custodial
receipts is tax-exempt, and accordingly, purchases of any such interests or
receipts are based on the opinions of counsel to the sponsors of such derivative
securities. Neither the Fund nor its investment adviser or sub-advisers will
review the proceedings related to the creation of any tax-exempt derivatives or
the basis for such opinions.
Securities Lending. A Portfolio would continue to accrue interest on
loaned securities and would also earn income on investment collateral for such
loans. Any cash collateral received by a Portfolio in connection with such
loans may be invested in any of the following instruments: (a) obligations
issued or guaranteed as to principal and interest by the U.S. Government or
agencies or instrumentalities thereof; (b) commercial paper; (c) certificates of
deposit; (d) bankers' acceptances; (e) bilateral and triparty repurchase
agreements with respect to the securities listed in (a) through (d); (f) bank
time deposits issued or guaranteed as to principal and interest by an entity,
except a broker/dealer, named on an "approved list" provided by the investment
adviser or sub-adviser; (g) shares issued by unaffiliated money market funds;
and (h) other high-yielding short-term investments which the adviser or sub-
adviser believes give liquidity to pay back the borrower when the loaned
securities are returned. In any event, cash collateral shall only be invested
in instruments, including repurchase agreements, that mature on or before the
maturity date of the applicable lending transaction.
While the Index Master Portfolio may earn additional income from
lending securities, such activity is incidental to the investment objective of
the Index Master Portfolio. The value of securities loaned may not exceed 33
1/3% of the value of the
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Index Master Portfolio's total assets. In connection with such loans, the Index
Master Portfolio will receive collateral consisting of cash or U.S. Government
securities, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. In addition, the
Index Master Portfolio will be able to terminate the loan at any time, will
receive reasonable interest on the loan, as well as amounts equal to any
dividends, interest or other distributions on the loaned securities. In the
event of the bankruptcy of the borrower, the Trust could experience delay in
recovering the loaned securities. Management of the Trust believes that this
risk can be controlled through careful monitoring procedures.
Yields and Ratings. The yields on certain obligations are dependent
on a variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"),
Fitch Investor Services, Inc. ("Fitch") and S&P represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. Subsequent to its purchase by a Portfolio, a rated security may
cease to be rated. A Portfolio's adviser or sub-adviser will consider such an
event in determining whether the Portfolio should continue to hold the security.
Securities of Small Cap Issuers. Securities of small cap issues purchased
by the Small Cap Value Equity and Small Cap Growth Equity Portfolios may be
exchange-listed or purchased "over-the-counter."
Interest Rate Transactions and Currency Swaps. The Bond Portfolios
may enter into interest rate swaps, caps and floors on either an asset-based or
liability-based basis, depending on whether a Portfolio is hedging its assets or
its liabilities. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of floating rate payments for fixed rate payments). The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The International Bond Portfolio may also enter into currency swaps,
which involve the exchange of the rights of a
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Portfolio and another party to make or receive payments in specified currencies.
A Portfolio will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate or currency
swap on a daily basis and will deliver an amount of cash, U.S. Government
securities or other liquid high-grade debt securities having an aggregate net
asset value at least equal to the accrued excess to a custodian that satisfies
the requirements of the 1940 Act. If the other party to an interest rate swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that the Portfolio is contractually entitled to received. Because
currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency, the entire
principal value of a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations. A Portfolio
will not enter into any interest rate or currency swap unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
rated either "A" or "A-1" or better by S&P, Duff & Phelps or Fitch, or "A" or
"P-1" or better by Moody's.
A Portfolio will enter into currency or interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by the Portfolio's
adviser or sub-adviser. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.
Investment Companies. Each Portfolio, other than the Index Equity
Portfolio, currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be
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invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or by the Fund as a whole.
Special Consideration Regarding the Ohio Tax Free Income Portfolio. The
Ohio Tax-Free Income Portfolio will not trade its securities for the purpose of
seeking profits. For purposes of this policy, the Portfolio may vary its
portfolio securities if (i) there has been an adverse change in a security's
credit rating or in that of its issuer or in the adviser's or sub-adviser's
credit analysis of the security or its issuer; (ii) there has been, in the
opinion of the adviser and sub-adviser, a deterioration or anticipated
deterioration in general economic or market conditions affecting issuers of Ohio
Municipal Obligations, or a change or anticipated change in interest rates;
(iii) adverse changes or anticipated changes in market conditions or economic or
other factors temporarily affecting the issuers of one or more portfolio
securities make necessary or desirable the sale of such security or securities
in anticipation of the Portfolio's repurchase of the same or comparable
securities at a later date; or (iv) the adviser or sub-adviser engages in
temporary defensive strategies.
Special Considerations Regarding Investments in Ohio Municipal Obligations.
The Ohio Tax-Free Money Market and Ohio Tax-Free Income Portfolios (the "Ohio
Portfolios") will invest most of their respective net assets in securities
issued by or on behalf of (or in certificates of participation in lease-purchase
obligations of) the State of Ohio, political subdivisions of the State, or
agencies or instrumentalities of the State or its political subdivisions (Ohio
Obligations). The Ohio Portfolios are therefore susceptible to general or
particular economic, political or regulatory factors that may affect issuers of
Ohio Obligations. The following information constitutes only a brief summary of
some of the many complex factors that may have an effect. The information does
not apply to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment in
particular Ohio Obligations or in those obligations of particular Ohio issuers.
It is possible that the investment may be in particular Ohio Obligations, or in
those of particular issuers,
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as to which those factors apply. However, the information below is intended
only as a general summary, and is not intended as a discussion of any specific
factors that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1994 is 11,102,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
five years the State rates were below the national rates (4.8% versus 5.6% in
1995). The unemployment rate and its effects vary among geographic areas of the
State .
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Portfolios or the ability of particular obligors to
make timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year (FY) or fiscal biennium in a deficit position. Most State operations
are financed through the General Revenue Fund (GRF), for which the personal
income and sales-use taxes are the major sources. Growth and depletion of GRF
ending fund balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has well-established
procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
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Key biennium-ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium, passed on
July 11, 1991, $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed a FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
of which $535.2 million has been transferred into the BSF (which had an
April 3, 1996 balance of over $828 million).
The GRF appropriations act for the current 1995-96 biennium was passed on
June 28, 1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for
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the biennium were included in that act. In accordance with the appropriations
act, the significant June 30, 1995 GRF fund balance, after leaving in the GRF an
unreserved and undesignated balance of $70 million, was transferred to the BSF
and other funds, including school assistance funds and, in anticipation of
possible federal program changes, a human services stabilization fund.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters have
authorized the incurrence of State debt and the pledge of taxes or excises to
its payment. At April 3, 1996, $892 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding. The
only such State debt at that date still authorized to be incurred were portions
of the highway bonds, and the following: (a) up to $100 million of obligations
for coal research and development may be outstanding at any one time
($39.6 million outstanding); (b) $240 million of obligations authorized for
local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year ($805.4 million outstanding); and (c) up to $200
million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($47.2 million outstanding,
with no more than $50 million to be issued in any one year).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly
that would submit a constitutional amendment relating to certain other aspects
of State debt. The proposal would authorize, among other things, the issuance
of State general obligation debt for a variety of purposes, with debt service on
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all State general obligation debt and GRF-supported obligations not to exceed 5%
of the preceding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, $4.8 billion of which was
outstanding or awaiting delivery at April 3, 1996.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of each
house or by a majority vote of the electors. It cannot be predicted whether
required Senate concurrence will be received.
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 120 districts
from voter-authorized income taxes, for significant portions of their budgets.
Litigation,
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similar to that in other states, is pending questioning the constitutionality of
Ohio's system of school funding. The trial court concluded that aspects of the
system (including basic operating assistance) are unconstitutional, and ordered
the State to provide for and fund a system complying with the Ohio Constitution.
The State appealed and a court of appeals reversed the trial court's findings
for plaintiff districts. The case is now pending on appeal in the Ohio Supreme
Court. A small number of the State's 612 local school districts have in any
year required special assistance to avoid year-end deficits. A current program
provides for school district cash need borrowing directly from commercial
lenders, with diversion of State subsidy distributions to repayment if needed.
Recent borrowings under this program totalled $94.5 million for 27 districts
(including $75 million for one)in FY 1993, $41.1 million for 28 districts in FY
1994, and $71.1 million for 29 districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cities and villages; for 19 of
them the fiscal situation was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
Special Considerations Regarding Investment in Pennsylvania Municipal
Obligations. The concentration of investments in Pennsylvania Municipal
Obligations by the Pennsylvania Municipal Money Market and Pennsylvania Tax-Free
Income Portfolios raises special investment considerations. In particular,
changes in the economic condition and governmental policies of the Commonwealth
of Pennsylvania and its municipalities could adversely affect the value of those
Portfolios and their portfolio securities. This
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section briefly describes current economic trends in Pennsylvania.
Pennsylvania has historically been dependent on heavy industry, although
recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic growth
in Pennsylvania are in the service sector, including trade, medical and health
services, education and financial institutions. Agriculture continues to be an
important component of the Commonwealth's economic structure, with nearly one-
third of the Commonwealth's total land area devoted to cropland, pasture and
farm woodlands.
The population of Pennsylvania experienced a slight increase in the period
1980 through 1990, and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1980 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 50% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 120 funds
have been established for purposes of recording receipts and disbursements of
the Commonwealth, of which the General Fund is the largest. Most of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. The major tax sources for the General Fund are the sales tax, the
personal income tax and the corporate net income tax. Major expenditures of the
Commonwealth include funding for education, public health and welfare,
transportation, and economic development.
The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund (the principal operating fund of the
Commonwealth) and for certain special revenue funds which together represent the
majority of expenditures of the Commonwealth. Although a negative balance was
experienced applying generally accepted accounting principles ("GAAP") in the
General Fund for fiscal 1990 and 1991, tax increases and spending decreases have
resulted in surpluses the last three years; and as of June 30, 1995, the General
Fund has had a surplus of $688.3 million. The deficit in the Commonwealth's
unreserved/undesignated funds also has been eliminated, and there was a surplus
of $79.2 million as of June 30, 1994.
Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay
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debt service on its obligations including suits relating to the following
matters: (a) the ACLU has filed suit in Federal court demanding additional
funding for child welfare services; the Commonwealth settled a similar suit in
the Commonwealth Court of Pennsylvania and is seeking the dismissal of the
federal suit, inter alia, because of that settlement. After its earlier denial
----- ----
was reversed by the Third Circuit Court of Appeals, the district court granted
class certification to the ACLU, and the parties are proceeding with discovery;
(b) in 1987, the Supreme Court of Pennsylvania held the statutory scheme for
county funding of the judicial system to be in conflict with the constitution of
the Commonwealth, but stayed judgment pending enactment by the legislature of
funding consistent with the opinion, and the legislature has yet to consider
legislation implementing the judgment. In 1992, a new action in mandamus was
filed seeking to compel the Commonwealth to comply with the original decision;
(c) litigation has been filed in both state and Federal court by an association
of rural and small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for funding local
school districts --the Federal case has been stayed pending resolution of the
state case and the state case is in the pre-trial stage; and (d) both the
Commonwealth and the City of Philadelphia are involved in Commonwealth Court
cases that may result in their being required to fund remedies for the
unintentional racial segregation in the Philadelphia public schools.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit markets
and a long-term solution to the City's financial crisis is still being sought.
The City experienced a series of General Fund deficits for fiscal years 1988
through 1992. The City has no legal authority to issue deficit reduction bonds
on its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority (the "Authority") to provide fiscal
oversight for Pennsylvania cities (primarily Philadelphia) suffering recurring
financial difficulties. The Authority is broadly empowered to assist cities in
avoiding defaults and eliminating deficits by encouraging the adoption of sound
budgetary practices and issuing bonds. In order for the Authority to issue
bonds on behalf of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority with certain
oversight powers with respect to the fiscal affairs of the City. Philadelphia
currently is operating under a five year plan approved by the Authority on April
17, 1995 with technical amendments officially incorporated on July 18, 1995.
The audited balance of the City's General Fund as of June 30, 1995 was $80.5
million.
The Authority's power to issue further bonds to finance capital projects or
deficit expired on December 31, 1994. The
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Authority may continue to issue debt to finance a cash flow deficit until
December 31, 1996, and its ability to refund outstanding bonds is unrestricted.
The Authority had $1,237.5 million in special revenue bonds outstanding as of
December 31, 1995.
Most recently, Moody's has rated the long-term general obligation bonds of
the Commonwealth "A1," and Standard & Poor's has rated such bonds "AA-." There
can be no assurance that the economic conditions on which these ratings are
based will continue or that particular bonds issues may not be adversely
affected by changes in economic or political conditions.
Special Considerations Regarding Investment in North Carolina Municipal
Obligations. The concentration of investments in North Carolina Municipal
Obligations by the North Carolina Municipal Money Market Portfolio raises
special investment considerations. In particular, changes in the economic
condition and governmental policies of North Carolina and its political
subdivisions, agencies, instrumentalities, and authorities could adversely
affect the value of the Portfolio and its portfolio securities. This section
briefly describes current economic trends in North Carolina.
The State of North Carolina has two major operating funds: the General Fund
and the Highway Fund. In addition, the 1989 General Assembly created the Highway
Trust Fund to provide funding for a major highway construction program. North
Carolina derives most of its revenue from taxes, including individual income
tax, corporation income tax, sales and use taxes, corporation franchise tax,
alcoholic beverage tax, insurance tax, inheritance tax, tobacco products tax,
and soft drink tax. North Carolina receives other non-tax revenues which are
also deposited in the General Fund. The most important are Federal funds
collected by North Carolina agencies, university fees and tuition, interest
earned by the North Carolina Treasurer on investments of General Fund moneys and
revenues from the judicial branch. The proceeds from the motor fuel tax, highway
use tax and motor vehicle license tax are deposited in the Highway Fund and the
Highway Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing and
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in
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the North Carolina sales tax and increases in the personal and corporate income
tax rates, as well as increases in the tax on cigarettes and alcohol, among
other items.
Fiscal year 1992 ended with a positive fund balance of approximately $164.8
million. By law, $41.2 million of such positive fund balance was required to be
reserved in the General Fund of North Carolina as part of a "Savings Reserve,"
leaving an unrestricted General Fund balance at June 30, 1992 of $123.6 million.
Fiscal year 1993 ended with a positive General Fund balance of approximately
$537.3 million. Of this amount, $134.3 million was reserved in the Savings
Reserve and $57 million was reserved in a Reserve for Repair and Renovation of
State Facilities, leaving an unrestricted General Fund balance at June 30, 1993
of $346 million. Fiscal year 1994 ended with a positive General Fund balance of
approximately $444.7 million. An additional $178 million was available from a
reserved fund balance. Of this aggregate amount, $155.7 million was reserved in
the Savings Reserve (bringing the total reserve to $210.6 million after prior
withdrawals) and $60 million was reserved in the Reserve for Repair and
Renovation of State Facilities (bringing the total reserve to $60 million after
prior withdrawals), leaving an unrestricted General Fund balance at June 30,
1994 of $407 million. Fiscal year 1995 ended with a positive General Fund
balance of approximately $343.4 million on an unaudited basis and $3.1 million
on an audited basis, after an accounting charge of $340.3 million to the
beginning fund balance to reflect the impact of the implementation for fiscal
1995 of GASB Statement No. 22, Accounting for Taxpayer-Assessed Tax Revenues in
Governmental Funds. For fiscal year 1995, $146.3 million was reserved in the
Savings Reserve (bringing the total reserve to $423.6 million after prior
contributions) and $146.3 million was reserved in the Reserve for Repair and
Renovation of State Facilities (bringing the total reserve to $146.3 million
after prior withdrawals), leaving an unrestricted General Fund balance at June
30, 1995 of $292.6 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis (GAAP), the General Fund balance at June 30, 1993, 1994, and 1995 was
$681.5 million, $900.6 million, and $1,024.6 million, respectively. The
foregoing amounts for fiscal years 1994 and 1995 reflect adjustments for GASB
Statement No. 22 adopted by the State during fiscal 1995 .
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved,
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along with capital improvements of $114 million for such fiscal year. For
fiscal 1997, $267 million of expansion funds were approved, along with $157
million of capital improvements. Tax reductions of approximately $363 million
for fiscal 1996 and $400 million for fiscal 1997 were authorized, principally
through the repeal of North Carolina's intangible personal property tax and
reductions in North Carolina's unemployment and personal income taxes. The
General Assembly also took several measures that benefitted North Carolina's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
The North Carolina budget is based upon a number of existing and assumed
State and non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the federal government's
relationship with State governments that, if enacted into law, could affect
fiscal and economic policies of the States, including North Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in November 1994, North Carolina ranked
ninth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in March 1996 to be 4.4% of the labor force, as
compared with an unemployment rate of 5.6% nationwide.
The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet its
financial obligations:
1. Swanson v. State of North Carolina -- State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
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that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
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North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All
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public pension and retirement benefits are now entitled to a $4,000 annual
exclusion.
Following Davis, federal retirees filed a class action suit in federal
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court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991,
the North Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and that the
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taxes collected from the federal retirees were thus not improperly collected.
In 1993, the United States Supreme Court vacated that decision and remanded the
case back to the North Carolina Supreme Court. The North Carolina Supreme Court
then ruled in favor of the State on the grounds that the federal retirees had
failed to comply with state procedures for challenging unconstitutional taxes.
Plaintiffs petitioned the United States Supreme Court for review of that
decision, and the United States Supreme Court denied that petition. The United
States District Court ruled in favor of the defendants in the companion federal
case, and a petition for reconsideration was denied. Plaintiffs appealed to the
United States Court of Appeals, which concurred with the lower court's ruling.
The United States Supreme Court rejected an appeal, ruling that the lawsuit was
a state matter, leaving the North Carolina Supreme Court's ruling in force.
An additional lawsuit was filed in 1995 in State Court by federal
pensioners to recover State income taxes paid on federal retirement benefits.
This case grew out of a claim by federal pensioners in the original federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
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State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and federal retirees, the
increased benefits to State retirees constituted an indirect violation of Davis.
-----
The lawsuit seeks a refund of taxes paid by federal retirees on federal
retirement benefits received in the years 1989 through 1993 and refunds or
monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. Potential refunds exceed $300 million. This case
has been suspended pending final judgment in Bailey (discussed below), and no
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court date has been set. The North Carolina Attorney General believes that
sound legal authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina -- State Tax Refunds - State
Retirees. State and local governmental retirees filed a class action suit in
1990 as a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
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Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions. On May 31, 1995 the Superior Court issued an
order ruling in favor of the plaintiffs. Under the terms of the order, the
Superior Court found that the act of the General Assembly that repealed the tax
exemption on State and local government retirement benefits is null, void, and
unenforceable and that retirement benefits which were vested before August 1989
are exempt from taxation. The North Carolina Attorney General has appealed this
order.
The North Carolina Attorney General's office estimates that the amount
in controversy is approximately $40-$45 million annually for the tax years 1989
through 1991. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld, its
provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989.
3. Fulton Corp. v. Justus. The State's intangible personal property tax
levied on certain shares of stock has been challenged by the plaintiff on
grounds that it violates the United States Constitution Commerce Clause by
discriminating against stock issued by corporations that do all or part of their
business outside the State. The plaintiff in the action is a North Carolina
corporation that does all or part of its business outside the State. The
plaintiff seeks to invalidate the tax in its entirety and to recover tax paid on
the value of its shares in other corporations. The North Carolina Court of
Appeals invalidated the taxable percentage deduction and excised it from the
statute beginning with the 1994 tax year. The effect of this ruling was to
increase collections by rendering all stock taxable on 100% of its value. The
State and the plaintiff sought further appellate review. On December 9, 1994,
the North Carolina Supreme Court ruled in favor of the State, reversing the
decision of the Court of Appeals and upholding the tax on intangible personal
property. In 1996 the United States Supreme Court reversed, ruled in the
plaintiff's favor that the tax was discriminatory, and ordered the case back to
the State Court for a ruling on the appropriate remedy. It is anticipated that
the State Court will order the State to pay refunds aggregating between $130
million and $140 million, including interest,
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although other alternative remedies are possible. In April 1995, the North
Carolina General Assembly repealed the State's intangible personal property tax,
effective for taxable years beginning on or after January 1, 1995.
In October 1993, the State issued a total of $194.7 million general
obligation bonds (consisting of $87.5 million Prison and Youth Services
Facilities Bonds, $61 million Public Improvement Refunding Bonds, $30.2 million
Highway Refunding Bonds, and $16 million Clean Water Refunding Bonds). An
additional $67.5 million general obligation bonds (Prison and Youth Services
Facilities Bonds) were issued in November, 1993. On November 2, 1993, a total of
$740 million general obligation bonds (consisting of $310 million University
Improvement Bonds, $250 million Community College Bonds, $145 million Clean
Water Bonds, and $35 million State Parks Bonds) were approved by the voters of
the State. Pursuant to this authorization, the State issued $400 million general
obligation bonds (Capital Improvement Bonds) in January, 1994. The proceeds of
these Capital Improvement Bonds may be used for any purpose for which the
proceeds of the University Improvement Bonds, Community College Bonds, and State
Parks Bonds may be used (none of such proceeds may be used for Clean Water
purposes). An additional $60 million general obligation bonds (Clean Water
Bonds) were issued in September and October, 1994. The remaining $85 million
general obligation bonds (Clean Water Bonds) were issued in June and July, 1995.
The offering of the remaining $195 million of these authorized bonds is
anticipated to occur over the next two years.
Currently, Moody's, S&P and Fitch rate North Carolina general obligation
bonds "Aaa," "AAA," and "AAA," respectively. See Appendix A.
Special Considerations Regarding Investment in Virginia Municipal
Obligations. The Virginia Municipal Money Market Portfolio will invest primarily
in Virginia Municipal Obligations. For this reason, the Portfolio is affected by
political, economic, regulatory or other developments that constrain the taxing,
revenue-collecting and spending authority of Virginia issuers or otherwise
affect the ability of Virginia issuers to pay interest, principal or any
premium. The following information constitutes only a brief summary of certain
of these developments and does not purport to be a complete description of them.
The information has been obtained from recent fiscal statements prepared by the
Commonwealth of Virginia relating to its securities and no independent
investigation has been undertaken to verify its accuracy. Moreover, the
information relates only to the state itself and not to the numerous special
purpose or local government units whose issues may also be held by the
Portfolio. The credits represented by such issues may be affected by a wide
variety of local factors or structuring concerns and no disclosure is made here
relating to such matters.
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The rate of economic growth in the Commonwealth of Virginia has increased
steadily over the past decade. Per capita income in Virginia has been
consistently above national levels during that time. The services sector in
Virginia generates the largest number of jobs, followed by wholesale and retail
trade, state and local government and manufacturing. Because of Northern
Virginia, with its proximity to Washington, D.C. and Hampton Roads, which has
the nation's largest concentration of military installations, the Federal
government has a greater economic impact on Virginia relative to its size than
any state other than Alaska and Hawaii. It is unclear what effect the current
efforts by the Federal government to restructure the defense budget will have on
long-term economic conditions in Virginia.
According to statistics published by the U.S. Department of Labor, Virginia
typically has one of the lowest unemployment rates in the nation. This is
generally attributed to the balance among the various sectors represented in the
economy. Virginia is one of twenty states with a right-to-work law and is
generally regarded as having a favorable business climate marked by few strikes
or work stoppages. Virginia is also one of the least unionized among the
industrialized states.
Virginia's state government operates on a two-year budget. The Constitution
vests the ultimate responsibility and authority for levying taxes and
appropriating revenue in the General Assembly, but the Governor has broad
authority to manage the budgetary process. Once an appropriation act becomes
law, revenue collections and expenditures are constantly monitored by the
Governor, assisted by the Secretary of Finance and the Department of Planning
and Budget, to ensure that a balanced budget is maintained. If projected revenue
collections fall below amounts appropriated at any time, the Governor must
reduce expenditures and withhold allotments of appropriations (other than for
debt service and other specified purposes) to restore balance. An amendment to
the Constitution, effective January 1, 1993, established a Revenue Stabilization
Fund. This Fund is used to offset a portion of anticipated shortfalls in
revenues in years when appropriations based on initial forecasts exceed expected
revenues in any subsequent forecast. The Revenue Stabilization Fund consists of
an amount not to exceed 10 percent of the Commonwealth's average annual tax
revenues derived from taxes on income and retail sales for the three preceding
fiscal years.
General Fund revenues are principally composed of direct taxes. In recent
fiscal years, most of the total tax revenues have been derived from five major
taxes imposed by the Commonwealth on individual and fiduciary income, sales and
use, corporate income, public services corporations and premiums of insurance
companies.
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In September 1991, the Debt Capacity Advisory Committee was created by the
Governor through an executive order. The committee is charged with annually
estimating the amount of tax-supported debt that may prudently be authorized
consistent with the financial goals, capital needs and policies of the
Commonwealth. The committee reviews the outstanding debt of all agencies,
institutions, boards and authorities of the Commonwealth for which the
Commonwealth has either a direct or indirect pledge of tax revenues or moral
obligation.
The Constitution of Virginia prohibits the creation of debt by or on behalf
of the Commonwealth that is backed by the Commonwealth's full faith and credit,
except as provided in Section 9 of Article X. Section 9 of Article X contains
several different provisions for the issuance of general obligation and other
debt, and the Commonwealth is well within its limit for each:
Section 9(a)(2) provides that the General Assembly may incur general
obligation debt to meet certain types of emergencies, subject to limitations on
amount and duration; to meet casual deficits in the revenue or in anticipation
of the collection of revenues of the Commonwealth; and to redeem a previous debt
obligation of the Commonwealth. Total indebtedness issued pursuant to this
Section may not exceed 30 percent of an amount equal to 1.15 times the annual
tax revenues derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the creation
of general obligation debt for capital projects. Such debt is required to be
authorized by an affirmative vote of a majority of each house of the General
Assembly and approved in a statewide election. The outstanding amount of such
debt is limited to an amount equal to 1.15 times the average annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the three preceding fiscal years less the total amount of
bonds outstanding. The amount of 9(b) debt that may be authorized in any single
fiscal year is limited to 25 percent of the limit on all 9(b) debt less the
amount of 9(b) debt authorized in the current and prior three fiscal years.
Section 9(c) provides that the General Assembly may authorize the creation
of general obligation debt for revenue-producing capital projects (so-called
"double-barrel" debt). Such debt is required to be authorized by an affirmative
vote of two-thirds of each house of the General Assembly and approved by the
Governor. The Governor must certify before the enactment of the authorizing
legislation and again before the issuance of the debt that the net revenues
pledged are expected to be sufficient to pay principal of and interest on the
debt. The outstanding
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amount of 9(c) debt is limited to an amount equal to 1.15 times the average
annual tax revenues derived from taxes on income and retail sales, as certified
by the Auditor of Public Accounts for the three preceding fiscal years. While
the debt limits under Sections 9(b) and 9(c) are each calculated as the same
percentage of the same average tax revenues, these debt limits are separately
computed and apply separately to each type of debt.
Article X further provides in Section 9(d) that the restrictions of
Section 9 are not applicable to any obligation incurred by the Commonwealth or
any of its institutions, agencies or authorities if the full faith and credit of
the Commonwealth is not pledged or committed to the payment of such obligation.
There are currently outstanding various types of such 9(d) revenue bonds.
Certain of these bonds, however, are paid in part or in whole from revenues
received as appropriations by the General Assembly from general tax revenues,
while others are paid solely from revenues of the applicable project. The debt
repayments of the Virginia Public Building Authority, the Virginia Port
Authority, the Virginia College Building Authority Equipment Leasing Program and
The Innovative Technology Authority are supported in large part by General Fund
appropriations.
The Commonwealth Transportation Board ("CTB") is a substantial issue of
bonds for highway projects. These bonds are secured by and payable from funds
appropriated by the General Assembly from the Transportation Trust Fund for such
purpose. The Transportation Trust Fund was established by the General Assembly
in 1986 as a special non-reverting fund administered and allocated by the
Transportation Board to provide increased funding for construction, capital and
other needs of state highways, airports, mass transportation and ports. The
Virginia Port Authority has also issued bonds which are secured by a portion of
the Transportation Trust Fund.
Virginia is involved in numerous leases that are subject to appropriation
of funding by the General Assembly. Virginia also finances the acquisition of
certain personal property and equipment through installment purchase agreements.
Bonds issued by the Virginia Housing Development Authority, the Virginia
Resources Authority and the Virginia Public School Authority are designed to be
self-supporting from their individual loan programs. A portion of the Virginia
Housing Development Authority and Virginia Public School Authority bonds and all
of the Virginia Resources Authority bonds are secured in part by a moral
obligation pledge of the Commonwealth. Should the need arise, the Commonwealth
may consider funding deficiencies in the respective debt service reserves for
such moral obligation debt. To date, none of these authorities has advised the
Commonwealth that any such deficiencies exist.
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Local government in the Commonwealth is comprised of 95 counties, 41
incorporated cities, and 188 incorporated towns. The Commonwealth is unique
among the several states in that cities and counties are independent, and their
land areas do not overlap. The largest expenditure by local governments in the
Commonwealth are for education, but local governments also provide other
services such as water and sewer, police and fire protection and recreational
facilities. The Virginia Constitution imposes numerous restrictions on local
indebtedness, affecting both its incurrence and amount.
In Davis v. Michigan (decided March 28, 1989), the United States Supreme
Court ruled unconstitutional states' exempting from state income tax the
retirement benefits paid by the state or local governments without exempting
retirement benefits paid by the Federal government. At that time, Virginia
exempted state and local retirement benefits but not Federal retirement
benefits. At a Special Session held in April 1989, the General Assembly repealed
the exemption of state and local retirement benefits. Following Davis, at least
five suits, some with multiple plaintiffs, for refunds of Virginia income taxes,
were filed by Federal retirees. These suits were consolidated under the name of
Harper v. Virginia Department of Taxation.
In a Special Session, the Virginia General Assembly on July 9, 1994, passed
emergency legislation to provide payments to Federal retirees in a settlement of
the retirees' claims as a result of Davis. The settlement payments are to be
made over a five-year period, commencing March 31, 1995. The total amount of
authorized appropriations for the settlement is $340 million (payable to
participating retirees in installments of $60 million on March 31, 1995, and $70
million on each succeeding March 31 through March 31, 1999, subject to
appropriation by the General Assembly).
On September 15, 1995, the Virginia Supreme Court rendered its decision in
Harper, reversing the judgment of the trial court, entering final judgement
- ------
in favor of the plaintiff retirees who elected not to settle, and dictating that
the amounts unlawfully collected be refunded with statutory interest. The total
cost to Virginia of the settlement and judgment will be approximately $394.9
million, of which approximately $203.2 million has been paid.
Most recently, Moody's has rated the long-term general obligation bonds of
the Commonwealth Aaa, and Standard & Poor's has rated such bonds AAA. There can
be no assurance that the economic conditions on which these ratings are based
will continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions.
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Special Considerations Regarding Investment in New Jersey Municipal
Obligations. The State of New Jersey and its political subdivisions, agencies
and public authorities are authorized to issue two general classes of
indebtedness: general obligation bonds and revenue bonds. Both classes of bonds
may be included in the New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios. The repayment of principal and interest on general obligation
bonds is secured by the full faith and credit of the issuer, backed by the
issuer's taxing authority, without recourse to any special project or source of
revenue. Special obligation or revenue bonds may be repaid only from revenues
received in connection with the project for which the bonds are issued, special
excise taxes, or other special revenue sources and generally are issued by
entities without taxing power. Neither the State of New Jersey nor any of its
subdivisions is liable for the repayment of principal or interest on revenue
bonds except to the extent stated in the preceding sentences.
General obligation bonds of the State are repaid from revenues obtained
through the State's general taxing authority. An inability to increase taxes may
adversely affect the State's ability to authorize or repay debt.
Public authorities, private non-profit corporations, agencies and similar
entities of New Jersey ("Authorities") are established for a variety of
beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities are
not operating entities of the State of New Jersey, but are separate legal
entities that are managed independently. The State oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity bonds
in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond-issuing Authority's
ability to repay debt on special obligation bonds and no assurance can be given
that sufficient revenues will be obtained to make such payments, although in
some instances repayment may be guaranteed or otherwise secured.
Various Authorities have issued bonds for the construction of health care
facilities, transportation facilities, office buildings and related facilities,
housing facilities, pollution control facilities, water and sewage facilities
and power and electric facilities. Each of these facilities may incur different
difficulties in meeting its debt repayment obligations. Hospital facilities, for
example, are subject to changes in Medicare and Medicaid reimbursement
regulations, attempts by
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Federal and state legislatures to limit the costs of health care and
management's ability to complete construction projects on a timely basis as well
as to maintain projected rates of occupancy and utilization. At any given time,
there are several proposals pending on a Federal and state level concerning
health care which may further affect a hospital's debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies, while power and electric facilities
may be subject to increased costs resulting from environmental restrictions,
fluctuations in fuel costs, delays in licensing procedures and the general
regulatory framework in which these facilities operate. All of these entities
are constructed and operated under rigid regulatory guidelines.
Some entities which financed facilities with proceeds of private activity
bonds issued by the New Jersey Economic Development Authority, a major issuer of
special obligation bonds, have defaulted on their debt service obligations.
Because these special obligation bonds were repayable only from revenue received
from the specific projects which they funded, the New Jersey Economic
Development Authority was unable to repay the debt service to bondholders for
such facilities. Each issue of special obligation bonds, however, depends on its
own revenue for repayment, and thus these defaults should not affect the ability
of the New Jersey Economic Development Authority to repay obligations on other
bonds that it issues in the future.
The State has, in the past, experienced a period of substantial economic
growth with unemployment levels below the national average. Recently, however,
the state has experienced an economic slowdown, and its unemployment rate has
risen to the extent the State has lost its relative advantage over the nation.
To the extent that any adverse conditions exist in the future which affect the
obligor's ability to repay debt, the value of the Portfolio may be immediately
and substantially affected.
The following are cases presently pending or threatened in which the State
has a potential for either a significant loss or revenue or a significant
unanticipated expenditure: (i) several labor unions have challenged 1994
legislation that caused changes to the State's funding of several public
employee pension funds and resulted in significant ongoing annual savings to the
State; the Court of Appeals for the Third Circuit has upheld the federal
district court's decision to grant summary judgment on some of the plaintiffs'
claims and to deny summary judgment on the remainder; (ii) the New Jersey
Hospital Association and certain hospitals have challenged the adequacy of
Medicaid reimbursement for hospital services; the Court of Appeals for the Third
Circuit has affirmed denial of the plaintiffs' application for a
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preliminary injunction; (iii) various hospitals have challenged the calculation
of the hospital assessment authorized by the Health Care Reform Act of 1992; the
case has been remanded by the Appellate Division to the Department of Health,
which held a hearing on August 30, 1995, and a determination is now pending;
(iv) the County of Passaic and other parties have filed suit alleging the State
and the New Jersey Department of Environmental Protection violated a 1984
consent order concerning the construction of a resource recovery facility in
that county; the plaintiffs have appealed the trial court's grant of summary
judgment to the defendants; (v) Robert E. Brennan has sued two members of the
New Jersey Bureau of Securities asserting numerous violations of his rights and
abuse of state power; he has appealed the trial court's grant of summary
judgment to the defendants; (vi) several cases filed in the State courts
challenge the basis on which recoveries of certain costs for residents in State
psychiatric hospitals and other facilities are shared between the State
Department of Human Services and the State's county governments and certain
counties are seeking the recovery from the Department of costs they have
incurred for the maintenance of such residents; most of those cases are now
pending before the Appellate Division; (vii) a coalition of churches and church
leaders in Hudson County have filed suits asserting the State-owned Liberty
State Park in Jersey City violates environmental standards and seeking
injunctive and monetary relief; (viii) Waste Management of Pennsylvania, Inc.
and an affiliate have filed suit alleging their constitutional rights were
violated by the State's issuance of two emergency redirection orders and a draft
permit; and (ix) representatives of the trucking industry have filed a
constitutional challenge to annual hazardous and solid waste licensure renewal
fees, seeking a declaratory judgment, injunctive relief, a refund of past fees
and attorneys fees; they are seeking class certification of their action.
Although the Portfolio generally intends to invest its assets primarily in
New Jersey Municipal Obligations rated within the two highest rating categories
of an NRSRO, there can be no assurance that such ratings will remain in effect
until such obligations mature or are redeemed or will not be revised downward or
withdrawn. Such revisions or withdrawals may have an adverse affect on the
market price of such securities.
Although there can be no assurance that such conditions will continue, the
State's general obligation bonds are currently rated "AA+" by S&P and "AA1" by
Moody's.
Additional Investment Limitations.
Each Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Portfolio only by a
vote of the holders of a
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majority of such Portfolio's outstanding shares (as defined below under
"Miscellaneous"). The Index Master Portfolio's fundamental investment
limitations are described separately.
Money Market Portfolios:
1) Each of the Money Market, Municipal Money Market and U.S. Treasury
Money Market Portfolios may not purchase securities of any one issuer (other
than securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or certificates of deposit for any such securities) if more
than 5% of the value of the Portfolio's total assets (taken at current value)
would be invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Portfolio or the
Fund, except that up to 25% of the value of the Portfolio's total assets (taken
at current value) may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the value of the Portfolio's total assets.
2) No Portfolio may borrow money or issue senior securities, except that
each Portfolio may borrow from banks and (other than a Municipal Money Market
Portfolio) enter into reverse repurchase agreements for temporary purposes in
amounts up to one-third of the value of its total assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets, except in connection
with any such borrowing and then in amounts not in excess of one-third of the
value of the Portfolio's total assets at the time of such borrowing. No
Portfolio will purchase securities while its aggregate borrowings (including
reverse repurchase agreements and borrowings from banks) in excess of 5% of its
total assets are outstanding. Securities held in escrow or separate accounts in
connection with a Portfolio's investment practices are not deemed to be pledged
for purposes of this limitation.
3) Each of the Municipal Money Market, U.S. Treasury Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios may not purchase securities which would cause 25% or
more of the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the
-42-
<PAGE>
obligations of issuers in the banking industry, or in obligations, such as
repurchase agreements, secured by such obligations (unless the Portfolio is in a
temporary defensive position) or which would cause, at the time of purchase,
more than 25% of the value of its total assets to be invested in the obligations
of issuers in any other industry. In applying the investment limitations stated
in this paragraph, (i) there is no limitation with respect to the purchase of
(a) instruments issued (as defined in Investment Limitation number 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (b) instruments issued by domestic
banks (which may include U.S. branches of foreign banks) and (c) repurchase
agreements secured by the instruments described in clauses (a) and (b); (ii)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (iii) utilities will be divided according to
their services, for example, gas, gas transmission, electric and gas, electric
and telephone will be each considered a separate industry.
4) Each of the Ohio Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia Municipal Money Market
and New Jersey Municipal Money Market Portfolios will invest at least 80% of its
net assets in AMT Paper and instruments the interest on which is exempt from
regular Federal income tax, except during defensive periods or during periods of
unusual market conditions.
5) The Municipal Money Market Portfolio will invest at least 80% of its
net assets in instruments the interest on which is exempt from regular Federal
income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.
Non-Money Market Portfolios:
Each of the Non-Money Market Portfolios (other than the Ohio Tax-Free
Income, Pennsylvania Tax-Free Income and New Jersey Tax-Free Income Portfolios)
may not:
1) Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without
-43-
<PAGE>
regard to these limitations. For purposes of this limitation, a security is
considered to be issued by the entity (or entities) whose assets and revenues
back the security. A guarantee of a security shall not be deemed to be a
security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
Each of the Non-Money Market Portfolios may not:
2) Purchase any securities which would cause 25% or more of the value of
the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued (as defined in Investment Limitation No. 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and (ii) repurchase agreements
secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
Each Non-Money Market Portfolio (other than the Managed Income,
Intermediate Government Bond, Short Government Bond, Intermediate Bond,
Government Income, International Bond, Core Bond and Balanced Portfolios) may
not:
3) Borrow money or issue senior securities, except that each Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Portfolio's investment practices are not deemed to
be pledged for purposes of this limitation.
None of the Managed Income, Intermediate Government Bond, Short Government
Bond, Intermediate Bond, Government Income, Core Bond, International Bond and
Balanced Portfolios may:
-44-
<PAGE>
4) Issue senior securities, borrow money or pledge its assets, except that
a Portfolio may borrow from banks or enter into reverse repurchase agreements or
dollar rolls in amounts aggregating not more than 33 1/3% of the value of its
total assets (calculated when the loan is made) to take advantage of investment
opportunities and may pledge up to 33 1/3% of the value of its total assets to
secure such borrowings. Each Portfolio is also authorized to borrow an
additional 5% of its total assets without regard to the foregoing limitations
for temporary purposes such as clearance of portfolio transactions and share
redemptions. For purposes of these restrictions, the purchase or sale of
securities on a "when-issued," delayed delivery or forward commitment basis, the
purchase and sale of options and futures contracts and collateral arrangements
with respect thereto are not deemed to be the issuance of a senior security, a
borrowing or a pledge of assets.
All Portfolios:
No Portfolio may:
1. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof, or the disposition of securities, in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts and, in
the case of the International Bond Portfolio, currencies.
5. Purchase securities of companies for the purpose of exercising
control.
6. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in futures contracts and related options or
a Portfolio's sale of securities short against the box, and (b) a
-45-
<PAGE>
Portfolio may obtain short-term credit as may be necessary for the clearance or
purchases and sales of portfolio securities.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each Portfolio may, to
the extent appropriate to its investment policies, purchase securities (publicly
traded securities in the case of each Money Market Portfolio) of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
8. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
9. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in shares of
an open-end management investment company with substantially the same investment
objective, policies and limitations as the Portfolio.
Although the foregoing investment limitations would permit the Money Market
Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months. Prior to making any such investments, a Money
Market Portfolio would notify its shareholders and add appropriate descriptions
concerning the instruments and transactions to its Prospectus.
Index Master Portfolio:
The investment limitations of the Index Master Portfolio, the Portfolio in
which the Index Equity Portfolio expects to invest all of its investable assets,
are separate from those of the Index Equity Portfolio. The Index Master
Portfolio may not:
1. Invest in commodities or real estate, including limited partnership
interests therein, although it may purchase and sell securities of companies
which deal in real estate and securities which are secured by interests in real
estate, and may purchase or sell financial futures contracts and options
thereon;
2. Make loans of cash, except through the acquisition of repurchase
agreements and obligations customarily purchased by institutional investors;
3. As to 75% of the total assets of the Index Master Portfolio, invest in
the securities of any issuer (except obligations of the U.S. Government and its
instrumentalities) if,
-46-
<PAGE>
as a result, more than 5% of the Index Master Portfolio's total assets, at
market, would be invested in the securities of such issuer;
4. Purchase or retain securities of an issuer if those officers and
trustees of the Trust or officers and directors of the Trust's investment
adviser owning more than 1/2 of 1% of such securities together own more than 5%
of such securities;
5. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 5% of the Index Master
Portfolio's gross assets valued at the lower of market or cost; provided that it
may borrow amounts not exceeding 33% of its net assets from banks and pledge not
more than 33% of such assets to secure such loans;
6. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value, except as described in (5)
above;
7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;
8. Engage in the business of underwriting securities issued by others;
9. Invest for the purpose of exercising control over management of any
company;
10. Invest its assets in securities of any investment company, except in
connection with a merger, acquisition of assets, consolidation or
reorganization;
11. Invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
12. Acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of its total assets would
be invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;
-47-
<PAGE>
15. Purchase securities on margin or sell short; or
16. Acquire more than 10% of the voting securities of any issuer.
Although (2) above prohibits cash loans, the Index Master Portfolio is
authorized to lend portfolio securities. With respect to (7) above, pursuant to
Rule 144A under the 1993 Act, the Index Master Portfolio may purchase certain
unregistered (i.e. restricted) securities upon a determination that a liquid
institutional market exists for the securities. If it is decided that a liquid
market does exist, the securities will not be subject to the 10% limitation on
holdings of illiquid securities stated in (7) above. While maintaining
oversight, the Board of Trustees of the Trust has delegated the day-to-day
function of making liquidity determinations to DFA, the Index Master Portfolio's
adviser. For Rule 144A securities to be considered liquid, there must be at
least two dealers making a market in such securities. After purchase, the Board
of Trustees of the Trust and DFA will continue to monitor the liquidity of Rule
144A securities.
For purposes of (12) above, utility companies will be divided according to
their services; e.g., gas, gas transmission, electric and gas, electric, water
and telephone will each be considered a separate industry.
Because the structure of the Index Master Portfolio is based on the
relative market capitalizations of eligible holdings, it is possible that the
Index Master Portfolio might include at least 5% of the outstanding voting
securities of one or more issuers. In such circumstances, the Trust and the
issuer would be deemed "affiliated persons" under the Investment Company Act of
1940, and certain requirements of the Act regulating dealings between affiliates
might become applicable.
TRUSTEES AND OFFICERS
THE FUND
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President
Bell Atlantic Corporation and Chief Financial
1717 Arch Street Officer since February
47th Floor West 1995, Vice President and
</TABLE>
-48-
<PAGE>
<TABLE>
<S> <C> <C>
Philadelphia, PA 19103 Chief Financial Officer
Age: 52 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, Groupo
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: 60 Princeton Area Communities
from 1992-94; Trustee,
Chemical Bank, New Jersey
Advisory Board from 1994
until 1995; Trustee,American
Red Cross - Mercer County
Chapter since 1995; and
Trustee, United Way-Greater
Mercer County since 1995.
Robert M. Hernandez Trustee Director since 1991, Vice
USX Corporation Chairman and Chief
600 Grant Street Financial Officer
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: 51 Chief Financial Officer
from 1991 to 1994, Senior
</TABLE>
- ---------------------
1. This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-49-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
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
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: 48 and Dean's Advisory
Council Member since July
1984, The Wharton School,
University of
Pennsylvania; Associate
Editor, Journal of
Banking and Finance since
June 1978; Associate
Editor, Journal of
Economics and Business
since October 1979;
Associate Editor, Journal
of Money, Credit and
Banking since January
1980; Research Associate,
New York University
Center for Japan-U.S.
Business and Economic
Studies since July 1989;
Editorial Advisory Board,
Open Economics Review
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
since November 1990;
Director, The Zweig Fund
and The Zweig Total
Return Fund; Director or
Trustee of Temporary
Investment Fund, Inc.,
Trust for Federal
Securities, Municipal
Fund for Temporary
Investment, Municipal
Fund for California
Investors, Inc.,
Municipal Fund for New
York Investors, Inc., and
Provident Institutional
Fund.
David R. Wilmerding, Jr. Chairman of President, Gates,
One Aldwyn Center the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: 60 (investment advisers)
since February 1989;
Director, Beaver Management
Corporation; Director,
Independence Square Income
Securities, Inc.; until
September 1988, President,
Treasurer and Trustee, The
Mutual Assurance Company;
until September 1988,
Chairman, President
Treasurer and Director, The
Green Tree Insurance Company
(a wholly-owned subsidiary of
The Mutual Assurance
Company); until September
1988, Director, Keystone
State Life Insurance Company;
Director, Trustee or
Managing General Partner of
a number of investment
companies advised by PIMC.
</TABLE>
-51-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 55
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" or "Distributor")
$10,000 annually and $275 per Portfolio for each full meeting of the Board that
they attend. Trustees who are not affiliated with PAMG or the Distributor are
reimbursed for any expenses incurred in attending meetings of the Board of
Trustees or any committee thereof. No officer, director or employee of PAMG,
PNC Institutional Management Corporation ("PIMC"), Provident Capital Management,
Inc. ("PCM"), BlackRock Financial Management, Inc. ("BlackRock"), PNC Equity
Advisors Company ("PEAC"), Morgan Grenfell Investment Services Limited ("Morgan
Grenfell"), CastleInternational Asset Management Limited
("CastleInternational"), PFPC Inc. ("PFPC"), Compass Capital Group, Inc.
("CCG"), CDI (collectively with PFPC and CCG, the "Administrators"), or PNC
Bank, National Association ("PNC Bank" or the "Custodian") currently receives
any compensation from the Fund. Drinker Biddle & Reath, of which Mr. Jones is a
partner, receives legal fees as counsel to the Fund. As of the date of this
Statement of Additional Information, the trustees and officers of the Fund, as a
group, owned less than 1% of the outstanding shares of each Portfolio.
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1995:
-52-
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from
Aggregate Benefits Estimated Registrant and
Compensation Accrued as Annual and Fund Complex/1/
Name of Person, from Part of Fund Benefits upon Paid to
Position Registrant Expenses Retirement Trustees
--------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Philip E. Coldwell,/*/ $ 9,500 N/A N/A (4)/2/ $46,200
Trustee
Robert R. Fortune,/*/ $ 9,500 N/A N/A (6)/2/ $66,200
Trustee
Rodney D. Johnson,/*/ $ 9,500 N/A N/A (6)/2/ $58,450
Trustee
G. Willing Pepper,/*/ $14,000 N/A N/A (7)/2/ $98,850
President and former
Chairman of the Board
Anthony M. Santomero, $ 9,000 N/A N/A (6)/2/ $51,000
Trustee
David R. Wilmerding, Jr., $ 9,500 N/A N/A (7)/2/ $63,200
Trustee
William O. Albertini, N/A N/A N/A N/A
Trustee**
Raymond J. Clark, Trustee** N/A N/A N/A N/A
Robert M. Hernandez, N/A N/A N/A N/A
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, and were not trustees of the
Fund during the fiscal year ended September 30, 1995.
------------------------
1. A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser
or have an investment adviser that is an affiliated person of the
investment adviser of any of the other investment companies.
2. Total number of such other investment company boards trustee served on
within the Fund Complex.
-53-
<PAGE>
THE TRUST
The names, ages and addresses of the trustees and officers of the Trust and
a brief statement of their present positions and principal occupations during
the past five years are set forth below. As used below, "DFA Entities" refers
to the following: Dimensional Fund Advisors Inc., Dimensional Fund Advisors
Ltd., DFA Australia Pty Limited, DFA Investment Dimensions Group Inc.
(Registered Investment Company), Dimensional Emerging Markets Fund Inc.
(Registered Investment Company), Dimensional Investment Group Inc. (Registered
Investment Company) and DFA Securities Inc.
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------------------
<S> <C> <C>
David G. Booth* Trustee, President President, Chairman-Chief
Santa Monica, and Chairman-Chief Executive Officer and Director of
CA Executive Officer all DFA Entities, except
Age: 49 Dimensional Fund Advisors Ltd.,
of which he is Chairman and
Director
George M. Trustee Leon Carroll Marshall Professor
Constantinides of Finance, Graduate School of
Chicago, IL Business, University of Chicago.
Age: 47 Director, DFA Investment
Dimensions Group Inc.,
Dimensional Investment Group Inc.
and Dimensional Emerging Markets
Fund Inc.
John P. Gould Trustee Distinguished Service Professor
Chicago, IL of Economics, Graduate School of
Age: 57 Business, University of Chicago.
Trustee, First Prairie Funds
(registered investment
companies). Director, DFA
Investment Dimensions Group Inc.,
Dimensional Investment Group
Inc., Dimensional Emerging
Markets Fund Inc. and Harbor
Investment Advisors.
</TABLE>
-54-
<PAGE>
Principal Occupation During
Trustees Position with Trust Last Five Years
-------- ------------------- ---------------------------
Roger G. Trustee Professor in Practice of Finance,
Ibbotson Yale School of Management.
New Haven, CT Director, DFA Investment
Age: 52 Dimensions Group Inc.,
Dimensional Investment Group
Inc., Dimensional Emerging
Markets Fund Inc., Hospital Fund,
Inc. (investment management
services) and Birr Portfolio
Analysis, Inc. (software
products). Chairman, Institute
Study of Securities Markets.
Chairman and President, Ibbotson
Associates, Inc., Chicago, IL
(software, data, publishing and
consulting).
Merton H. Trustee Robert R. McCormick Distinguished
Miller Service Professor Emeritus,
Chicago, IL Graduate School of Business,
Age: 72 University of Chicago. Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
Myron S. Trustee Frank E. Buck Professor of
Scholes Finance, Graduate School of
Greenwich, CT Business and Professor of Law,
Age: 54 Law School, Senior Research
Fellow, Hoover Institution, (all)
Stanford University. Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc., Benham Capital
Management Group of Investment
Companies and Smith Breedon Group
of Investment Companies. Limited
Partner, Long-Term Capital
Management L.P. (money manager).
Rex A. Trustee, Chairman Chairman, Chief Investment
Sinquefield* and Chief Officer and Director of all DFA
Santa Monica, Investment Officer Entities, except Dimensional Fund
CA Advisors Ltd., of which he is
Age: 51 Chairman, Chief Executive Officer
and Director.
-55-
<PAGE>
Principal Occupation During
Trustees Position with Trust Last Five Years
-------- ------------------- ---------------------------
*Interested
Trustees of the
Trust.
_____________
Principal Occupation During
Officers Position with Trust Last Five Years
-------- ------------------- ---------------------------
Arthur Barlow Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 40
Truman Clark Vice President Vice President of all DFA
Santa Monica, Entities. Consultant until
CA October 1995 and Principal and
Age: 54 Manager of Product Development,
Wells Fargo Nikko Investment
Advisors from 1990-1994.
Maureen Connors Vice President Vice President of all DFA
Santa Monica, entities.
CA
Age: 59
Robert Deere Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 38
Irene R. Vice President, Vice President and Secretary of
Diamant Secretary all DFA Entities. Associate
Santa Monica, attorney, Cahill Gordon & Reindel
CA from 1987 to 1991.
Age: 45
Eugene Fama, Vice President Vice President of all DFA
Jr. Entities.
Santa Monica,
CA
Age: 35
David Plecha Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 34
-56-
<PAGE>
Principal Occupation During
Trustees Position with Trust Last Five Years
-------- ------------------- ---------------------------
George Sands Vice President Vice President of all DFA
Santa Monica, Entities. Managing Director,
CA Asset Strategy Consulting, Los
Age: 40 Angeles, CA from 1991 to 1992 and
previously Vice President of
Wilshire Associates, Santa
Monica, CA.
Michael T. Vice President, Vice President, Chief Financial
Scardina Chief Financial Officer, Controller and Treasurer
Santa Monica, Officer, Controller of all DFA Entities.
CA and Treasurer
Age: 40
Cem Severoglu Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 31
Jeanne C. Executive Vice Executive Vice President of all
Sinquefield, President DFA Entities.
Ph.D.
Santa Monica,
CA
Age: 49
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust entitled
to receive compensation, the compensation received from the Trust during the
fiscal year ended November 30, 1995 and the total compensation received from all
four registered investment companies for which Dimensional Fund Advisors Inc.
("DFA") served as investment adviser during that same fiscal year.
-57-
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from
Aggregate Benefits Estimated Registrant and
Compensation Accrued as Annual Fund Complex/1/
Name of Person, from Part of Fund Benefits upon Paid to
Position Registrant Expenses Retirement Trustees
- --------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
George M. Constantinides, $5,000 N/A N/A $30,000
Trustee
John P. Gould, Trustee $5,000 N/A N/A $30,000
Roger G. Ibbotson, Trustee $5,000 N/A N/A $30,000
Merton H. Miller, Trustee $4,000 N/A N/A $24,000
Myron S. Scholes, Trustee $5,000 N/A N/A $30,000
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Fund's Declaration of Trust provides that
shareholders shall not be subject to any personal liability in connection with
the assets of the Fund for the acts or obligations of the Fund, and that every
note, bond, contract, order or other undertaking made by the Fund shall contain
a provision to the effect that the shareholders are not personally liable
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
- ---------------
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.
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<PAGE>
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved or
with which he may be threatened by reason of his being or having been a trustee,
and that the Fund will indemnify officers, representatives and employees of the
Fund to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory and Sub-Advisory Agreements. The advisory and sub-advisory
services provided by PAMG, PIMC, BlackRock, PCM, PEAC, Morgan Grenfell,
CastleInternational and, with respect to the Index Master Portfolio, Dimensional
Fund Advisors Inc. ("DFA") and the fees received by each of them for such
services are described in the Prospectuses. As stated in the Prospectuses, PAMG
may from time to time voluntarily waive its advisory fees with respect to a
Portfolio and may voluntarily reimburse Portfolios for expenses. In addition,
if the total expenses borne by any Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, PAMG and
the Administrators will bear the amount of such excess to the extent required by
such regulations in proportion to the fees otherwise payable to them for such
year. Such amount, if any, will be estimated and accrued daily and paid on a
monthly basis. As of the date of this Statement of Additional Information, to
the knowledge of the Fund, there were no state expense limitations more
restrictive than the following: 2 1/2% of the first $30 million of average
annual net assets, 2% of the next $70 million of average annual net assets, and
1/2% of average annual net assets in excess of $100 million.
PAMG renders advisory services to each of the Portfolios, except the Index
Equity Portfolio, pursuant to an Investment Advisory Agreement. PIMC will
render advisory services to the Index Equity Portfolio pursuant to an Investment
Advisory Agreement until June 2, 1996, when the Index Equity Portfolio expects
to invest all of its investable assets in the Index
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<PAGE>
Master Portfolio. From each Portfolio's (other than the Index Equity, New
Jersey Municipal Money Market, New Jersey Tax-Free Income, Core Bond, Short
Government Bond and International Bond Portfolios) respective commencement of
operations until January 4, 1996 PIMC served as adviser. From January 14, 1996
through May __, 1996, PIMC served as investment adviser to the New Jersey
Municipal Money Market Portfolio.
From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolio of the
International Bond Portfolio. From July 1, 1991 to December 31, 1995, Midlantic
Bank served as investment adviser to the predecessor portfolio of the New Jersey
Tax-Free Income Portfolio. From July 1, 1991 to December 31, 1995, Midlantic
Bank served as investment adviser to the predecessor portfolio of the New Jersey
Municipal Money Market Portfolio. From December 9, 1992 to January 13, 1996,
BlackRock served as investment adviser to the predecessor portfolio of the Core
Bond Portfolio. From July 17, 1992 to January 13, 1996, BlackRock served as
investment adviser to the predecessor portfolio of the Short Government Bond
Portfolio.
PCM renders sub-advisory services to the Balanced, Value Equity, Small Cap
Value Equity and Select Equity Portfolios pursuant to Sub-Advisory Agreements.
CastleInternational renders sub-advisory services to the International Equity
and International Emerging Markets Portfolios pursuant to a Sub-Advisory
Agreement. PIMC renders sub-advisory services to the Money Market, U.S.
Treasury Money Market, Municipal Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios
pursuant to Sub-Advisory Agreements. BlackRock renders sub-advisory services to
the Balanced, Managed Income, Intermediate Government Bond, Tax-Free Income,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short Government Bond,
Intermediate Bond, New Jersey Tax-Free Income, Core Bond and Government Income
Portfolios pursuant to Sub-Advisory Agreements. PEAC renders sub-advisory
services to the Index Equity, Growth Equity and Small Cap Growth Equity
Portfolios pursuant to Sub-Advisory Agreements. Morgan Grenfell renders sub-
advisory services to the International Bond Portfolio pursuant to a Sub-Advisory
Agreement. DFA renders advisory services to the Index Master Portfolio, the
registered investment company in which the Index Equity Portfolio expects to
invest all of its assets after its 1996 conversion, pursuant to an Investment
Management Agreement. After the Index Equity Portfolio's 1996 conversion to a
two-tiered structure described in the Prospectus, PIMC will no longer render
advisory services, and PEAC will no longer render sub-advisory services, to the
Index Equity Portfolio. The Investment Advisory Agreement with PAMG and the
above-referenced Sub-Advisory Agreements are collectively referred to as the
"Advisory Contracts."
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<PAGE>
From December 1, 1992 (commencement of operations) to March 29, 1995, PNC
Bank, Ohio, National Association ("PNC Bank Ohio") served as sub-adviser to the
Ohio Tax-Free Income Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, PNC Bank Ohio served as sub-adviser to the
Municipal Money Market Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, PNC Bank Ohio served as sub-adviser to the
Managed Income and Growth Equity Portfolios. From April 20, 1992 to September
10, 1993, PCM served as sub-adviser to the Intermediate Government Bond
Portfolio. From July 23, 1992 to March 29, 1995, PNC Bank served as sub-adviser
to the Index Equity Portfolio. From September 11, 1993 to March 29, 1995, PNC
Bank served as sub-adviser to the Managed Income, Intermediate Government Bond
and Growth Equity Portfolios. From December 1, 1992 (commencement of
operations) to March 29, 1995, PNC Bank served as sub-adviser to the Ohio Tax-
Free Income and Pennsylvania Tax-Free Income Portfolios. From September 13,
1993 (commencement of operations) to March 29, 1995, PNC Bank served as sub-
adviser to the Select Equity Portfolio. From September 14, 1993 (commencement
of operations) to March 29, 1995, PNC Bank served as sub-adviser to the Small
Cap Growth Equity Portfolio. From September 17, 1993 (commencement of
operations) to March 29, 1995, PNC Bank served as sub-adviser to the
Intermediate Bond Portfolio. From May 14, 1990 (commencement of operations) to
July 1, 1995, PNC Bank served as sub-adviser to the Tax-Free Income Portfolio.
PCM served as sub-adviser to the International Equity and International Emerging
Markets Portfolios from commencement of operations (April 27, 1992 in the case
of the International Equity Portfolio; June 17, 1994 in the case of the
International Emerging Markets Portfolio) to April 19, 1996.
PNC Bank served as sub-adviser for the Money Market Portfolio from October
4, 1989 (commencement of operations) to January 4, 1996; for the Municipal Money
Market Portfolio from September 10, 1993 to January 4, 1996; for the U.S.
Treasury Money Market Portfolio from November 1, 1989 (commencement of
operations) to January 4, 1996; for the Ohio Municipal Money Market Portfolio
from June 1, 1993 (commencement of operations) to January 4, 1996; for the
Pennsylvania Municipal Money Market Portfolio from June 1, 1993 (commencement of
operations) to January 4, 1996; for the North Carolina Municipal Money Market
Portfolio from May 4, 1993 (commencement of operations) to January 4, 1996; for
the Virginia Municipal Money Market Portfolio from July 25, 1994 (commencement
of operations) to January 4, 1996; and for the New Jersey Municipal Money Market
Portfolio from January 13, 1996 to May __, 1996. From April 4, 1990
(commencement of operations) to January 4, 1996, PNC Bank served as sub-adviser
to the Balanced Portfolio. From March 1, 1993 to January 4, 1996, PEAC served
as sub-adviser to the Select Equity Portfolio.
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<PAGE>
Under the relevant Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock,
Morgan Grenfell and CastleInternational are not liable for any error of judgment
or mistake of law or for any loss suffered by the Fund or a Portfolio in
connection with the performance of the Advisory Contracts. Under the Advisory
Contracts, PAMG, PIMC, PCM, PEAC, BlackRock, Morgan Grenfell,
CastleInternational and DFA are liable for a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard of their respective duties and
obligations thereunder. Each of the Advisory Contracts (except the Advisory
Contract relating to the Index Master Portfolio) is terminable as to a Portfolio
by vote of the Fund's Board of Trustees or by the holders of a majority of the
outstanding voting securities of the relevant Portfolio, at any time without
penalty, on 60 days' written notice to PAMG, PIMC, PCM, PEAC, Morgan Grenfell,
BlackRock or CastleInternational, as the case may be. PAMG, PIMC, PCM, PEAC,
Morgan Grenfell, BlackRock and CastleInternational may also terminate their
advisory relationship with respect to a Portfolio on 60 days' written notice to
the Fund. The Advisory Contract relating to the Index Master Portfolio is
terminable by vote of the Trust's Board of Trustees or by the holders of a
majority of the outstanding voting securities of the Index Master Portfolio at
any time without penalty on 60 days' written notice to DFA. DFA may also
terminate its advisory relationship with respect to the Index Master Portfolio
on 90 days' written notice to the Trust. Each of the Advisory Contracts
terminates automatically in the event of its assignment.
For the year or periods ended September 30, 1995, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid Reimburse-
(After ----------
Portfolios Waivers) Waivers ments
- ---------- --------- ------- -----
<S> <C> <C> <C>
Money Market $1,051,446 $5,217,130 $0
Municipal Money Market 189,929 921,718 0
U.S. Treasury Money Market 489,209 2,327,266 0
Ohio Municipal Money Market 49,133 245,955 0
Pennsylvania Municipal Money Market 304,651 1,264,187 0
North Carolina Municipal Money
Market 46,472 369,591 4,999
Managed Income 1,790,332 767,285 0
Tax-Free Income 0 49,671 1,599
Intermediate Government Bond 379,534 569,302 0
Ohio Tax-Free Income 0 42,044 6,713
Pennsylvania Tax-Free Income 161,038 137,951 0
Intermediate Bond 342,301 335,908 0
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid Reimburse-
(After ----------
Portfolios Waivers) Waivers ments
- ---------- --------- ------- -----
<S> <C> <C> <C>
Value Equity 2,832,644 746,727 0
Growth Equity 866,271 324,851 0
Small Cap Growth Equity 618,374 137,615 0
Select Equity 691,447 259,293 0
Index Equity 30,772 382,205 0
Small Cap Value Equity 1,143,071 114,307 0
International Equity 2,391,607 597,902 0
Balanced 642,763 241,037 0
Virginia Municipal Money Market 0 85,063 35,957
International Emerging Markets 258,648 52,186 0
Government Income/1/ 0 37,256 11,980
</TABLE>
/1/ For the period from commencement of operations (October 3, 1994) through
September 30, 1995.
For the year or periods ended September 30, 1994, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $951,230 $3,359,847 $0
Municipal Money Market 171,405 599,920 0
U.S. Treasury Money
Market 281,771 986,201 0
Ohio Municipal Money
Market 6,724 217,938 20,660
Pennsylvania Municipal
Money Market 42,612 336,382 19,022
North Carolina Municipal
Money Market 0 249,914 26,804
Managed Income 1,398,343 599,290 0
Tax-Free Income 0 47,655 35,898
Intermediate Government 368,546 552,819 0
Bond
Ohio Tax-Free Income 0 35,709 35,496
Pennsylvania Tax-Free
Income 49,646 227,003 9,645
Intermediate Bond 131,294 206,071 0
Value Equity 2,306,672 865,002 0
Growth Equity 467,637 175,364 0
Small Cap Growth Equity 55,825 160,320 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Select Equity 303,169 113,689 0
Index Equity 28,392 376,934 0
Small Cap Value Equity 890,883 197,974 0
International Equity 1,408,053 477,733 0
Balanced 470,579 202,166 0
Virginia Municipal Money
Market/1/ 0 8,925 4,816
International Emerging
Markets/2/ 7,672 16,051 0
</TABLE>
/1/ For the period from commencement of operations (July 25, 1994) through
September 30, 1994.
/2/ For the period from commencement of operations (June 17, 1994) through
September 30, 1994.
For the year or periods ended September 30, 1993, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $2,899,093 $815,911 $0
Municipal Money Market 509,475 131,249 0
U.S. Treasury Money Market 601,820 195,459 0
Ohio Municipal Money
Market/1/ 0 28,953 8,630
Pennsylvania Municipal
Money Market/1/ 0 18,117 11,411
North Carolina Municipal
Money Market/2/ 0 47,085 11,729
Managed Income 1,522,695 87,513 0
Tax-Free Income 0 43,457 7,314
Intermediate Government 594,202 77,301 0
Bond
Ohio Tax-Free Income/3/ 0 8,781 20,906
Pennsylvania Tax-Free
Income/3/ 0 87,528 19,064
Intermediate Bond/5/ 5,432 5,432 0
Value Equity 1,996,726 108,242 0
Growth Equity 400,652 31,912 0
Small Cap Growth Equity/6/ 0 2,773 0
Select Equity/7/ 14,325 5,372 0
Index Equity 212,413 161,606 0
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Small Cap Value Equity 564,065 34,794 0
International Equity 598,040 47,134 0
Balanced 124,556 45,203 0
</TABLE>
/1/ Commenced operations June 1, 1993.
/2/ Commenced operations May 3, 1993.
/3/ Commenced operations December 1, 1992.
/4/ Commenced operations September 1, 1993.
/5/ Commenced operations September 17, 1993.
/6/ Commenced operations September 14, 1993.
/7/ Commenced operations September 13, 1993.
For the year or periods ended September 30, 1995, PIMC paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- ---------- -------
<S> <C> <C>
Money Market $0 $721,072
Municipal Money Market 0 123,516
U.S. Treasury Money Market 0 312,942
Ohio Municipal Money Market 0 32,788
Pennsylvania Municipal Money
Market 0 174,315
North Carolina Municipal Money
Market 0 46,229
Managed Income 1,253,232 537,100
Tax-Free Income 0 34,770
Intermediate Government 265,674 398,511
Bond
Ohio Tax-Free Income 0 29,431
Pennsylvania Tax-Free Income 112,727 96,566
Intermediate Bond 239,611 235,136
Value Equity 2,060,105 543,074
Growth Equity 630,015 236,255
Small Cap Growth Equity 449,727 100,084
Select Equity 502,871 188,576
Index Equity 30,772 286,654
Small Cap Value Equity 831,324 83,132
</TABLE>
-65-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- ---------- -------
<S> <C> <C>
International Equity 1,913,286 478,322
Balanced 467,464 175,299
Virginia Municipal Money Market 0 9,451
International Emerging Markets 227,610 45,924
Government Income/1/ 0 26,079
</TABLE>
/1/ Commenced operations October 3, 1994.
For the year or periods ended September 30, 1994, PIMC paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
-66-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
- ---------- --------------- --------
<S> <C> <C>
Money Market $0 $479,008
Municipal Money Market 0 85,703
U.S. Treasury Money Market 0 140,886
Ohio Municipal Money Market 0 24,962
Pennsylvania Municipal Money Market 0 42,110
North Carolina Municipal Money Market 0 27,768
Managed Income 1,198,580 199,763
Tax-Free Income 0 33,359
Intermediate Government Bond 276,410 368,546
Ohio Tax-Free Income 0 24,996
Pennsylvania Tax-Free Income 33,198 160,456
Intermediate Bond 97,470 138,685
Value Equity 2,018,338 288,334
Growth Equity 409,182 58,455
Small Cap Growth Equity 55,825 101,371
Select Equity 265,273 37,896
Index Equity 28,392 275,602
Small Cap Value Equity 791,896 0
International Equity 1,257,191 251,438
Balanced 409,420 79,849
Virginia Municipal Money Market/1/ 0 992
International Emerging Markets/2/ 6,723 14,153
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
For the year or periods ended September 30, 1993, PIMC paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- ---------
<S> <C> <C>
Money Market $0 $412,778
Municipal Money Market 0 71,192
U.S. Treasury Money Market 0 88,587
Ohio Municipal Money Market/1/ 0 3,217
Pennsylvania Municipal Money 0 2,013
Market/1/
North Carolina Municipal Money 0 5,232
Market/2/
Managed Income 1,069,887 61,259
</TABLE>
-67-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- --------- -------
<S> <C> <C>
Tax-Free Income $0 $30,420
Intermediate Government Bond 415,941 54,111
Ohio Tax-Free Income/3/ 0 6,174
Pennsylvania Tax-Free Income/3/ 0 61,270
Intermediate Bond/5/ 3,802 3,802
Value Equity 1,452,164 78,721
Growth Equity 291,383 25,967
Small Cap Growth Equity/6/ 0 2,017
Select Equity /7/ 10,418 3,906
Index Equity 159,310 121,205
Small Cap Value Equity 410,229 25,305
International Equity 478,432 37,707
Balanced 90,586 32,875
</TABLE>
/1/ Commenced operations June 1, 1993.
/2/ Commenced operations May 3, 1993.
/3/ Commenced operations December 1, 1992.
/4/ Commenced operations September 1, 1993.
/5/ Commenced operations September 17, 1993.
/6/ Commenced operations September 14, 1993.
/7/ Commenced operations September 13, 1993.
For the period from October 1, 1992 to September 10, 1993, PIMC paid sub-
advisory fees of $1,017,364 and $274,275 to PNC Bank Ohio for the Managed Income
and Growth Equity Portfolios, respectively. For the period from October 1, 1992
to September 10, 1993, PIMC paid sub-advisory fees of $397,885 to PMC with
respect to the Intermediate Government Bond Portfolio.
For the services it provides as investment adviser to the Index Master
Portfolio, DFA is paid a monthly fee calculated as a percentage of average net
assets of the Index Master Portfolio. For the fiscal years ending November 30,
1993, 1994 and 1995, the Index Master Portfolio paid advisory fees to DFA
totalling $7,231, $10,833 and $18,816, respectively. The Index Equity Portfolio
did not invest in the Index Master Portfolio during such periods.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank. For the period from March 1, 1995 through January
13, 1996 and for the fiscal years ended February 28, 1995, 1994 and 1993, the
predecessor portfolio to the New Jersey Tax-Free Income Portfolio paid
$ , $607,485, $159,582 and $37,159, respectively, in investment
--------------
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<PAGE>
advisory fees to Midlantic Bank pursuant to its prior investment advisory
contract. In addition, during the period from March 1, 1995 through January 12,
1996 and during the fiscal years ended February 28, 1995, 1994 and 1993,
Midlantic Bank waived $_______, $2,451, $318,099 and $100,403, respectively, in
investment advisory fees. During the period from January 13, 1996 through
January 31, 1996, the New Jersey Tax-Free Income Portfolio paid PAMG $________
in investment advisory fees, and PAMG waived $__________ in investment advisory
fees.
The predecessor portfolio to the International Bond Portfolio was advised
by Midlantic Bank. For the period from March 1, 1995 through January 31, 1996
and for the fiscal years ended February 28, 1995, 1994 and 1993, the predecessor
portfolio to the International Bond Portfolio paid $____________, $361,620,
$346,865 and $265,549, respectively, in investment advisory fees to Midlantic
Bank pursuant to its prior investment advisory contract.
The predecessor portfolio to the New Jersey Municipal Money Market
Portfolio was advised by Midlantic Bank. For the period from March 1, 1995
through January 12, 1996 and for the fiscal years ended February 28, 1995, 1994
and 1993, the predecessor portfolio to the New Jersey Municipal Money Market
Portfolio paid $158,240, $158,536 and $139,596, respectively, in investment
advisory fees to Midlantic Bank pursuant to its prior investment advisory
contract. During the period from January 13, 1996 through January 31, 1996, the
New Jersey Municipal Money Market Portfolio paid PAMG $___________ in investment
advisory fees, and PAMG waived $___________ in investment advisory fees.
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996 and for
the fiscal years ended June 30, 1995 and 1994 and for the period December 9,
1992 (commencement of operations) through June 30, 1993, BlackRock waived its
entire investment advisory fee in the amounts of $____________, $56,894, $34,010
and $24,761, respectively, and reimbursed expenses amounting to $________,
$137,364, $137,179 and $0, respectively. During the period from January 13,
1996 through March 31, 1996, the Core Bond Portfolio paid PAMG $____________ in
investment advisory fees, and PAMG waived $____________ in investment advisory
fees.
The predecessor portfolio to the Short Government Bond Portfolio was
advised by BlackRock. For the period from July 1, 1995 through January 12, 1996
and for the fiscal years ended June 30, 1995, 1994 and 1993, BlackRock waived
its entire investment advisory fee in the amounts of $__________, $102,707,
$110,232 and $64,580, respectively, and reimbursed expenses amounting to
$_______, $61,195, $55,582 and $0, respectively. During the period from January
13, 1996 through March 31, 1996, the Short
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<PAGE>
Government Bond Portfolio paid PAMG $__________ in investment advisory fees, and
PAMG waived $_________ in investment advisory fees.
Administration Agreements. CCG, PFPC and CDI serve as the Fund's co-
administrators pursuant to administration agreements (collectively, the
"Administration Agreement"). PFPC and CDI have agreed to maintain office
facilities for the Fund, furnish the Fund with statistical and research data,
clerical, accounting, and bookkeeping services, and certain other services
required by the Fund.
CCG serves as an Administrator to the Fund pursuant to a Co-Administration
Agreement. Under the Co-Administration Agreement, CCG is responsible for: (i)
the supervision and coordination of the performance of the Fund's service
providers; (ii) the negotiation of service contracts and arrangements between
the Fund and its service providers; (iii) acting as liaison between the trustees
of the Fund and the Fund's service providers; and (iv) providing ongoing
business management and support services in connection with the Fund's
operations.
The Administration Agreement provides that CCG, PFPC and CDI will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations thereunder.
PFPC serves as the administrative services agent for the Index Master
Portfolio pursuant to an Administration and Accounting Services Agreement. The
services provided by PFPC are subject to supervision by the executive officers
and the Board of Trustees of the Trust, and include day-to-day keeping and
maintenance of certain records, calculation of the offering price of the shares,
preparation of reports and acting as liaison with the Trust's custodians and
dividend and disbursing agents. At the time of the Index Master Portfolio's
conversion, for its services, PFPC will be entitled to compensation from the
Index Master Portfolio at the annual rate of .015% of the Index Master
Portfolio's average daily net assets. At the time of the Index Equity
Portfolio's expected conversion to a feeder portfolio, PFPC will charge each
investor in the Index Master Portfolio a monthly fee of $2,600.
From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators to the Fund pursuant to
an administration agreement substantially similar to the administration
agreement currently in effect for the Fund. For the year or periods ended
September 30, 1995, the
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<PAGE>
Fund paid PFPC and PDI combined administration fees (after waivers), and PFPC
and PDI waived combined administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- ---------- ------- --------------
<S> <C> <C> <C>
Money Market $1,686,008 $200,348 $0
Municipal Money Market 208,246 162,303 0
U.S. Treasury Money Market 631,041 281,107 0
Ohio Municipal Money Market 43,263 55,100 0
Pennsylvania Municipal
Money Market 322,632 200,313 0
North Carolina Municipal
Money Market 24,058 114,630 1,666
Managed Income 751,452 267,310
Tax-Free Income 0 19,868 2,132
Intermediate Government 244,417 135,117
Bond
Ohio Tax-Free Income 0 16,817 8,950
Pennsylvania Tax-Free
Income 68,050 51,546 0
Intermediate Bond 139,960 131,323 0
Value Equity 1,083,967 187,474 0
Growth Equity 360,966 72,170 0
Small Cap Growth Equity 238,595 36,310 0
Select Equity 288,666 57,058 0
Index Equity 96,814 316,163 0
Small Cap Value Equity 359,637 97,592 0
International Equity 689,601 107,601 0
Balanced 216,630 104,752 0
Virginia Municipal Money
Market 0 28,354 11,986
International Emerging
Markets 41,383 8,350 0
Government Income/1/ 0 14,903 15,973
</TABLE>
/1/ Commenced operations October 3, 1994.
For the year or periods ended September 30, 1994, the Fund paid PFPC and PDI
combined administration fees (after waivers), and PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $ 803,349 $541,066 $0
Municipal Money Market 42,931 214,178 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
U.S. Treasury Money Market 132,901 289,756 0
Ohio Municipal Money
Market 2,241 72,646 6,887
Pennsylvania Municipal
Money Market 11,758 114,573 6,340
North Carolina Municipal
Money Market 0 83,304 8,934
Managed Income 521,204 277,849 0
Tax-Free Income 0 19,062 14,359
Intermediate Government 186,742 181,804 0
Bond
Ohio Tax-Free Income 0 14,284 14,199
Pennsylvania Tax-Free
Income 19,858 90,020 3,858
Intermediate Bond 52,518 82,428 0
Value Equity 1,075,209 61,908 0
Growth Equity 128,262 105,557 0
Small Cap Growth Equity 20,166 58,432 0
Select Equity 52,164 99,421 0
Index Equity 27,115 378,211 0
Small Cap Value Equity 354,486 41,462 0
International Equity 502,876 0 0
Balanced 125,112 119,522 0
Virginia Municipal Money
Market/1/ 0 2,975 1,605
International Emerging
Markets/2/ 1,259 2,537 0
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
For the year or periods ended September 30, 1993, the Fund paid PFPC and PDI
combined administration fees (after waivers), and PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $674,120 $101,509 $0
Municipal Money Market 117,768 21,036 0
U.S. Treasury Money Market 157,519 30,288 0
Ohio Municipal Money Market/1/ 0 9,651 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Pennsylvania Municipal Money
Market/1/ 0 6,039 0
North Carolina Municipal
Money Market/2/ 0 15,659 0
Managed Income 397,750 87,513 0
Tax-Free Income 0 11,914 0
Intermediate Government Bond 167,611 24,673 0
Ohio Tax-Free Income/3/ 0 8,797 6,515
Pennsylvania Tax-Free Income/3/ 0 85,754 5,766
Value Equity 528,584 9,382 0
Growth Equity 101,208 12,879 0
Small Cap Growth Equity/4/ 173 835 0
Select Equity/5/ 4,722 2,441 0
Index Equity 195,736 59,581 0
Small Cap Value Equity 156,048 5,441 0
International Equity 123,924 6,477 0
Balanced 44,667 8,046 0
</TABLE>
/1/ Commenced operations June 1, 1993.
/2/ Commenced operations May 3, 1993.
/3 /Commenced operations December 1, 1992.
/4/ Commenced operations September 14, 1993.
/5/ Commenced operations September 13, 1993.
For the period from October 1, 1992 to January 31, 1993, the Fund paid PFPC
and a former co-administrator combined administration fees, before waivers, of
$397,594, $74,771, $77,953, $212,227, $0, $76,317, $227,477, $43,210, $118,702,
$56,278, $41,645 and $4,938 with respect to the Money Market, Municipal Money
Market, U.S. Treasury Money Market, Managed Income, Tax-Free Income,
Intermediate Government Bond, Value Equity, Growth Equity, Index Equity, Small
Cap Value Equity, International Equity and Balanced Portfolios, respectively.
For that period, PFPC and the former co-administrator waived combined
administration fees of $0, $0, $0, $0, $5,469, $0, $0, $0, $0, $0, $0 and $4,080
for such respective Portfolios. For the period from commencement of operations
to January 31, 1993, the Fund paid PFPC and the former co-administrator combined
administration fees, before waivers, of $0 and $0 for the Ohio Tax-Free Income
and Pennsylvania Tax-Free Income Portfolios, respectively. For the same period,
PFPC and the former co-administrator waived combined administration fees of $124
and $1,774 for such
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<PAGE>
respective Portfolios, and reimbursed such Portfolios for certain operational
expenses totalling $1,848 and $1,859, respectively.
The predecessor portfolio to the New Jersey Municipal Money Market,
International Bond and New Jersey Tax-Free Income Portfolios received
administrative services from SEI Financial Management Corporation ("SEI").
During the period from March 1, 1995 through January 12, 1996 and during the
fiscal years ended February 28, 1995, 1994 and 1993, the predecessor portfolio
to the New Jersey Municipal Money Market Portfolio paid $_________, $44,863,
$43,497, and $52,343, respectively in administration fees to SEI pursuant to the
prior administration agreement, and SEI waived $____________, $26,345, $27,844
and $10,475, respectively, in administration fees. During the period from
January 13, 1996 through January 31, 1996, the New Jersey Municipal Money Market
Portfolio paid the Administrators $_________ in administration fees, and the
Administrators waived $_________ in administration fees. During the period from
March 1, 1995 through January 12, 1996 and during the fiscal years ended
February 28, 1995, 1994 and 1993, the predecessor portfolio to the New Jersey
Tax-Free Income Portfolio paid $___________, $105,029, $79,454 and $15,884,
respectively, in administrative fees to SEI pursuant to the prior administration
agreement, and SEI waived $___________, $77,951, $63,850 and $25,385,
respectively, in administrative fees. During the period from January 13, 1996
through January 31, 1996, the New Jersey Tax-Free Income Portfolio paid the
Administrators $_________ in administration fees, and the Administrators waived
$___________ in administration fees. During the period from March 1, 1995
through January 12, 1996 and during the fiscal years ended February 28, 1995,
1994 and 1993, the predecessor portfolio to the International Bond Portfolio
paid $___________, $81,364, $78,033 and $59,749, respectively, in administrative
fees to SEI pursuant to the prior administration agreement. During the period
from January 13, 1996 through January 31, 1996, the predecessor portfolio to the
International Bond Portfolio paid the Administrators $_______ in administrative
fees.
The predecessor portfolio to the Short Government Bond and Core Bond
Portfolios received administrative services from State Street Bank and Trust
Company ("State Street"). During the period from July 1, 1995 through January
12, 1996 and during the fiscal years ended June 30, 1995 and 1994 and for the
period December 9, 1992 (commencement of operations) through June 30, 1993, the
predecessor portfolio to the Core Bond Portfolio paid $ $______, 73,257,
$40,261 and $4,076, respectively, in administrative fees to State Street
pursuant to the prior administration agreement, and State Street waived
$__________, $0, $32,500 and $3,701, respectively, in administrative fees.
During the period from January 13, 1996 through March 31, 1996, the Core Bond
Portfolio paid the Administrators $_________ in administration fees, and the
Administrators waived $_________ in
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<PAGE>
administration fees. During the period from July 1, 1995 through January 12,
1996 and during the fiscal years ended June 30, 1995, 1994 and 1993, the
predecessor portfolio to the Short Government Bond Portfolio paid $__________,
$69,234, $79,160 and $7,885, respectively, in administrative fees to State
Street pursuant to the prior administration agreement, and State Street waived
$_________, $0, $0 and $64,580, respectively, in administrative fees. During
the period from January 13, 1996 through March 31, 1996, the Short Government
Bond Portfolio paid the Administrators $________ in administration fees, and the
Administrators waived $__________ in administration fees.
Custodian and Transfer Agency Agreements. PNC Bank is custodian of the
Fund's assets pursuant to a custodian agreement (the "Custodian Agreement").
Under the Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a
separate account or accounts in the name of each Portfolio, (ii) holds and
transfers portfolio securities on account of each Portfolio, (iii) accepts
receipts and makes disbursements of money on behalf of each Portfolio, (iv)
collects and receives all income and other payments and distributions on account
of each Portfolio's securities and (v) makes periodic reports to the Board of
Trustees concerning each Portfolio's operations. PNC Bank is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Fund, provided that, with respect to sub-custodians other than sub-
custodians for foreign securities, PNC Bank remains responsible for the
performance of all its duties under the Custodian Agreement and holds the Fund
harmless from the acts and omissions of any sub-custodian. The Chase Manhattan
Bank, N.A., State Street Bank and Trust Company and Barclays Bank PLC currently
serve as the Fund's sub-custodians. Citibank, N.A. serves as the international
sub-custodian with respect to the International Bond Portfolio.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon each investment portfolio's
average gross assets, with a minimum monthly fee of $1,000 per investment
portfolio. PNC Bank is also entitled to out-of-pocket expenses and certain
transaction charges. PNC Bank intends to waive its custody fees with respect to
the Index Equity Portfolio once the Portfolio invests its assets in the Index
Master Portfolio.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in each Portfolio, (ii) addresses
and mails all communications by each Portfolio to record owners of its shares,
including reports to shareholders, dividend and distribution notices and proxy
materials for its meetings of shareholders, (iii) maintains shareholder accounts
and, if requested, sub-
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<PAGE>
accounts and (iv) makes periodic reports to the Board of Trustees concerning the
operations of each Portfolio. PFPC may, on 30 days' notice to the Fund, assign
its duties as transfer and dividend disbursing agent to any other affiliate of
PNC Bank Corp. For its services with respect to the Fund's Institutional and
Service Shares under the Transfer Agency Agreement, PFPC receives fees at the
annual rate of .03% of the average net asset value of outstanding Institutional
and Service Shares in each Portfolio, plus per account fees and disbursements.
For its services under the Transfer Agency Agreement with respect to Investor
Shares, PFPC receives per account fees, with minimum annual fees of $24,000 for
each Portfolio, plus disbursements.
PNC Bank serves as the Trust's custodian and PFPC serves as the Trust's
transfer and dividend disbursing agent. The Index Equity Portfolio will bear
its pro rata portion of the Index Master Portfolio's custody and transfer and
dividend disbursing fees and expenses once the Index Equity Portfolio invests
its assets in the Index Master Portfolio.
Distributor and Distribution and Service Plan. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of each Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares.
Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or CCG or any other affiliate
of PNC Bank fees for distribution and sales support services. Currently, as
described further below, only Investor A Shares, Investor B Shares and Investor
C Shares bear the expense of distribution fees under the Plan. In addition, the
Fund may pay CCG fees for the provision of personal services to shareholders and
the processing and administration of shareholder accounts. CCG, in turn,
determines the amount of the service fee and shareholder processing fee to be
paid to brokers, dealers, financial institutions and industry professionals
(collectively, "Service Organizations"). The Plan provides, among other things,
that: (i) the Board of Trustees shall receive quarterly reports regarding the
amounts expended under the Plan and the purposes for which such expenditures
were made; (ii) the Plan will continue in effect for so long as its continuance
is approved at least annually by the Board of Trustees in accordance with Rule
12b-1 under the 1940 Act; (iii) any material amendment thereto must be approved
by the Board of Trustees, including the trustees who are not "interested
persons" of the Fund (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
entered into in connection with the Plan (the "12b-1 Trustees"), acting in
person at a meeting called for said purpose; (iv) any amendment to increase
materially the costs
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<PAGE>
which any class of shares may bear for distribution services pursuant to the
Plan shall be effective only upon approval by a vote of a majority of the
outstanding shares of such class and by a majority of the 12b-1 Trustees; and
(v) while the Plan remains in effect, the selection and nomination of the Fund's
trustees who are not "interested persons" of the Fund shall be committed to the
discretion of the Fund's non-interested trustees.
The Plan is terminable as to any class of Shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class. Similarly, any agreement entered into
pursuant to the Plan with a Service Organization is terminable as to a class
without penalty, at any time, by the Fund or by the Service Organization upon
written notice to the other. Each such agreement will terminate automatically
in the event of its assignment.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. These commissions approximate
the commissions payable with respect to sales of Investor A Shares. The
distribution fees payable under the Plan (at a maximum annual rate of .75% of
the average daily net asset value of each Portfolio's outstanding Investor B
Shares) are intended to cover the expense to the Distributor of paying such up-
front commissions, and the contingent deferred sales charge is calculated to
charge the investor with any shortfall that would occur if Investor B Shares are
redeemed prior to the expiration of the conversion period, after which Investor
B Shares automatically convert to Investor A Shares.
With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor C Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, and the
contingent deferred sales charge is calculated to charge the investor with any
shortfall that would occur if Investor C Shares are redeemed within 18 months of
purchase.
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<PAGE>
In addition, the Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of their past profits or other
sources available to them. The Fund is not required or permitted under the Plan
to make distribution payments with respect to Service or Institutional Shares.
Service Organizations may charge their clients additional fees for account
services.
The Fund intends to enter into service arrangements with institutions
pursuant to which institutions will render certain support services to their
customers ("Customers") who are the beneficial owners of Service, Investor A,
Investor B and Investor C Shares. Such services will be provided to Customers
who are the beneficial owners of Shares of such classes and are intended to
supplement the services provided by the Fund's Administrators and transfer agent
to the Fund's shareholders of record. In consideration for payment of a service
fee of up to .25% (on an annualized basis) of the average daily net asset value
of the Investor A, Investor B and Investor C Shares owned beneficially by their
Customers and .15% (on an annualized basis) of the average daily net asset value
of the Service Shares beneficially owned by their Customers, institutions may
provide general shareholder liaison services, including, but not limited to (i)
answering customer inquiries regarding account status and history, the manner in
which purchases, exchanges and redemptions of shares may be effected and certain
other matters pertaining to the Customers' investments; and (ii) assisting
Customers in designating and changing dividend options, account designations and
addresses. In consideration for payment of a shareholder processing fee of up
to a separate .15% (on an annualized basis) of the average daily net asset value
of Service, Investor A, Investor B and Investor C Shares owned beneficially by
their Customers, institutions may provide one or more of these additional
services to such Customers: (i) providing necessary personnel and facilities to
establish and maintain Customer accounts and records; (ii) assistance in
aggregating and processing purchase, exchange and redemption transactions; (iii)
placement of net purchase and redemption orders with the Distributor; (iv)
arranging for wiring of funds; (v) transmitting and receiving funds in
connection with Customer orders to purchase or redeem shares; (vi) processing
dividend payments; (vii) verifying and guaranteeing Customer signatures in
connection with redemption orders and transfers and changes in Customer-
designated accounts, as necessary; (viii) providing periodic statements showing
Customers' account balances and, to the extent practicable, integrating such
information with other Customer transactions otherwise effected through or with
a Service Organization; (ix) furnishing (either separately or on an integrated
basis with other reports sent to a shareholder by a
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<PAGE>
Service Organization) monthly and year-end statements and confirmations of
purchases, exchanges and redemptions; (x) transmitting on behalf of the Fund,
proxy statements, annual reports, updating prospectuses and other communications
from the Fund to Customers; (xi) receiving, tabulating and transmitting to the
Fund proxies executed by Customers with respect to shareholder meetings; (xii)
providing subaccounting with respect to shares beneficially owned by Customers
or the information to the Fund necessary for subaccounting; (xiii) sub-transfer
agency services; and (xiv) such other similar services as the Fund or a Customer
may request.
For the fiscal year ended September 30, 1995, the Investor A and Investor B
Shares of the Portfolios bore the expense of distribution fees relating to the
Fund's prior distribution plans for Investor A Shares and Investor B Shares, and
the Service Shares and Investor B Shares of the Portfolios bore the expense of
servicing and shareholder processing fees relating to the Fund's prior service
plans for Service Shares and Investor B Shares as follows:
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<PAGE>
<TABLE>
<CAPTION>
Distribution Plan Service Plan Service Plan
Investor A Investor B (Investor B (Service
Portfolios Shares Shares Shares) Shares)
- ---------- --------- --------- ------------ --------
<S> <C> <C> <C> <C>
Money Market $31,400 - - $2,336,729
Municipal Money Market 143 - - 624,366
U.S. Treasury Money Market 8,770 - - 1,585,537
Ohio Municipal Money Market 132 - - 146,311
Pennsylvania Municipal 1,199 - - 387,016
Money Market
North Carolina Municipal
Money Market 36 - - 1,334
Managed Income 50,278 - - 245,386
Tax-Free Income 30,269 - - 8,543
Intermediate Government 22,909 - - 146,738
Bond
Ohio Tax-Free Income 7,686 $467 $156 13,273
Pennsylvania Tax-Free 197,753 15,286 5,095 34,032
Income
Intermediate Bond 1,122 - - 98,742
Value Equity - - - -
Growth Equity - - - -
Small Cap Growth Equity - - - -
Select Equity - - - -
Index Equity - - - -
Small Cap Value Equity - 6,258 2,086 -
International Equity - 5,330 2,010 -
Balanced - 14,053 4,684 -
Virginia Municipal Money - - - 1,287
Market
International Emerging - - - -
Markets
Government Income 3,976 42,314 11,145 -
</TABLE>
No Investor C Shares of any Portfolio were offered during the fiscal year ended
September 30, 1995.
For the period from January 13, 1996 through January 31, 1996, the
Service and Investor A Shares of the New Jersey Municipal Money Market and
New Jersey Tax-Free Income Portfolios bore the expense of fees paid
pursuant to the Plan as follows: (i) New Jersey Municipal Money Market:
Service Shares, $___________; and Investor A Shares, $_________; and (ii)
New Jersey Tax-Free Income Portfolio: Service Shares, $________; and
Investor A Shares, $___________. For the period from January 13, 1996
through March 31, 1996, the Service Shares, Investor A Shares and Investor
B Shares of the Short Government Bond and Core Bond Portfolios bore the
expense of fees paid pursuant to the Plan as follows: (i) Short Government
Bond Portfolio: Service Shares, $_________; and Investor A Shares,
$_________;
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<PAGE>
and (ii) Core Bond Portfolio: Investor A Shares, $____________; and
Investor B Shares, $__________.
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG, PIMC (with respect to the Index Equity
Portfolio until the Portfolio invests its asset in the Index Master
Portfolio) and the Administrators, transfer agency fees, fees and expenses
of officers and trustees who are not affiliated with PAMG, PIMC or the
Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, distribution fees, shareholder processing
fees, shareholder servicing fees, fees and expenses in registering and
qualifying the Portfolios and their shares for distribution under federal
and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing
shareholders, expenses relating to shareholder reports, shareholder
meetings and proxy solicitations, fidelity bond and trustees and officers
liability insurance premiums, the expense of independent pricing services
and other expenses which are not expressly assumed by PAMG, PIMC or the
Fund's service providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular investment
portfolio will be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board determines to be
fair and equitable.
PAMG, PIMC and the sub-advisers expect to waive voluntarily a portion
of their respective advisory and sub-advisory fees during the Portfolios'
current fiscal year. In addition, if the total expenses borne by any
Portfolio in a fiscal year exceed the expense limitations imposed by
applicable state securities regulations, PAMG, PIMC (with respect to the
Index Equity Portfolio until the Portfolio invests its asset in the Index
Master Portfolio), the respective sub-adviser and the Administrators will
bear the amount of the excess to the extent required by such regulations in
proportion to the advisory and administration fees otherwise payable to
them for such year.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-advisers seek
to obtain the best price and execution for a Portfolio, taking into account
such factors as the price (including the applicable brokerage commission or
dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While the adviser and
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<PAGE>
sub-advisers generally seek reasonably competitive commission rates, payment of
the lowest commission or spread is not necessarily consistent with obtaining the
best price and execution in particular transactions. Payments of commissions to
brokers who are affiliated persons of the Fund, or the Trust with respect to the
Index Master Portfolio, (or affiliated persons of such persons) will be made in
accordance with Rule 17e-1 under the 1940 Act. With respect to the Index Master
Portfolio, commissions paid on such transactions would be commensurate with the
rate of commissions paid on similar transactions to brokers that are not so
affiliated.
No Portfolio has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The adviser and sub-advisers may,
consistent with the interests of a Portfolio, select brokers on the basis of the
research, statistical and pricing services they provide to a Portfolio and the
adviser's or sub-adviser's other clients. Information and research received
from such brokers will be in addition to, and not in lieu of, the services
required to be performed by the adviser and sub-advisers under their respective
contracts. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that the adviser or sub-adviser determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of the adviser or sub-adviser to a Portfolio and its other
clients and that the total commissions paid by a Portfolio will be reasonable in
relation to the benefits to a Portfolio over the long-term. With respect to the
Index Master Portfolio, it will seek to acquire and dispose of securities in a
manner which would cause as little fluctuation in the market prices of stocks
being purchased or sold as possible in light of the size of the transactions
being effected, and brokers will be selected with this goal in view. DFA
monitors the performance of brokers which effect transactions for the Index
Master Portfolio to determine the effect that the Index Master Portfolio's
trading has on the market prices of the securities in which they invest. DFA
also checks the rate of commission being paid by the Index Master Portfolio to
its brokers to ascertain that they are competitive with those charged by other
brokers for similar services. Transactions also may be placed with brokers who
provide DFA with investment research, such as reports concerning individual
issuers, industries and general economic and financial trends and other research
services. The Investment Management Agreement permits DFA knowingly to pay
commissions on such transactions which are greater than another broker might
charge if DFA, in good faith, determines that the commissions paid are
reasonable in relation to the research or brokerage services provided by the
broker or dealer when viewed in terms of either a particular transaction or
DFA's overall responsibilities to the Trust.
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<PAGE>
Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).
For the year or period ended September 30, 1995, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Value Equity $364,680
Growth Equity 356,156
Small Cap Growth Equity 88,691
Select Equity 341,935
Index Equity 73,946
Small Cap Value Equity 251,396
International Equity 2,667,245
Balanced 144,451
International Emerging Markets 356,727
</TABLE>
For the year or period ended September 30, 1994, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Value Equity $431,232
Growth Equity 530,428
Small Cap Growth Equity 62,339
Select Equity 156,700
Index Equity 47,190
Small Cap Value Equity 185,560
International Equity 1,031,631
Balanced 164,460
International Emerging Markets 32,367
</TABLE>
For the year or period ended September 30, 1993, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Value Equity $136,565
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Growth Equity/*/ 366,421
Small Cap Growth Equity/*/ 1,186
Select Equity 4,770
Index Equity 18,386
Small Cap Value Equity/*/ 105,423
International Equity 308,297
Balanced 68,556
</TABLE>
/*/ The Growth Equity, Small Cap Growth Equity and Small Cap Value Equity
Portfolios paid Shearson Lehman Hutton Inc. ("Shearson"), an affiliate of
the Fund's former distributor, $4,390, $264 and $636, respectively.
Approximately 1%, 22% and 1% of the aggregate brokerage commissions of such
respective Portfolios were paid to Shearson, representing approximately 1%,
22% and 1% of the aggregate dollar amounts of transactions by those
respective Portfolios involving the payment of commissions.
For the Index Master Portfolio's fiscal years ended November 30, 1993,
1994, and 1995, the Index Master Portfolio paid brokerage commissions totalling
$41,393, $10,610 and $15,289, respectively.
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market
-84-
<PAGE>
Portfolio, the turnover rates should not adversely affect the Portfolio's net
asset values or net income.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid. It is the policy of the
Portfolios to give primary consideration to obtaining the most favorable price
and efficient execution of transactions involving money market instruments. In
seeking to implement this policy of the Portfolios, the adviser and sub-advisers
will effect transactions involving money market instruments with those dealers
they believe provide the most favorable prices and are capable of providing
efficient executions.
The adviser or sub-advisers may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that a Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for each Portfolio and for other investment accounts
managed by the adviser or sub-advisers are made independently of each other in
light of differing conditions. However, the same investment decision may be
made for two or more such accounts. In such cases, simultaneous transactions
are inevitable. Purchases or sales are then averaged as to price and allocated
as to amount in a manner deemed equitable to each such account. While in some
cases this practice could have a detrimental effect upon the price or value of
the security as far as a Portfolio is concerned, in other cases it could be
beneficial to a Portfolio. A Portfolio will not purchase securities during the
existence of any underwriting or selling group relating to such securities of
which PAMG, PIMC, BlackRock, PNC Bank, PCM, PEAC, Morgan Grenfell,
CastleInterna-tional, the Administrators, the Distributor or any affiliated
person (as defined in the 1940 Act) thereof is a member except pursuant to
procedures adopted by the Board of Trustees in accordance with Rule 10f-3 under
the 1940 Act. In no instance will portfolio securities be purchased from or
sold to PAMG, PIMC, BlackRock, PNC Bank, PCM, PEAC, Morgan Grenfell,
CastleInternational, the Administrators, the Distributor or any affiliated
person of the foregoing entities except as permitted by SEC exemptive order or
by applicable law.
-85-
<PAGE>
The portfolio turnover rate of a Portfolio is calculated by dividing the
lesser of a Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. The Index Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Index Master Portfolio's shares.
The Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
the Fund as of the end of its most recent fiscal year. As of September 30,
1995, the following Portfolios held the following securities:
<TABLE>
<CAPTION>
Portfolio Security Value
- --------- -------- -----
<S> <C> <C>
Money Market
- ------------
Bear, Stearns & Co. Variable Rate Obligation $70,000,000
Goldman Sachs, LP Variable Rate Obligation 47,000,000
Merrill Lynch & Co. Medium Term Note 42,000,000
Merrill Lynch & Co. Commercial Paper 24,490,222
Merrill Lynch & Co. Variable Rate Obligation 25,002,938
Morgan Stanley & Co. Repurchase Agreement 125,000,000
U.S. Treasury Money Market
- --------------------------
Morgan Stanley & Co. Repurchase Agreement $100,000,000
Managed Income
- --------------
Salomon Brothers, Inc. Corporate Bond $7,062,375
Merrill Lynch & Co. Corporate Bond 2,202,895
Morgan Stanley & Co. Corporate Bond 15,961,839
Balanced
- --------
Salomon Brothers, Inc. Corporate Bond $450,592
Merrill Lynch & Co. Corporate Bond 919,875
Index Equity
- ------------
Salomon Brothers, Inc. Common Stock $256,275
Merrill Lynch & Co. Common Stock 543,750
Short Government Bond
- ---------------------
Salomon Brothers, Inc. Common Stock $492,000
PaineWebber Group Inc. Common Stock 147,375
International Bond
- ----------------------------
Salomon Brothers, Inc. Common Stock $2,046,250
</TABLE>
-86-
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber Group Inc. Common Stock 1,558,125
Government Income
- -----------------
Merrill Lynch & Co. Common Stock $999,995
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
Computation of Public Offering Prices for Investor A Shares of the Non-
Money Market Portfolios. An illustration of the computation of the public
offering price per Investor A Share of the respective Non-Money Market
Portfolios, based on the value of such Portfolios' net assets as of September
30, 1995, follows:
TABLE
-----
<TABLE>
<CAPTION>
Value Growth Small Cap Index
Equity Equity Growth Equity Select Equity Equity
Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets................ $16,909,532 $10,033,689 $ 7,347,607 $ 3,807,750 $6,500,597
Outstanding
Shares................... 1,214,898 771,222 490,591 320,632 478,864
=========== =========== =========== =========== ==========
Net Asset Value
Per Share................ $ 13.92 $ 13.01 $ 14.98 $ 11.88 $ 13.58
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset value
per share)............... $ .66 $ .61 $ .71 $ .56 $ .64
----------- ----------- ----------- ----------- ----------
Offering to Public........ $ 14.58 $ 13.62 $ 15.69 $ 12.44 $ 14.22
=========== =========== =========== =========== ==========
<CAPTION>
Small
Cap Value International Managed Tax-Free
Equity Equity Balanced Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets................ $21,562,824 $17,720,931 $67,891,929 $11,977,229 $6,590,747
Outstanding
Shares................... 1,424,503 1,338,381 4,946,071 1,153,926 621,214
=========== =========== =========== =========== ==========
Net Asset Value
Per Share................ $ 15.14 $ 13.24 $ 13.73 $ 10.38 $ 10.61
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .71 $ .62 $ .65 $ .49 $ .50
----------- ----------- ----------- ----------- ----------
Offering to Public........ $ 15.85 $ 13.86 $ 14.38 $ 10.87 $ 11.11
=========== =========== =========== =========== ==========
<CAPTION>
Intermediate Pennsylvania Short
Government Ohio Tax- Tax-Free Government Intermediate
Bond Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
-87-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets............... $ 9,801,709 $ 3,302,252 $42,774,116 $ 311,448 $ 646,591
Outstanding
Shares................... 977,718 328,448 4,142,417 32,087 68,597
=========== =========== =========== =========== ==========
Net Asset Value
Per Share................ $ 10.03 $ 10.05 $ 10.33 $ 9.71 $ 9.43
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .47 $ .47 $ .49 $ .46 $ .44
----------- ----------- ----------- ----------- ----------
Offering to Public........ $ 10.50 $ 10.52 $ 10.82 $ 10.17 $ 9.87
=========== =========== =========== =========== ==========
<CAPTION>
International New Jersey
Government International Emerging Tax-Free Core
Income Bond Markets Income Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets................ $ 2,989,844 $ 100 $ 2,562,718 $ 100 $ 100
Outstanding
Shares................... 279,974 10 313,245 10 10
=========== =========== =========== =========== ==========
Net Asset Value
Per Share................ $ 10.68 $ 10.00 $ 8.18 $ 10.00 $ 10.00
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .50 $ .47 $ .39 $ .47 $ .47
----------- ----------- ----------- ----------- ----------
Offering to Public........ $ 11.18 $ 10.47 $ 8.57 $ 10.47 $ 10.47
=========== =========== =========== =========== ==========
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $37,132
Tax-Free Income 8,850
Intermediate Government Bond 42,765
Ohio Tax-Free Income 2,725
Pennsylvania Tax-Free Income 121,089
Intermediate Bond 1,513
Value Equity 68,289
Growth Equity 47,859
Small Cap Growth Equity 77,356
Select Equity 34,761
</TABLE>
-88-
<PAGE>
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Index Equity 51,229
Small Cap Value Equity 61,709
International Equity 83,938
Balanced 144,255
International Emerging Markets 24,915
Government Income 69,712
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1994 were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $150,150
Tax-Free Income $37,504
Intermediate Government Bond 50,694
Ohio Tax-Free Income 64,596
Pennsylvania Tax-Free Income 678,464
Intermediate Bond 2,124
Value Equity 195,675
Growth Equity 81,496
Small Cap Growth Equity 44,054
Select Equity 17,550
Index Equity 38,454
Small Cap Value Equity 230,590
International Equity 303,547
Balanced 1,213,056
International Emerging Markets 130,755
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1993 were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $202,926
Tax-Free Income 128,003
Intermediate Government Bond 127,347
Ohio Tax-Free Income 68,959
Pennsylvania Tax-Free Income 1,083,103
Value Equity 155,096
Growth Equity 60,863
Index Equity 37,281
Small Cap Value Equity 250,615
</TABLE>
-89-
<PAGE>
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
International Equity 86,294
Balanced 1,304,538
</TABLE>
For the period from January 13, 1996 through January 31, 1996, the total
front-end sales charges paid by the shareholders of Investor A Shares of the New
Jersey Tax-Free Income Portfolio were $__________. For the period from January
13, 1996 through March 31, 1996, the total front-end sales charges paid by the
shareholders of Investor A Shares of the Short Government Bond and Core Bond
Portfolios were $_________ and $______________, respectively.
There is no initial sales charge on purchases of $1,000,000 or more of
Investor A Shares of the Non-Money Market Portfolios. However, a contingent
deferred sales charge of 1.00% will be imposed on the lesser of the net asset
value of the shares on the purchase or redemption date for Investor A Shares
purchased on a no-load basis and subsequently redeemed within 18 months after
purchase.
Investor B Shares of the Non-Money Market Portfolios are sold at the net
asset value per share next determined after a purchase order is received.
Investor B Shares of the Non-Money Market Portfolios are subject to a contingent
deferred sales charge which is payable on redemption of such Investor B Shares.
Investor C Shares of the Non-Money Market Portfolios are sold at the net
asset value per share next determined after a purchase order is received. In
addition, Investor C Shares of the Non-Money Market Portfolios are subject to a
contingent deferred sales charge which is payable on redemptions of such
Investor C Shares within 18 months of purchase.
Service and Institutional Shares of each Portfolio are sold at the net
asset value per share next determined after a purchase order is received.
Exchange Privilege. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states where
the exchange may legally be made.
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales
-90-
<PAGE>
charge applies) when Investor Shares of a Money Market Portfolio are redeemed
and the proceeds are used to purchase Investor A Shares, Investor B Shares or
Investor C Shares of a Non-Money Market Portfolio.
Investments of Redemption Proceeds from Other Investment Companies.
Investors may purchase Investor A Shares of the Non-Money Market Portfolios at
net asset value, without a sales charge, with the proceeds from the redemption
of shares of any other investment company which were sold with a sales charge or
commission in accordance with the terms set forth in the Prospectuses. This does
not include shares of an affiliated mutual fund which were or would be subject
to a contingent deferred sales charge upon redemption. For purposes of this
restriction, the term "affiliated mutual fund" means:
i) any Portfolio of the Fund; and
ii) any other investment company, if such company and the Fund hold
themselves out to investors as related companies for purposes of
investment and investor services, and if:
a) that company and the Fund have a common investment adviser
or distributor; or
b) the investment adviser or distributor of such company or the Fund
is an "affiliated person" (as defined in Section 2(a)(3) of the
1940 Act) of the investment adviser or distributor of the Fund or
the company, respectively.
Miscellaneous. The Fund reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption or repurchase of
a Portfolio's shares by making payment in whole or in part in securities chosen
by the Fund and valued in the same way as they would be valued for purposes of
computing a Portfolio's net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the 1940
Act so that a Portfolio is obligated to redeem its shares solely in cash up to
the lesser of $250,000 or 1% of its net asset value during any 90-day period for
any one shareholder of a Portfolio.
With respect to the Index Master Portfolio, if the Board of Trustees of the
Trust determines that it would be detrimental to the best interests of the
remaining shareholders of the Index Master Portfolio to make payment wholly or
partly in cash, the Index Master Portfolio may pay the redemption price in whole
or in part by a distribution of portfolio securities from the Index Master
Portfolio of the shares being redeemed in lieu of cash in
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<PAGE>
accordance with Rule 18f-1 under the Investment Company Act of 1940. Investors,
such as the Portfolio, may incur brokerage charges and other transaction costs
selling securities that were received in payment of redemptions.
Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the Fund may
redeem shares involuntarily to reimburse a Portfolio for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder as provided in the Prospectus from time to
time.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined
had the matrix or formula method not been used. All cash, receivables and
current payables are carried on the Fund's books at their face value. Other
assets, if any, are valued at fair value as determined in good faith under the
supervision of the Board of Trustees.
Money Market Portfolios. The net asset value for each class of each Share
of the Money Market Portfolios for the purpose of pricing purchase and
redemption orders is determined twice each day, once as of 12:00 noon (Eastern
Time) and once as of 4:00 p.m. (Eastern Time) on each Business Day. Each
Portfolio's net asset value per share is calculated by adding the value of all
securities, cash and other assets of the respective classes of the Portfolio,
subtracting the liabilities and dividing the result by the number of outstanding
Shares of such classes. The net asset value per Share of each class of each
Portfolio is determined independently of the other classes and the other
Portfolios.
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<PAGE>
The Fund seeks to maintain for each of the Money Market Portfolios a net
asset value of $1.00 per share for purposes of purchase and redemptions and
values their portfolio securities on the basis of the amortized cost method of
valuation, described below. There can be no assurance that the net asset value
per share will not vary.
A Money Market Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities.
As noted above, the value of the portfolio securities of each Money Market
Portfolio is calculated using the amortized cost method of valuation. Under this
method the market value of an instrument is approximated by amortizing the
difference between the acquisition cost and value at maturity of the instrument
on a straight-line basis over the remaining life of the instrument. The effect
of changes in the market value of a security as a result of fluctuating interest
rates is not taken into account. The market value of debt securities usually
reflects yields generally available on securities of similar quality. When such
yields decline, market values can be expected to increase, and when yields
increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Money Market Portfolio would receive if the security were sold prior to
maturity. The Fund's Board of Trustees has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share for each
Money Market Portfolio, which include a review of the extent of any deviation of
net asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1% for a Money
Market Portfolio, the Fund's Board of Trustees will promptly consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redeeming shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends, shortening the average portfolio maturity, reducing the number of
outstanding shares without monetary consideration, and utilizing a net asset
value per share as determined by using available market quotations.
Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will
limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser determines present minimal credit
risks pursuant to guidelines adopted by the Fund's Board of Trustees.
-93-
<PAGE>
There can be no assurance that a constant net asset value will be maintained for
any Money Market Portfolio.
Equity Portfolios. The net asset value for each Service, Investor A,
Investor B, Investor C and Institutional Share for each Equity Portfolio is
calculated as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by adding the value of all its
securities, cash and other assets allocated to each respective class of shares
and dividing by the respective total number of outstanding shares of each class.
The net asset value per share of each class of each Portfolio is determined
independently of the other classes and the other Portfolios.
Valuation of securities held by each Portfolio is as follows: securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at the last reported sale price that day; securities traded on a
national securities exchange or on the NASDAQ National Market System for which
there were no sales on that day and securities traded on other over-the-counter
markets for which market quotations are readily available are valued at the mean
of the bid and asked prices; an option or futures contract is valued at the last
sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal
exchange or board of trade on which such option or contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices prior to 4:00
p.m. (Eastern Time); and securities for which market quotations are not readily
available are valued at fair market value as determined in good faith by or
under the direction of the Fund's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
Valuation of securities of foreign issuers and those held by the
International Equity and International Emerging Markets Portfolios is as
follows: to the extent sale prices are available, securities which are traded
on a recognized stock exchange, whether U.S. or foreign, are valued at the
latest sale price on that exchange prior to the time when assets are valued or
prior to the close of regular trading hours on the NYSE. In the event that
there are no sales, the mean between the last available bid and asked prices
will be used. If a security is traded on more than one exchange, the latest
sale price on the exchange where the stock is primarily traded is used. An
option or futures contract is valued at the last sales price prior to 4:00 p.m.
(Eastern Time), as quoted on the principal exchange or board of trade on which
such option or contract is traded, or in the absence of a sale, the mean between
the last bid and asked prices prior to 4:00 p.m. (Eastern Time). In the event
that application of these methods of valuation results in a price for
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<PAGE>
value per share of each class of each Portfolio is determined independently of
the other classes and the other Portfolios.
Valuation of securities held by each Bond Portfolio is as follows: domestic
securities traded on a national securities exchange or on the NASDAQ National
Market system are valued at the last reported sale price that day; domestic
securities traded on a national securities exchange or on the NASDAQ National
Market System for which there were no sales on that day are valued at the mean
of the bid and asked prices; foreign securities traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE (if a security is traded on more than one
exchange, the latest sale price on the exchange where the stock is primarily
traded is used); foreign securities traded on a recognized stock exchange for
which there were no sales on that day are valued at the mean of the bid and
asked prices; other securities are valued on the basis of valuations provided by
a pricing service approved by the Board of Trustees, provided that if the
investment adviser or sub-adviser concludes that the price provided by a pricing
service does not represent the fair value of a security, such security will be
valued at fair value determined by the adviser or sub-adviser based on
quotations or the equivalent thereof received from dealers; an option or futures
contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as
quoted on the principal exchange or board of trade on which such option or
futures contract is traded, or in the absence of a sale, the mean between the
last bid and asked prices prior to 4:00 p.m. (Eastern Time); the amortized cost
method of valuation is used with respect to debt obligations with sixty days or
less remaining to maturity; and securities for which market quotations are not
readily available are valued at fair market value as determined in good faith by
or under the direction of the Fund's Board of Trustees. Any securities which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
Certain of the securities acquired by the International Bond Portfolio may
be traded on foreign exchanges or over-the-counter markets on days on which the
Portfolio's net asset value is not calculated. In such cases, the net asset
value of the Portfolio's shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Portfolio.
-95-
<PAGE>
PERFORMANCE INFORMATION
A Portfolio may quote performance in various ways. All performance
information supplied by a Portfolio in advertising is historical and is not
intended to indicate future returns.
Money Market Portfolio Yield. Each Money Market Portfolio's current and
effective yields for Service, Investor A, Investor B, Investor C and
Institutional Shares are computed separately using standardized methods required
by the SEC. The annualized yield for a class of Service, Investor A, Investor
B, Investor C or Institutional Shares is computed by: (a) determining the net
change in the value of a hypothetical account having a balance of one share at
the beginning of a seven-calendar day period; (b) dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return; and (c) annualizing the results (i.e., multiplying the base period
----
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared and all dividends
declared on both the original share and such additional shares, but does not
include realized gains and losses or unrealized appreciation and depreciation.
Compound effective yields are computed by adding 1 to the base period
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<PAGE>
return (calculated as described above) raising the sum to a power equal to 365/7
and subtracting 1. In addition, a standardized "tax-equivalent yield" may be
quoted for Service, Investor A, Investor B, Investor C and Institutional Shares
in the Municipal Money Market, Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios, which
is computed separately for each class by: (a) dividing the portion of the
Portfolio's yield for shares (as calculated above) that is exempt from Federal
or state income tax by one minus a stated Federal or state income tax rate; and
(b) adding the figure resulting from (a) above to that portion, if any, of the
yield that is not exempt from Federal and state income tax.
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1995 (January 31, 1996 with respect to the
New Jersey Municipal Money Market Portfolio) before waivers was as follows:
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal
Effective income
Portfolio Yield Yield tax rate of 28%)
- --------- ----- ----- ---------------
<S> <C> <C> <C>
Money Market
Service Shares 4.97% 5.09% N/A
Investor A Shares 4.70 4.81 N/A
Institutional Shares 5.27 5.41 N/A
Investor B Shares 4.20 4.29 N/A
Municipal Money Market
Service Shares 3.12 3.17 4.33%
Investor A Shares 2.86 2.90 3.97
Institutional Shares 3.42 3.48 4.75
U.S. Treasury Money Market
Service Shares 4.84 4.96 N/A
Investor A Shares 4.57 4.67 N/A
Institutional Shares 5.14 5.27 N/A
Ohio Municipal Money Market
Service Shares 3.14 3.19 4.36
Investor A Shares 2.87 2.91 3.99
Institutional Shares 3.44 3.50 4.78
Pennsylvania Municipal Money
Market
Service Shares 3.15 3.20 4.38
Investor A Shares 2.88 2.92 4.00
Institutional Shares 3.45 3.51 4.79
North Carolina Municipal
Money Market
Service Shares 3.13% 3.18% 4.35%
Investor A Shares 2.86 2.90 3.97
Institutional Shares 3.43 3.49 4.76
Virginia Municipal Money
Market
Service Shares 2.90 2.94 4.03
Institutional Shares 3.20 3.25 4.44
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal
Effective income
Portfolio Yield Yield tax rate of 28%)
- --------- ----- ----- ---------------
<S> <C> <C> <C>
New Jersey Municipal Money
Market Portfolio
Service Shares ___ ___ ___
Investor A Shares ___ ___ ___
Institutional Shares ___ ___ ___
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1995,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1995. The Investor B Class and the
Investor C Class of the New Jersey Money Market Portfolio had not commenced
operations as of January 31, 1996.
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1995 (January 31, 1996 with respect to the
New Jersey Municipal Money Market Portfolio) after waivers was as follows:
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal
Effective income
Portfolio Yield Yield tax rate of 28%)
- --------- ----- ----- ---------------
<S> <C> <C> <C>
Money Market
Service Shares 5.34% 5.48% N/A
Investor A Shares 5.07 5.20 N/A
Institutional Shares 5.64 5.80 N/A
Investor B Shares 4.57 4.67 N/A
Municipal Money Market
Service Shares 3.56 3.62 4.33%
Investor A Shares 3.30 3.35 3.97
Institutional Shares 3.86 3.93 4.75
U.S. Treasury Money Market
Service Shares 5.26 5.40 N/A
Investor A Shares 4.99 5.11 N/A
Institutional Shares 5.56 5.71 N/A
Ohio Municipal Money Market
Service Shares 3.60 3.66 5.00
Investor A Shares 3.33 3.38 4.63
Institutional Shares 3.901 3.98 5.42
Pennsylvania Municipal Money
Market
Service Shares 3.57 3.63 4.96
Investor A Shares 3.30 3.35 4.58
Institutional Shares 3.87 3.94 5.38
</TABLE>
-98-
<PAGE>
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal
Effective income
Portfolio Yield Yield tax rate of 28%)
- --------- ----- ----- ---------------
<S> <C> <C> <C>
North Carolina Municipal
Money Market
Service Shares 3.66% 3.73% 5.08%
Investor A Shares 3.39 3.45 4.71
Institutional Shares 3.96 4.04 5.50
Virginia Municipal Money
Market
Service Shares 3.75 3.82 5.21
Institutional Shares 4.05 4.13 5.63
New Jersey Municipal Money
Market Portfolio
Service Shares ___ ___ ___
Investor A Shares ___ ___ ___
Institutional Shares ___ ___ ___
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1995,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1995. The Investor B Class and the
Investor C Class of the New Jersey Municipal Money Market Portfolio had not
commenced operations as of January 31, 1996.
The fees which may be imposed by institutions on their Customers are not
reflected in the calculations of yields for the Money Market Portfolios. Yields
on Institutional Shares will generally be higher than yields on Service Shares;
yields on Service Shares will generally be higher than yields on Investor A
Shares; and yields on Investor A Shares will generally be higher than yields on
Investor B Shares and Investor C Shares.
From time to time, in advertisements, sale literature, reports to
shareholders and other materials, the yields of a Portfolio's Service, Investor
A, Investor B, Investor C or Institutional Shares may be quoted and compared to
those of other mutual funds with similar investment objectives and to stock or
other relevant indexes. For example, the yield of a Portfolio's Service,
Investor A, Investor B, Investor C or Institutional Shares may be compared to
the Donoghue's Money Fund Average, which is an average compiled by
IBC/Donoghue's MONEY FUND REPORT(R), a widely-recognized independent publication
that monitors the performance of money market funds, the average yields reported
by the Bank Rate Monitor from money market deposit accounts offered by the 50
leading banks and thrift institutions in the top five standard metropolitan
statistical areas, or to the data prepared by Lipper Analytical Services, Inc.,
a widely-recognized independent service that monitors the performance of mutual
funds. Yield may also be compared to yields set forth in the weekly statistical
release H.15(519) or
-99-
<PAGE>
the monthly statistical release designated G.13(415) published by the Board of
Governors of the Federal Reserve system.
Total Return. For purposes of quoting and comparing the performance of
shares of the Non-Money Market Portfolios to the performance of other mutual
funds and to stock or other relevant indexes in advertisements, sales
literature, communications to shareholders and other materials, performance may
be stated in terms of total return. The total return for each class of a Non-
Money Market Portfolio will be calculated independently of the other classes
within that Portfolio. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according to the
following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
In calculating the ending redeemable value for Investor A Shares of the
Fund's Non-Money Market Portfolios, the maximum front-end sales charge is
deducted from the initial $1,000 payment and all dividends and distributions by
the particular Portfolio are assumed to have been reinvested at net asset value
as described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor B Shares of the
Non-Money Market Portfolios, the maximum contingent deferred sales charge is
deducted at the end of the period and all dividends and distributions by the
particular Portfolio are assumed to have been reinvested at net asset value as
described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor C Shares of the
Fund's Non-Money Market Portfolios, the maximum contingent deferred sales charge
is deducted at the end of the period, and all dividends and distributions by the
particular Portfolio are assumed to have been reinvested at net asset value as
described in the particular Prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the specified
-100-
<PAGE>
periods that would equate the initial amount invested to the ending redeemable
value.
Based on the foregoing calculation, the average annual total returns for
each Non-Money Market Portfolio for periods ended September 30, 1995 were as
follows:
-101-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
For the 5 Since
For the Year years ended commencement
Portfolio Ended 9/30/95 9/30/95 of operations
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
Managed Income
Service Shares/(1)/ 12.97% N/A 4.67%
Investor A Shares/(2)/ 7.68 N/A 5.77
Institutional Shares/(3)/ 13.27 9.07% 8.29
Investor B Shares/(4)/ N/A N/A N/A
Tax-Free Income
Service Shares/(1)/ 11.24 N/A 5.11
Investor A Shares/(5)/ 6.03 7.27 7.02
Institutional Shares/(6)/ 11.54 N/A 6.65
Investor B Shares/(7)/ N/A N/A N/A
Intermediate Government Bond
Service Shares/(1)/ 9.99 N/A 3.95
Investor A Shares/(8)/ 5.08 N/A 4.24
Institutional Shares/(9)/ 10.28 N/A 6.04
Investor B Shares/(10)/ N/A N/A N/A
Ohio Tax-Free Income
Service Shares/(1)/ 10.45 N/A 4.45
Investor A Shares/(11)/ 5.51 N/A 3.67
Institutional Shares/(11)/ 10.75 N/A 5.45
Investor B Shares/(12)/ N/A N/A 4.46
Pennsylvania Tax-Free Income
Service Shares/(1)/ 10.51 N/A 4.78
Investor A Shares/(11)/ 5.37 N/A 4.70
Institutional Shares/(11)/ 10.81 N/A 6.59
Investor B Shares/(13)/ N/A N/A 4.85
Intermediate Bond
Service Shares/(17)/ 10.46 N/A 3.15
Investor A Shares/(18)/ 5.35 N/A 4.18
Institutional Shares/(19)/ 10.76 N/A 3.36
Investor B Shares/(20)/ N/A N/A N/A
Government Income
Service Shares/(20)/ N/A N/A N/A
Investor A Shares/(21)/ N/A N/A 9.19
Institutional Shares/(20)/ N/A N/A N/A
Investor B Shares/(22)/ N/A N/A 8.49
Value Equity
Service Shares/(1)/ 25.40 N/A 15.12
Investor A Shares/(23)/ 19.56 N/A 12.36
Institutional Shares/(24)/ 25.73 N/A 14.00
Investor B Shares/(25)/ N/A N/A N/A
Growth Equity
Service Shares/(26)/ 29.43 N/A 11.26
Investor A Shares/(27)/ 23.43 N/A 8.39
Institutional Shares/(3)/ 29.88 12.05 10.17
Investor B Shares/(28)/ N/A N/A N/A
</TABLE>
-102-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
For the 5 Since
For the Year years ended commencement
Portfolio Ended 9/30/95 9/30/95 of operations
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
Small Cap Growth Equity
Service Shares/(29)/ 48.13% N/A 22.29%
Investor A Shares/(29)/ 41.32 N/A 19.38
Institutional Shares/(30)/ 48.50 N/A 22.30
Investor B Shares/(31)/ N/A N/A N/A
Select Equity
Service Shares/(29)/ 23.43 N/A 11.52
Investor A Shares/(32)/ 17.71 N/A 9.53
Institutional Shares/(33)/ 23.76 N/A 11.76
Investor B Shares/(34)/ N/A N/A N/A
Index Equity
Service Shares/(1)/ 28.99 N/A 15.50
Investor A Shares/(35)/ 22.92 N/A 11.37
Institutional Shares/(9)/ 29.30 N/A 12.95
Investor B Shares/(36)/ N/A N/A N/A
Small Cap Value Equity
Service Shares/(1)/ 17.17 N/A 13.71
Investor A Shares/(35)/ 11.69 N/A 14.18
Institutional Shares/(37)/ 17.43 N/A 15.56
Investor B Shares/(38)/ N/A N/A 11.77
International Equity
Service Shares/(1)/ 2.19 N/A 8.57
Investor A Shares/(35)/ (2.58) N/A 7.61
Institutional Shares/(39)/ 2.46 N/A 11.21
Investor B Shares/(40)/ N/A N/A (2.80)
International Emerging
Markets
Service Shares/(41)/ (19.91) N/A (12.31)
Investor A Shares/(41)/ (23.74) N/A (15.64)
Institutional Shares/(41)/ (19.72) N/A (12.08)
Investor B Shares/(42)/ N/A N/A N/A
Balanced
Service Shares/(1)/ 19.94 N/A 10.34
Investor A Shares/(43)/ 14.51 12.73% 10.14
Institutional Shares/(44)/ 20.32 N/A 11.28
Investor B Shares/(45)/ N/A N/A 14.10
</TABLE>
- ---------------------------------
/(1)/ Commenced operations on July 29, 1993.
/(2)/ Commenced operations on February 5, 1992.
/(3)/ Commenced operations on November 1, 1989.
/(4)/ Class had not commenced operations at September 30, 1995.
/(5)/ Commenced operations on May 14, 1990.
/(6)/ Commenced operations on January 21, 1993.
/(7)/ Class had not commenced operations at September 30, 1995.
/(8)/ Commenced operations on May 11, 1992.
/(9)/ Commenced operations on April 20, 1992.
/(10)/ Class had not commenced operations at September 30, 1995.
/(11)/ Commenced operations on December 1, 1992.
/(12)/ Commenced operations on October 13, 1994.
-103-
<PAGE>
/(13)/ Commenced operations on October 3, 1994.
/(14)/ Commenced operations on September 1, 1993.
/(15)/ Commenced operations on November 17, 1993.
/(16)/ Class had not commenced operations at September 30, 1995.
/(17)/ Commenced operations on September 23, 1993.
/(18)/ Commenced operations on May 20, 1994.
/(19)/ Commenced operations on September 17, 1993.
/(20)/ Class had not commenced operations at September 30, 1995.
/(21)/ Commenced operations on October 4, 1994.
/(22)/ Commenced operations on October 3, 1994.
/(23)/ Commenced operations on May 2, 1992.
/(24)/ Commenced operations on May 20, 1992.
/(25)/ Class had not commenced operations at September 30, 1995.
/(26)/ Commenced operations on July 29, 1993.
/(27)/ Commenced operations on March 14, 1992.
/(28)/ Class had not commenced operations at September 30, 1995.
/(29)/ Commenced operations on September 15, 1993.
/(30)/ Commenced operations on September 14, 1993.
/(31)/ Class had not commenced operations at September 30, 1995.
/(32)/ Commenced operations on October 13, 1993.
/(33)/ Commenced operations on September 13, 1993.
/(34)/ Class had not commenced operations at September 30, 1995.
/(35)/ Commenced operations on June 2, 1992.
/(36)/ Class had not commenced operations at September 30, 1995.
/(37)/ Commenced operations on April 13, 1992.
/(38)/ Commenced operations on October 3, 1994.
/(39)/ Commenced operations on April 27, 1992.
/(40)/ Commenced operations on October 3, 1994.
/(41)/ Commenced operations on June 17, 1994.
/(42)/ Class had not commenced operations at September 30, 1995.
/(43)/ Commenced operations on May 14, 1990.
/(44)/ Commenced operations on May 1, 1992.
/(45)/ Commenced operations on October 3, 1994.
The predecessor portfolio to the International Bond and New Jersey Tax-Free
Income Portfolios each offered and sold only one class of shares. Based on the
foregoing calculation, the average annual total return for the predecessor
portfolios to the International Bond and New Jersey Tax-Free Income Portfolios
for the periods ended February 28, 1995 were as follows:
-104-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the For the 5
Year years
ended ended Since commencement
Portfolio 2/28/95 2/28/95 of operations
- --------- ------- ------- -------------
<S> <C> <C> <C>
Predecessor Portfolio to the (2.31)% N/A 6.47%
New Jersey Tax-Free Income
Portfolio/(1)/
Predecessor Portfolio to the
International Bond Portfolio/(2)/ 1.50 N/A 7.40
</TABLE>
/(1)/ Commenced operations on July 1, 1991.
/(2)/ Commenced operations on July 1, 1991.
The predecessor portfolio to the Short Government Bond and Core Bond
Portfolios each offered and sold only one class of shares. Based on the
foregoing calculation, the average annual total return for the predecessor
portfolios to the Short Government Bond and Core Bond Portfolios for the periods
ended June 30, 1995 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the For the 5
Year years
ended ended Since commencement
Portfolio 6/30/95 6/30/95 of operations
- --------- ------- ------- -------------
<S> <C> <C> <C>
Predecessor Portfolio to the 12.44% N/A 7.17%
Core Bond Portfolio/(1)/
Predecessor Portfolio to the
Short Government Bond 7.55 N/A 4.90
Portfolio/(2)/
</TABLE>
/(1)/ Commenced operations on December 9, 1992.
/(2)/ Commenced operations on July 17, 1992.
Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
each class of a Non-Money Market Portfolio's shares with other performance
measures. For example, in comparing the total return of a Non-Money Market
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money
-105-
<PAGE>
Market Portfolio may calculate the aggregate total return for its shares of a
certain class for the period of time specified in the advertisement or
communication by assuming the investment of $10,000 in such Non-Money Market
Portfolio's shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. A Non-Money
Market Portfolio may not, for these purposes, deduct from the initial value
invested or the ending value any amount representing front-end and deferred
sales charges charged to purchasers of Investor A, Investor B or Investor C
Shares. The Investor A, Investor B and Investor C classes of the Portfolio
will, however, disclose, if appropriate, the maximum applicable sales charges
and will also disclose that the performance data does not reflect sales charges
and that inclusion of sales charges would reduce the performance quoted.
In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
Non-Money Market Portfolio Yield. The Balanced, Managed Income, Tax-Free
Income, Intermediate Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, Short Government Bond, Intermediate
Bond, Government Income, Core Bond and International Bond Portfolios may
advertise their yields on their Service, Investor A, Investor B, Investor C and
Institutional Shares. Under the rules of the SEC, each such Portfolio
advertising the respective yields for its Service, Investor A, Investor B,
Investor C and Institutional Shares must calculate yield using the following
formula:
a-b
YIELD = 2[(----- +1)/6/ - 1]
cd
-106-
<PAGE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360th of the stated dividend rate of
the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. However,
interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have discounts based on current market value that are less
than the then-remaining portion of the original issue discount (market premium),
the yield to maturity is based on the market value.
-107-
<PAGE>
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter. In the case of Investor A Shares of a Non-Money
Market Portfolio, a Portfolio's maximum offering price per share for purposes of
the formula includes the maximum front-end sales charge imposed by the Portfolio
- -- currently as much as 5.00% of the per share offering price.
Each of the Tax-Free Income, Ohio Tax-Free Income, New Jersey Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios may advertise the tax-
equivalent yield for its shares of a specified class. Under the rules of the
SEC, such a Portfolio advertising its tax-equivalent yield must calculate such
tax-equivalent yield by dividing that portion of the yield of the Portfolio
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Portfolio which is not tax-exempt.
The annualized yield information for the 30-day period ended September 30,
1995 for the Portfolios referenced below was as follows:
-108-
<PAGE>
<TABLE>
<CAPTION>
Before
After Waivers Waivers
------------------------------ ---------------------------------------
Tax-Equivalent Tax-Equivalent
Yield Yield
Portfolio Yield (assumes a Yield (assumes a
- --------- ----- Federal income ----- Federal income
tax rate of tax rate of
28%) 28%)
---- ----
<S> <C> <C> <C> <C>
Managed Income
Service Shares 5.76% N/A 5.56% N/A
Investor A Shares 5.27 N/A 5.07 N/A
Institutional Shares 6.07 N/A 5.87 N/A
Tax-Free Income
Service Shares 4.69 6.51% 3.91 5.43%
Investor A Shares 4.26 5.92 3.48 4.83
Institutional Shares 5.00 6.94 4.22 5.86
Intermediate Government Bond
Service Shares 5.42 N/A 5.05 N/A
Investor A Shares 5.15 N/A 4.78 N/A
Institutional Shares 5.74 N/A 5.37 N/A
Ohio Tax-Free Income
Service Shares 5.22 7.25 4.15 5.76
Investor A Shares 4.96 6.89 3.89 5.40
Institutional Shares 5.49 7.63 4.42 6.14
Investor B Shares 4.51 6.26 3.44 4.77
Pennsylvania Tax-Free
Income 5.11 7.10 4.79 6.65
Service Shares 4.73 6.57 4.41 6.13
Investor A Shares 5.38 7.47 5.06 7.03
Institutional Shares 4.42 6.14 4.10 5.69
Intermediate Bond
Service Shares 6.07 N/A 5.73 N/A
Investor A Shares 5.78 N/A 5.44 N/A
Institutional Shares 6.41 N/A 6.07 N/A
Government Income
Investor A Shares 6.69 N/A 5.24 N/A
Investor B Shares 6.37 N/A 4.92 N/A
</TABLE>
The Investor C Class had not commenced operations as of September 30, 1995.
The annualized yield information for the 30-day period ended January
31, 1996 for the New Jersey Tax-Free Income Portfolio and for the
predecessor portfolio to the International Bond Portfolio was as follows:
-109-
<PAGE>
<TABLE>
<CAPTION>
After Waivers Before Waivers
------------------------ ----------------------------
Tax-Equivalent Tax-Equivalent
Yield (assumes Yield (assumes
a Federal a Federal
income tax income tax
Portfolio Yield rate of 28%) Yield rate of 28%)
- ---------- ----- ------------ ----- ------------
<S> <C> <C> <C> <C>
New Jersey Tax-
Free Income
Portfolio
Service Shares % % % %
---- ---- ---- ----
Investor A
Shares
---- ---- ---- ----
Predecessor 5.27 N/A
Portfolio to the ---- ----
International Bond
Portfolio
</TABLE>
The annualized yield information for the 30-day period ended
March 31, 1996 for the Short Government Bond and Core Bond Portfolios
was as follows:
<TABLE>
<CAPTION>
After Waivers Before Waivers
------------- --------------
Portfolio Yield Yield
--------- ----- -----
<S> <C> <C>
Short Government Bond
Service Shares ___% ___%
Investor A Shares ___ ___
Institutional Shares ___ ___
Core Bond
Service Shares ___ ___
Investor A Shares ___ ___
Investor B Shares ___ ___
Institutional Shares ___ ___
</TABLE>
Other Information Regarding Investment Returns. In addition to
providing performance information that demonstrates the total return or
yield of shares of a particular class of a Portfolio over a specified
period of time, the Fund may provide certain other information
demonstrating hypothetical investment returns. Such information may
include, but is not limited to, illustrating the compounding effects of a
dividend in a dividend reinvestment plan or the impact of tax-free
investing. As illustrated below, the Fund may demonstrate, using certain
specified hypothetical data, the compounding effect of dividend
reinvestment on investments in a Non-Money Market Portfolio.
-110-
<PAGE>
The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising, sales literature, communications to shareholders and other
materials the benefits of tax-free investing. For example, Table 1 shows
taxpayers how to translate Federal tax savings from investments the income on
which is not subject to Federal income tax into an equivalent yield from a
taxable investment. Similarly, Tables 2, 3, 4, 5 and 6 show Pennsylvania, Ohio,
North Carolina, Virginia and New Jersey shareholders the approximate yield that
a taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of the Pennsylvania Municipal Money Market and
Pennsylvania Tax-Free Income Portfolios, the Ohio Municipal Money Market and
Ohio Tax-Free Income Portfolios, the North Carolina Municipal Money Market
Portfolio, the Virginia Municipal Money Market Portfolio, and the New Jersey
Municipal Money Market and New Jersey Tax-Free Income Portfolios, respectively.
The yields below are for illustration purposes only and are not intended to
represent current or future yields for the Money and Non-Money Market Municipal
Portfolios, which may be higher or lower than the yields shown.
-111-
<PAGE>
TABLE 1 - Federal Only
- ------- ------------
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1996 Taxable Marginal
Income Bracket Tax Rate/*/ 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -------------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $24,000 $ 0 - $40,100 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$24,001 - $58,150 $40,101 - $96,900 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$58,151 -$121,300 $96,901 -$147,700 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$121,301-$263,750 $147,701-$263,750 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $263,750 Over $263,750 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%
</TABLE>
/*/Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1996, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $117,950 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $117,950 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1996 is estimated to be from $117,950 to $240,451 and for married
taxpayers filing a joint return from $176,950 to $299,451. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1996.
-112-
<PAGE>
TABLE 2 - Federal and Pennsylvania
- ------- ------------------------
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1996 Federal Marginal
Taxable Income Bracket Tax Rate * 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ---------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 24,000 $ 0 - $40,100 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$24,001 - $ 58,150 $ 40,101 - $96,900 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$58,151 - $121,300 $ 96,901 -$147,700 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$121,301- $263,750 $147,701 -$263,750 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $263,750 Over $263,750 41.291% 5.110% 5.962% 6.813% 7.665% 8.517% 9.368% 10.220%
</TABLE>
*The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income taxes). If the standard deduction is taken for
Federal income tax purposes, the taxable equivalent yield required to equal a
specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1996, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $117,950 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $117,950 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1996 is
estimated to be from $117,950 to $240,451 and for married taxpayers filing a
joint return from $176,950 to $299,451. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1996.
-113-
<PAGE>
TABLE 3 - Federal and Ohio
- ------- ----------------
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
-------------------------------------------------------------
3 3.5 4 4.5 5 5.5 6
1996 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 24,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
24,001 - 40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001 - 58,150 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
58,151 - 80,000 31% 5.201% 34.59% 4.59% 5.35% 6.12% 6.88% 7.64% 8.41% 9.17%
80,001 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 121,300 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
121,301 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
<TABLE>
<CAPTION>
1996 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 40,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
40,001 - 40,100 15% 5.201% 19.42% 3.72% 4.34% 4.96% 5.58% 6.20% 6.82% 7.45%
</TABLE>
-114-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40,101- 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001 - 96,900 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
96,901 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 147,700 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
147,701 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
*The income brackets applicable to the state of Ohio do not correspond to the
Federal taxable income brackets. In addition, Ohio taxable income will likely
be different than Federal taxable income because it is computed by reference to
Federal adjusted gross income with specifically-defined Ohio modifications and
exemptions, and does not consider many of the deductions allowed from Federal
adjusted gross income in computing Federal taxable income. No other state tax
credits, exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals. For
1996, taxpayers with adjusted gross income in excess of a $117,950 threshold
amount are subject to an overall limitation on certain itemized deductions,
requiring a reduction in such deductions equal to the lesser of (i) 3% of
adjusted gross income in excess of the $117,950 threshold or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1996 is from $117,950 to $240,450 and for married taxpayers filing a
joint return the range is from $176,950 to $299,450. The Federal tax brackets,
the threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be further adjusted
for inflation for each year after 1996.
-115-
<PAGE>
Table 4 - Federal and North Carolina
- ------- --------------------------
<TABLE>
<CAPTION>
1996 Taxable North
Income Bracket Federal Carolina Combined Federal Tax-Exempt Yield
Marginal Marginal and North Carolina
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
------------- ------------ -------- -------- ------------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 12,750 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%
12,751 - 24,000 21,251 - 40,100 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
24,001 - 58,150 40,101 - 96,000 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
58,151 - 60,000 96,901 - 100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 121,300 100,001 - 147,000 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
121,301 - 263,750 147,701 - 263,000 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 263,750 Over 263,750 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 8.076% 8.974% 9.871% 10.768%
</TABLE>
*The taxable income brackets applicable to North Carolina do not correspond to
the Federal taxable income brackets. The taxable income brackets presented in
this table represent the breakpoints for both the Federal and North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable income
may be different than North Carolina taxable income. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at the
combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher-income individuals. For
1996, taxpayers with adjusted gross income in excess of $117,950 are subject to
an overall limitation on certain itemized deductions, requiring a reduction in
such deductions equal to the lesser of (i) 3% of adjusted gross income in excess
of $117,950 or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased out at the rate of
two percentage points for each $2,500 (or fraction thereof) of adjusted gross
income in the phase-out zone. For single taxpayers the range of adjusted gross
income comprising the phase-out zone for 1996 is from $117,950 to $240,451, and
for married taxpayers filing a joint return the range is from $176,950 to
$299,451. The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1996.
-116-
<PAGE>
Table 5 - Federal and Virginia
- ------- --------------------
<TABLE>
<CAPTION>
1995 Taxable
Income Bracket Federal Virginia Combined Federal Tax-Exempt Yield
Marginal Marginal and Virginia
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
------------- ------------ -------- -------- ------------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 22,750 0 - 38,000 15.0% 5.75% 19.888% 3.745% 4.369% 4.993% 5.617% 6.241% 6.865% 7.489%
22,751 - 55,100 38,001 - 91,850 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631% 7.368% 8.105% 8.842%
55,101 - 115,000 91,851 - 140,000 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920% 7.688% 8.457% 9.226%
115,001 - 250,000 140,001 - 250,000 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460% 8.289% 9.118% 9.947%
OVER 250,000 OVER 250,000 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905% 8.783% 9.661% 10.540%
</TABLE>
*The taxable income brackets applicable to Virginia do not correspond to the
Federal taxable income brackets. Because Virginia imposes a maximum tax rate of
5.75% on taxable income over $17,000, the taxable income brackets presented in
this table represent the breakpoints only for the Federal marginal tax rate
changes. When applying these brackets, Federal taxable income may be different
than Virginia taxable income. No state tax credits, exemptions, or local taxes
have been taken into account in arriving at the combined marginal tax rate. The
income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the table.
It is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1995, taxpayers with adjusted gross income in
excess of $114,700 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser of (i)
3% of adjusted gross income excess of $114,700 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1995 is
from $114,700 to $237,201 and for married taxpayers filing a joint return from
$172,050 to $294,551. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1995.
-117-
<PAGE>
Table 6 - Federal and New Jersey
- ------- ----------------------
<TABLE>
<CAPTION>
Approximate
Federal NJ Combined Federal Tax-Exempt Yield
1996 Taxable Marginal Marginal and N J
Income Bracket* Tax Rate Tax Rate Marginal Tax Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
---------------- -------- -------- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 24,000 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
24,001 - 35,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
35,001 - 40,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
40,001 - 58,150 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
58,151 - 75,000 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
75,001 -121,300 31.0% 6.370% 35.395% 4.643% 5.418% 6.191% 6.965% 7.739% 8.513% 9.287% 10.061% 10.835%
121,301 -263,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 263,750 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
Joint Return Taxable Yield - Joint Return
------------
0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 40,100 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
40,101 - 50,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
50,001 - 70,000 28.0% 2.450% *29.764% 4.271% 4.983% 5.695% 6.407% 7.189% 7.831% 8.543% 9.255% 9.966%
70,001 - 80,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
80,001 - 96,900 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
96,901 -147,700 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
147,701 -150,000 36.0% 5.525% *39.536% 4.961% 5.789% 6.616% 7.442% 8.269% 9.096% 9.923% 10.750% 11.577%
150,001 -263,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 263,750 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
</TABLE>
-118-
<PAGE>
* The taxable income brackets applicable to New Jersey do not correspond to
the Federal taxable income brackets. The taxable income brackets presented
in this table represent the breakpoints for both the Federal and New
Jersey marginal tax rate changes. When applying these brackets, Federal
taxable income will be different than New Jersey taxable income because
New Jersey does not start with Federal taxable income in computing its own
state income tax base. No state tax credits, exemptions, or local taxes
have been taken into account in arriving at the combined marginal tax
rate. The income amount shown is income subject to Federal income tax
reduced by adjustments to income, exemptions, and itemized deductions
(including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at
least as great as that shown in the table. It is assumed that the investor
is not subject to the alternative minimum tax. Where applicable, investors
should consider that the benefit of certain itemized deductions and the
benefit of personal exemptions are limited in the case of higher-income
individuals. For 1996, taxpayers with adjusted gross income in excess of
$117,950 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser
of (i) 3% of adjusted gross income in excess of $117,950 or (ii) 80% of
the amount of such itemized deductions otherwise allowable. The benefit of
each personal exemption is phased out at the rate of two percentage points
for each $2,500 (or fraction thereof) of adjusted gross income in the
phase-out zone. For single taxpayers the range of adjusted gross income
comprising the phase-out zone for 1996 is from $117,950 to $240,451, and
for married taxpayers filing a joint return the range is from $176,950 to
$299,451. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction, and the range over which
personal exemptions are phased out will be further adjusted for inflation
for each year after 1996.
-119-
<PAGE>
Miscellaneous. Yields on shares of a Portfolio may fluctuate daily and do
not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses and whether there are any
special account charges which may reduce the effective yield. The fees which
may be imposed by Service Organizations and other institutions on their
customers are not reflected in the calculations of total returns or yields for
the Portfolios.
When comparing a Portfolio's performance to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility.
Likewise, money market funds may offer greater stability of principal, but
generally do not offer the higher potential returns from stock mutual funds.
From time to time, a Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Portfolios to one another in appropriate categories over specific periods of
time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
-120-
<PAGE>
compilations or indices that may be developed and made available in the future.
The Fund may also from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on a Portfolio investment are
reinvested by being paid in additional Portfolio shares, any future income or
capital appreciation of a Portfolio would increase the value, not only of the
original investment in the Portfolio, but also of the additional Portfolio
shares received through reinvestment. The Fund may also include discussions or
illustrations of the potential investment goals of a prospective investor,
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives)
investment management techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Portfolio), as well as the views of the Portfolios'
adviser and/or sub-advisers as to current market, economy, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Portfolio. In
addition, selected indices may be used to illustrate historic performance of
select asset classes. The Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
treasury bills and shares of a Portfolio. In addition, advertisements,
shareholder communications or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in a Portfolio
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and investment alternative to certificates of deposit and other
financial instruments. Such advertisements or communicators may include
symbols, headlines or other material which highlight or summarize the
information discussed in more
-121-
<PAGE>
detail therein. Materials may includes lists of representative clients of the
Portfolios' investment advisers. Materials may refer to the CUSIP numbers of
the various classes of the Portfolios and may illustrate how to find the
listings of the Portfolios in newspapers and periodicals. Materials may also
include discussions of other Portfolios, products, and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
A Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate a Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the
Portfolio's percentage change in price movements over that period.
A Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. A Portfolio may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
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TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or their shareholders, and the discussion here
and in the Prospectuses is not intended as a substitute for careful tax
planning. Investors are urged to consult their tax advisers with specific
reference to their own tax situation.
Please note that for purposes of satisfying certain of the requirements for
taxation as a regulated investment company described below, upon its conversion
to a master fund-feeder fund structure the Index Equity Portfolio will be deemed
to own a proportionate share of the assets and gross income of the Index Master
Portfolio in which the Index Equity Portfolio invests all of its assets. Also,
with respect to the Index Equity Portfolio, the discussion below that relates to
the taxation of futures contracts and other rules pertaining to the timing and
character of income apply to the Index Master Portfolio.
Each Portfolio has elected and intends to qualify for taxation as a
regulated investment company under Part I of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Portfolio generally is exempt from Federal income tax on its net
investment income and realized capital gains that it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of (a) 90% of its investment company taxable income (net investment income and
the excess of net short-term capital gain over net long-term capital loss, if
any, for the year) and (b) 90% of its net tax-exempt interest income, if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below. Distributions of investment
company taxable income and net tax-exempt interest income made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement") and derive less than 30% of
its gross income from the sale or other disposition of stock, securities and
certain other investments (including foreign currencies or options, futures or
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forward contracts on foreign currencies but only to the extent that such
currencies or options, futures or forward contracts are not directly related to
the Portfolio's principal business of investing in stock or securities) held for
less than three months (the "Short-Short Gain Test"). Future Treasury
regulations may provide that foreign currency gains that are not "directly
related" to a Portfolio's principal business of investing in stock or securities
will not satisfy the Income Requirement. Interest (including original issue
discount and "accrued market discount") received by a Portfolio at maturity or
upon disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security held for less than three months for purposes of the Short-Short Gain
Test. However, any other income that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each of the Money and Non-Money Market Municipal Portfolios is designed to
provide investors with tax-exempt interest income. Shares of the Money and Non-
Money Market Municipal Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Portfolio's dividends being
tax-exempt but also such dividends would be taxable when distributed to the
beneficiary. In addition, the Money and Non-Money Market Municipal Portfolios
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by private activity bonds or "related person" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and (a) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, (b)
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who occupies more than 5% of the entire usable area of such facilities, or (c)
for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
corporation and its shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, all shareholders
required to file a Federal income tax return are required to report the receipt
of exempt interest dividends and other exempt interest on their returns.
Moreover, while such dividends and interest are exempt from regular Federal
income tax, they may be subject to alternative minimum tax (currently imposed at
the rate of 26% (28% on the taxable excess over $175,000) or 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers) in two circumstances. First, exempt interest dividends derived from
certain "private activity" bonds issued after August 7, 1986, generally will
constitute an item of tax preference for both corporate and non-corporate
taxpayers. Second, exempt interest dividends derived from all bonds, regardless
of the date of issue, must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum tax purposes. Receipt of
exempt interest dividends may result in collateral Federal income tax
consequences to certain other taxpayers, including financial institutions,
property and casualty insurance companies, individual recipients of Social
Security or Railroad Retirement benefits, and foreign corporations engaged in
trade or business in the United States. Prospective investors should consult
their own tax advisors as to such consequences .
If a Money or Non-Money Market Municipal Portfolio distributes exempt
interest dividends during the shareholder's taxable year, no deduction generally
will be allowed for any interest expense on indebtedness incurred to purchase or
carry shares of such Portfolio.
The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios
are not subject to the Ohio personal income tax, school district income taxes in
Ohio, the Ohio corporation franchise tax, or the Ohio dealer in intangibles tax,
provided
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that, with respect to the Ohio corporation franchise tax and the Ohio dealer in
intangibles tax, the Fund timely files the annual report required by Section
5733.09 of the Ohio Revised Code. Distributions with respect to shares of the
Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios properly
attributable to proceeds of insurance paid to those Portfolios that represent
maturing or matured interest on defaulted Obligations held by those Portfolios
and that are excluded from gross income for federal income tax purposes will not
be subject to Ohio personal income tax or municipal or school district income
taxes in Ohio, nor included in the net income base of the Ohio corporation
franchise tax.
Distributions of exempt-interest dividends, to the extent attributable to
interest on North Carolina Municipal Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax.
An investment in a Portfolio (including the North Carolina Municipal Money
Market Portfolio) by a corporation subject to the North Carolina franchise tax
will be included in the capital stock, surplus and undivided profits base in
computing the North Carolina franchise tax. Investors in a Portfolio including,
in particular, corporate investors which may be subject to the North Carolina
franchise tax, should consult their tax advisors with respect to the effects on
such tax of an investment in a Portfolio and with respect to their North
Carolina tax situation in general.
Distributions of investment company taxable income will be taxable (other
than the possible allowance of the dividends received deduction described below)
to shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any
distribution from a Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. The Money Market
and Non-Money Market Municipal Portfolios may each purchase securities that do
not bear Tax-Exempt Interest. Any income on such securities recognized by the
Portfolio will be distributed and will be taxable to its shareholders.
Each Portfolio intends to distribute to shareholders any of its excess of
net long-term capital gain over net short-term
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capital loss ("net capital gain") for each taxable year. Such gain is
distributed as a capital gain dividend and is taxable to shareholders as long-
term capital gain, regardless of the length of time the shareholder has held his
shares, whether such gain was recognized by the Portfolio prior to the date on
which a shareholder acquired shares of the Portfolio and whether the
distribution was paid in cash or reinvested in shares.
In the case of corporate shareholders, distributions (other than capital
gain dividends) of a Non-Money Market Portfolio for any taxable year generally
qualify for the dividends received deduction to the extent of the gross amount
of "qualifying dividends" received by such Portfolio for the year. Generally, a
dividend will be treated as a "qualifying dividend" if it has been received from
a domestic corporation. Distributions of net investment income from debt
securities and of net realized short-term capital gains will be taxable to
shareholders as ordinary income and will not be treated as "qualifying
dividends" for purposes of the dividends received deduction.
Ordinary income of individuals will be taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains will
be taxable at a maximum rate of 28%. Capital gains and ordinary income of
corporate taxpayers are both taxed at a maximum nominal rate of 35%, but at
marginal rates of 39% for taxable income between $100,000 and $335,000 and 38%
for taxable income between $15,000,000 and 18,333,333.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares. For shareholders of the Non-Money Market Portfolios, any
loss incurred on the sale or exchange of a Portfolio's shares, held six months
or less, will be disallowed to the extent of exempt-interest dividends paid with
respect to such shares, and any loss not so disallowed will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Generally, futures contracts held by a Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time a Portfolio holds the futures contract
("the 40-60 rule"). The
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amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Portfolio in a
prior year as a result of the constructive sale of the contracts. With respect
to futures contracts to sell, which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by the Portfolio, losses as to such contracts to sell will be
subject to certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which also will
be applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed not
to begin prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Portfolio may make an election
which will exempt (in whole or in part) those identified futures contracts from
being treated for Federal income tax purposes as sold on the last business day
of the Fund's taxable year, but gains and losses will be subject to such short
sales, wash sales, loss deferral rules and the requirement to capitalize
interest and carrying charges. Under temporary regulations, a Portfolio would
be allowed (in lieu of the foregoing) to elect either (1) to offset gains or
losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40-60 rule will apply to the net gain or loss attributable to the
futures contracts, but in the case of a mixed straddle account election, not
more than 50% of any net gain may be treated as long-term and no more than 40%
of any net loss may be treated as short-term. Options on futures contracts
generally receive Federal tax treatment similar to that described above.
The Internal Revenue Service has issued a private letter ruling with
respect to certain other investment companies to the following effect: gains
realized from a futures contract to purchase or to sell will be treated for
purposes of the Short-Short Gain Test as being derived from a security held for
three months or more regardless of the actual period for which the contract is
held if the gain arises as a result of a constructive sale of the contract at
the end of the taxable year as described above, and will be treated as being
derived from a security held for less than three months only if the contract is
terminated (or transferred) during the taxable year (other than by reason of
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mark-to-market) and less than three months elapses between the date the contract
is acquired and the termination date. Although private letter rulings are not
binding on the Internal Revenue Service with respect to the Portfolios, the Fund
believes that the Internal Revenue Service would take a comparable position with
respect to the Portfolios. In determining whether the Short-Short Gain Test is
met for a taxable year, increases and decreases in the value of a Portfolio's
futures contracts and securities that qualify as part of a "designated hedge,"
as defined in the Code, may be netted.
Special rules govern the Federal income tax treatment of the portfolio
transactions of the International Equity, International Emerging Markets and
International Bond Portfolios and certain transactions of the other Portfolios
that are denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, certain preferred stock); (ii) the accruing of certain trade
receivables and payables; (iii) the entering into or acquisition of any forward
contract or similar financial instruments; and (iv) the entering into or
acquisition of any futures contract, option or similar financial instrument, if
such instrument is not marked-to-market. The disposition of a currency other
than the U.S. dollar by a U.S. taxpayer also is treated as a transaction subject
to the special currency rules. With respect to such transactions, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts that are capital assets
in the hands of the taxpayer and which are not part of a straddle ("Capital
Asset Election"). In accordance with Treasury regulations, certain transactions
with respect to which the taxpayer has not made the Capital Asset Election and
that are part of a "Section 988 hedging transaction" (as defined in the Code and
the Treasury regulations) are integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" (as identified by such Treasury regulations) are not subject to
the mark-to-market or loss deferral rules under the Code. Some of the non-U.S.
dollar-denominated investments that the Portfolios may make (such as non-U.S.
dollar-denominated debt securities and obligations and preferred stock) and some
of the foreign currency contracts the International Equity, International
Emerging Markets and International Bond Portfolios may enter into will be
subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Portfolio which is not subject to
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the special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss and will not
be segregated from the gain or loss on the underlying transaction.
In addition, certain forward foreign currency contracts held by a
Portfolio at the close of the Fund's taxable year will be subject to "mark-to-
market" treatment. If the Fund makes the Capital Asset Election with respect to
such contracts, the contract will be subject to the 40-60 rule described above.
Otherwise, such gain or loss will be ordinary in nature. To receive such
Federal income tax treatment, a foreign currency contract must meet the
following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under these
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information the Treasury has not issued any such
regulations. Forward foreign currency contracts entered into by the
International Equity, International Emerging Markets and International Bond
Portfolios also may result in the creation of one or more straddles for Federal
income tax purposes, in which case certain loss deferral, short sales, and wash
sales rules and requirements to capitalize interest and carrying charges may
apply.
If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal Obligations)
will be taxable as ordinary dividends to the extent of such Portfolio's current
and accumulated earnings and profits. Such distributions will be eligible for
the dividends received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Portfolio intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of the each calendar year to avoid liability for this
excise tax.
The Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either
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an incorrect tax identification number or no number at all, (ii) who is subject
to backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or (iii) who has failed to
certify to the Fund when required to do so that he is not subject to backup
withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectus, shares will be fully
paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
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The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be paid in cash or by distribution of the securities or
other consideration received from the sale and conveyance; (ii) sell and convert
the assets belonging to one or more classes of shares into money and, in
connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of shares
if the Board of Trustees reasonably determines that such combination will not
have a material adverse effect on the shareholders of any class participating in
such combination and, in connection therewith, to cause all outstanding shares
of any such class to be redeemed or converted into shares of another class of
shares at their net asset value. The Board of Trustees may authorize the
termination of any class of shares after the assets belonging to such class have
been distributed to its shareholders.
MISCELLANEOUS
Counsel. The law firm of Drinker Biddle & Reath, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel.
The law firm of Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square,
Philadelphia, Pennsylvania 19103, serves as the Trust's counsel.
Independent Accountants. Coopers & Lybrand, LLP, serves as the Fund's
and the Trust's independent accountants.
Five Percent Owners. The name, address and percentage ownership of
each person that on May 16, 1996 owned of record or beneficially 5% or more of
the outstanding shares of a Portfolio which had commenced operations as of that
date was as follows:
Money Market Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
- ----------------------
75.5%; PNC Bank Ohio, 201 E. Fifth Street, Cincinnati, OH 45202, 7.9%; U.S.
----
Treasury Money Market Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester,
- -------------------------------
PA 19113, 77.3%; MidLantic National Bank, Edison, NJ 08818-0600, 10.6%;
Municipal Money Market Portfolio: PNC Bank Ohio, 201 E. Fifth St., Cincinnati,
- --------------------------------
OH 45202, 5.2%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 81.6%;
Ohio Municipal Money Market Portfolio: BHC Securities, One Commerce Square, 2005
- -------------------------------------
Market St, Phila., PA 19103, 21.4%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA
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19113, 41.0%; Wayne County National Bank, P.O. Box 550, Wooster, OH 44691, 6.8%;
Consolidated Stores Corp., 300 Phillipi Road, Columbus, OH 43228, 22.4%; North
-----
Carolina Municipal Money Market Portfolio: Centura Bank, P.O. Box 1220, Rocky
- -----------------------------------------
Mount, NC 27802, 5.1%; United Carolina Bank Whiteville, P.O. Drawer 632,
Whiteville, NC 28472, 25.2%; McWood & Co., First Citizens Bank, P.O. Box 29522,
Raleigh, NC 27626, 17.6%; North Carolina Trust Co., 301 North Elm St.,
Greensboro, NC 27402, 26.5%; Central Carolina Bank & Trust Co., P.O. Box 30010,
Durham, NC 27702, 5.7%; Pennsylvania Municipal Money Market Portfolio: PNC Bank,
---------------------------------------------
200 Stevens Dr., Suite 260, Lester, PA 19113, 74.8%; Janney Montgomery Scott,
1801 Market Street, Philadelphia, PA 19103, 7.3%; Virginia Municipal Money
------------------------
Market Portfolio: Oldom & Co., First Virginia Bank Inc., 6400 Arlington Blvd.,
- ----------------
Falls Church, VA 22042, 56.7%; American National Bank & Trust Co, 628 Main St,
Danville, VA 24543, 17.1%; New Jersey Municipal Money Market Portfolio: BHC
-------------------------------------------
Securities, 2005 Market St., Phila., PA 19103, 8.8%; PNC Bank, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 69.7%; Janney Montgomery Scott, 1801 Market Street,
Phila., PA 19103, 14.4%; Managed Income Portfolio: PNC Bank, 200 Stevens Dr.,
------------------------
Suite 260, Lester, PA 19113, 93.2%; Tax-Free Income Portfolio: PNC Bank, 200
-------------------------
Stevens Dr., Suite 260, Lester, PA 19113, 84.4%; Ohio Tax-Free Income Portfolio:
------------------------------
BHC Securities, 100 N. 20th Street, Phila., PA 19103, 28.0%; PNC Bank, 200
Stevens Dr., Suite 260, Lester, PA 19113, 61.7%; Pennsylvania Tax-Free Income
----------------------------
Portfolio: BHC Securities, 100 N. 20th St., Phila., PA 19103, 32.5%; PNC Bank,
- ---------
200 Stevens Dr., Suite 260, Lester, PA 19113, 37.9%; New Jersey Tax-Free Income
--------------------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 49.9%;
- ---------
Intermediate Government Bond Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
- --------------------------------------
Lester, PA 19113, 93.6%; Short Government Bond Portfolio: PNC Bank, 200 Stevens
-------------------------------
Dr., Suite 260, Lester, PA 19113, 89.2%; Intermediate Bond Portfolio: PNC Bank,
---------------------------
200 Stevens Dr., Suite 260, Lester, PA 19113, 95.2%; Government Income
-----------------
Portfolio: BHC Securities, 100 N. 20th St., Phila., PA 19103, 18.6%;
- ---------
International Emerging Markets Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
- ----------------------------------------
Lester, PA 19113, 92.4%; Growth Equity Portfolio: PNC Bank, 200 Stevens Dr.,
-----------------------
Suite 260, Lester, PA 19113, 96.1%; Index Equity Portfolio: PNC Bank, 200
----------------------
Stevens Dr., Suite 260, Lester, PA 19113, 90.6%; Small Cap Value Equity
----------------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 77.2%;
- ---------
National City Bank Kentucky, P.O. Box 94777, Cleveland, OH 44101, 7.8%;
International Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
- ------------------------------
19113, 91.2%; Balanced Portfolio: BHC Securities, 100 N. 20th St., Phila., PA
------------------
19103, 18.5%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 68.4%;
Value Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
- ----------------------
89.2%; Small Cap Growth Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
---------------------------------
Lester, PA 19113, 86.5%; and Select Equity Portfolio: PNC Bank, 200 Stevens Dr.,
-----------------------
Suite 260, Lester, PA 19113, 97.1%; International Bond Portfolio: PNC Bank, 200
----------------------------
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<PAGE>
Stevens Dr., Suite 260, Lester, PA 19113, 78.2%; and Core Bond Portfolio: PNC
-------------------
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 94.2%.
On May __, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a national bank organized under the laws of the
United States. All of the capital stock of PNC Bank is owned by PNC Bancorp,
Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp.,
a publicly-held bank holding company.
Banking Laws. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. PAMG, PIMC, BlackRock, PCM, PEAC,
CastleInternational, PNC Bank and Institutions that are banks or bank affiliates
are subject to such banking laws and regulations. In addition, state securities
laws on this issue may differ from the interpretations of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.
PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational and PNC Bank
believe they may perform the services for the Fund contemplated by their
respective agreements with the Fund without violation of applicable banking laws
or regulations. It should be noted, however, that there have been no cases
deciding whether bank and non-bank subsidiaries of a registered bank holding
company may perform services comparable to those that are to be performed by
these companies, and future changes in either Federal or state statutes and
regulations relating to permissible activities of banks and their subsidiaries
or affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
these companies from continuing to perform such services for the Fund. If such
were to occur, it is expected that the Board of Trustees would recommend that
the Fund enter into new agreements or would consider the possible termination of
the Fund. Any new advisory or sub-advisory agreement would normally be subject
to shareholder approval.
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<PAGE>
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of its Shares, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operations with respect to its Shares. It is not
anticipated, however, that any change in the Fund's method of operations would
affect its net asset value per share or result in a financial loss to any
shareholder.
Shareholder Approvals. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
FINANCIAL STATEMENTS
All Portfolios, except the International Bond, New Jersey Tax-Free
Income, New Jersey Municipal Money Market, Short Government Bond, Core Bond and
Index Master Portfolios. The audited financial statements and notes thereto in
the Fund's Annual Report to Shareholders for the fiscal year ended September 30,
1995 (the "1995 Annual Report") are incorporated in this Statement of Additional
Information by reference. No other parts of the 1995 Annual Report are
incorporated by reference herein. The financial statements included in the 1995
Annual Report have been audited by the Fund's independent accountants, Coopers &
Lybrand, LLP, whose reports thereon are incorporated herein by reference. Such
financial statements have been incorporated herein in reliance upon such reports
given upon their authority as experts in accounting and auditing. Additional
copies of the 1995 Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.
Short Government Bond and Core Bond Portfolios. The Short Government
Bond and Core Bond Portfolios commenced operations as separate investment
portfolios of The BFM Institutional Trust Inc. (the "Predecessor BFM
Portfolios"), and were transferred to the Fund on January 13, 1996. The audited
financial statements and notes thereto for the Short Government Bond and Core
Bond Portfolios contained in their Report to Shareholders dated March 31, 1996
(the "March Report") are incorporated by reference into this Statement of
Additional Information. No other parts of the March Report are incorporated by
reference herein. The financial
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<PAGE>
statements included in the March Report for the period ended March 31, 1996 have
been audited by the Fund's independent accountants, Coopers & Lybrand, LLP,
whose report thereon is incorporated herein by reference. The financial
statements included in the March Report for each of the two years in the period
ended June 30, 1995, and for the period from July 17, 1992 through June 30, 1993
for the Short Government Bond Portfolio and the period from December 9, 1992
through June 30, 1993 for the Core Bond Portfolio, have been audited by the
former independent accountants of the Predecessor BFM Portfolios, Deloitte &
Touche, LLP, whose report thereon is also incorporated herein by reference. Such
financial statements have been incorporated herein by reference in reliance on
the reports of Coopers & Lybrand, LLP and Deloitte & Touche, LLP given upon
their authority as experts in accounting and auditing. Additional copies of the
March Report may be obtained at no charge by telephoning the Distributor at the
telephone number appearing on the front page of this Statement of Additional
Information.
International Bond, New Jersey Municipal Money Market and New Jersey
Tax-Free Income Portfolios. The International Bond, New Jersey Municipal Money
Market and New Jersey Tax-Free Income Portfolios commenced operations as
separate investment portfolios of The Compass Capital Group of Funds, and were
transferred to the Fund on February 13, 1996 (International Bond Portfolio) and
January 13, 1996 (New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios), respectively. The audited financial statements for the
International Bond, New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios contained in their Reports to Shareholders dated January 31,
1996 (the "January Reports") are incorporated by reference into this Statement
of Additional Information. No other parts of the January Reports are
incorporated by reference herein. The financial statements included in the
January Reports have been audited by the Fund's independent accountants, Coopers
& Lybrand, LLP, whose reports thereon are incorporated herein by reference.
Such financial statements have been incorporated herein by reference in reliance
upon such reports given upon their authority as experts in accounting and
auditing. Additional copies of the January Reports may be obtained at no charge
by telephoning the Distributor at the telephone number appearing on the front
page of this Statement of Additional Information.
Index Master Portfolio. The audited financial statements for the U.S.
Large Company Series of The DFA Investment Trust Company (the "DFA Company")
contained in its Report to Shareholders dated November 30, 1995 (the "Index
Master Report") are incorporated by reference into this Statement of Additional
Information. No other parts of the Index Master Report are incorporated by
reference herein. The financial statements included in the Index Master Report
have been audited by the DFA Company's independent accountants, Coopers &
Lybrand, LLP, whose
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<PAGE>
reports thereon are incorporated herein by reference. Such financial statements
have been incorporated herein by reference in reliance upon such reports given
upon their authority as experts in accounting and auditing. Additional copies of
the Index Master Report may be obtained at no charge by telephoning the DFA
Company at _______________.
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<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 rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE>
year or less which is issued by United States commercial banks, thrifts and non-
bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
A-4
<PAGE>
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and
A-5
<PAGE>
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are
A-6
<PAGE>
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
A-7
<PAGE>
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A-9
<PAGE>
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
A-10
<PAGE>
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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<PAGE>
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
COMPASS CAPITAL FUNDS(R)
(FORMERLY, THE PNC(R) FUND)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A of the Registration Statement are the
following tables:
(i) Audited Financial Highlights for the Money Market, U.S.
Treasury Money Market, Municipal Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, Value Equity, Growth Equity,
Small Cap Value Equity, Small Cap Growth Equity,
International Equity, International Emerging Markets,
Select Equity, Index Equity, Balanced, Intermediate
Government Bond, Intermediate Bond, Managed Income,
Tax-Free Income, Pennsylvania Tax-Free Income,
Government Income and Ohio Tax-Free Income Portfolios
for the fiscal years ended September 30, 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 period ended
January 31, 1996 and the fiscal years ended February
28, 1995, February 28, 1994, February 28, 1993 and
February 29, 1992.
(iii) Audited Financial Highlights for the Short Government
Bond and Core Bond Portfolios for the period ended
March 31, 1996 and the fiscal years ended June 30,
1995, June 30, 1994 and June 30, 1993.
C-1
<PAGE>
(2) Incorporated by reference into Part B of the Registration
Statement are the following audited financial statements:
(i) With respect to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market and Virginia Municipal
Money Market Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1995;
Statements of Net Assets -September 30, 1995;
Statements of Operations for the year ended
September 30, 1995;
Statements of Changes in Net Assets for the year
ended September 30, 1995;
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, 1995;
Schedules of Investments with respect to the
International Equity Portfolio - September 30,
1995;
Statements of Assets and Liabilities - September
30, 1995;
Statements of Net Assets -September 30, 1995;
Statements of Operations for the year ended
September 30, 1995;
C-2
<PAGE>
Statements of Changes in Net Assets for the year
ended September 30, 1995;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Intermediate Bond and
Government Income Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1995;
Statements of Net Assets -September 30, 1995;
Statements of Operations for the year ended
September 30, 1995;
Statements of Changes in Net Assets for the year
ended September 30, 1995;
Notes to Financial Statements.
(iv) With respect to the International Bond, New Jersey Tax-
Free Income and New Jersey Municipal Money Market
Portfolios:
Reports of Independent Accountants for the period
ended January 31, 1996;
Statements of Net Assets for the period ended
January 31, 1996 (New Jersey Tax-Free Income and
New Jersey Municipal Money Market Portfolios);
Schedule of Investments - January 31, 1996
(International Bond Portfolio);
Statement of Assets and Liabilities - January 31,
1996 (International Bond Portfolio);
C-3
<PAGE>
Statements of Operations for the period ended
January 31, 1996;
Statements of Changes in Net Assets for the period
ended January 31, 1996;
Notes to Financial Statements.
(v) With respect to the Short Government Bond and Core Bond
Portfolios:
Report of Independent Accountants for the period
ended March 31, 1996;
Schedules of Investments - March 31, 1996;
Statements of Assets and Liabilities - March 31,
1996;
Statements of Operations for the period ended
March 31, 1996;
Statements of Changes in Net Assets for the period
ended March 31, 1996;
Notes to Financial Statements.
(vi) With respect to the Multi-Sector Mortgage Securities
Portfolio III:
Report of Independent Auditors for the fiscal year
ended June 30, 1995;
Portfolio of Investments - June 30, 1995;
Statement of Assets and Liabilities - June 30,
1995;
Statement of Operations for the year ended June
30, 1995;
Statement of Cash Flows for the year ended June
30, 1995;
Statement of Changes in Net Assets for the year
ended June 30, 1995;
C-4
<PAGE>
Notes to Financial Statements.
(vii) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Report of Independent Accountants for the fiscal
year ended November 30, 1995;
Statement of Net Assets - November 30, 1995;
Statement of Operations for the year ended
November 30, 1995;
Statement of Changes in Net Assets for the year
ended November 30, 1995;
Notes to Financial Statements.
(b) Exhibits:
(1) (a) Declaration of Trust of the Registrant dated December
22, 1988 is incorporated herein by reference to Exhibit
(1) of Registrant's Registration Statement on Form N-1A
filed on December 23, 1988.
(b) Amendment No. 1 to Declaration of Trust is incorporated
herein by reference to Exhibit (1)(b) of Pre-Effective
Amendment No. 2 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1989.
(c) Amendment No. 2 to the Declaration of Trust dated
December 23, 1993 is incorporated herein by reference
to Exhibit (1)(c) of Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A filed
on July 8, 1994.
(2) Registrant's Code of Regulations is incorporated herein
by reference to Exhibit (2) of Form N-1A, filed on
December 23, 1988.
(3) None.
C-5
<PAGE>
(4) (a) Specimen Copies of Share Certificates for Shares of
beneficial interest in Class A-1, Class A-2, Class A-3,
Class B-1, Class B-2, Class B-3, Class C-1, Class C-2,
Class C-3, Class D-1, Class D-2, Class D-3, Class E-1,
Class E-2, Class E-3, Class F-1, Class F-2, Class F-3,
Class G-1, Class G-2, Class G-3, Class H-1, Class H-2,
Class H-3, Class I-1, Class I-2, Class I-3, Class J-1,
Class J-2, Class J-3, Class K-1, Class K-2, Class K-3,
Class L-1, Class L-2, Class L-3, Class M-1, Class M-2,
Class M-3, Class N-1, Class N-2, Class N-3, Class O-1,
Class O-2, Class O-3, Class P-1, Class P-2, Class P-3
of the Registrant are incorporated herein by reference
to Exhibit 4 of Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A filed
on May 8, 1992.
(b) Form of Share Certificates for Shares of beneficial
interest in Class Q-1, Class Q-2, Class Q-3, Class R-1,
Class R-2, Class R-3, Class S-1, Class S-2, Class S-3,
Class T-1, Class T-2, Class T-3, Class U-1, Class U-2,
Class U-3 of the Registrant are incorporated herein by
reference to Exhibit 4(b) of Post-Effective Amendment
No. 8 to Registrant's Registration Statement on Form N-
1A filed on January 22, 1993.
(c) Form of Share Certificates for Shares of beneficial
interest in Class V-1, Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3 of the Registrant is
incorporated herein by reference to Exhibit (4)(c) of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A filed on November
10, 1993.
(d) Form of Share Certificates for Shares of beneficial
interest in Class Z-1, Class Z-2 and Class Z-3 of the
Registrant is incorporated herein by reference to
Exhibit (4)(d) of Post-Effective Amendment No. 15 to
Registrant's
C-6
<PAGE>
Registration Statement on Form N-1A filed on May 11,
1995.
(e) Form of Share Certificates for Shares of beneficial
interest in Class AA-1, Class AA-2, Class AA-3; Class
AA-4; Class BB-1, Class BB-2, Class BB-3 and Class BB-
4; and Class CC-1, Class CC-2, Class CC-3 and Class CC-
4 is incorporated herein by reference to Exhibit (4)(e)
of Post-Effective Amendment No. 18 to Registrant's
Registration Statement on Form N-1A filed on October
12, 1995.
(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.
(b) Investment Advisory Agreement between Registrant and
BlackRock Financial Management, Inc. with respect to
the Multi-Sector Mortgage Securities Portfolio III.
(c) Sub-Advisory Agreements between PNC Asset Management
Group, Inc. and BlackRock Financial Management, Inc./
Provident Capital Management, Inc./ PNC Equity Advisors
Company/ PNC Institutional Management Corporation/
Morgan Grenfell Investment Services Limited/ and
CastleInternational Asset Management Limited.
(6) (a) Distribution Agreement between Registrant and Provident
Distributors, Inc. dated January 31, 1994 is
incorporated herein by reference to Exhibit (6)(a) of
Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A filed on July 8,
1994.
(b) Form of Appendix A to the Distribution Agreement
between Registrant and Provident Distributors, Inc. is
incorporated herein by reference to Exhibit (6)(b) of
Post-Effective Amendment No. 18 to Registrants
C-7
<PAGE>
Registration Statement on Form N-1A filed on October
12, 1995.
(c) Amendment No. 2 to the Distribution Agreement between
Registrant and Provident Distributors, Inc. dated
October 18, 1994 is incorporated herein by reference to
Exhibit 6(c) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(d) Amendment No. 3 to the Distribution Agreement between
Registrant and Provident Distributors, Inc.
(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) Form of Appendix B to Custodian Agreement dated October
4, 1989 between Registrant and PNC Bank, National
Association is incorporated herein by reference to
Exhibit (8)(d) of Post-
C-8
<PAGE>
Effective Amendment No. 18 to Registrant's Registration
Statement on Form N-1A filed on October 12, 1995.
(e) Sub-Custodian Agreement dated April 27, 1992 among the
Registrant, PNC Bank, National Association and The
Chase Manhattan Bank is incorporated herein by
reference to Exhibit (8)(e) of Post-Effective Amendment
No. 10 to Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(f) Global Sub-Custody Agreement between Barclays Bank PLC
and PNC Bank, National Association dated October 28,
1992 is incorporated herein by reference to Exhibit
(8)(e) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(g) Custodian Agreement between State Street Bank and Trust
Company and PNC Bank, National Association dated June
13, 1983 is incorporated herein by reference to Exhibit
(8)(f) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(h) Amendment No. 1 to Custodian Agreement between State
Street Bank and Trust Company and PNC Bank dated
November 21, 1989 is incorporated herein by reference
to Exhibit (8)(g) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(i) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to the Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit 8(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(j) Letter Agreement between Registrant and PNC Bank,
National Association relating
C-9
<PAGE>
to custodian services with respect to the Ohio
Municipal Money Market, Pennsylvania Municipal Money
Market, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Value Equity, Index
Equity and Small Cap Value Equity Portfolios is
incorporated herein by reference to Exhibit (8)(e) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(k) Letter Agreement dated March 1, 1993 between Registrant
and PNC Bank, National Association relating to
custodian services with respect to the North Carolina
Municipal Money Market, Short-Term Bond, Intermediate-
Term Bond, Small Cap Growth Equity and Core Equity
Portfolios is incorporated herein by reference to
Exhibit (8)(h) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A filed
on November 10, 1993.
(9) (a) Co-Administration Agreement among Registrant, Compass
Distributors, Inc. Distributors, Inc. and PFPC Inc.
(b) Co-Administration Agreement between Registrant and
Compass Capital Group, Inc.
(c) 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.
(d) Amendment No. 1 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit 9(h) of
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A filed on February
5, 1992.
C-10
<PAGE>
(e) Amendment No. 2 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Pennsylvania Municipal Money Market,
Ohio Municipal Money Market, Intermediate Government,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Value Equity, Index Equity and Small Cap Value Equity
Portfolios is incorporated herein by reference to
Exhibit 9(h) of Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A filed
on December 13, 1991.
(f) 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.
(g) 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.
(h) Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is incorporated herein by
reference to Exhibit (9)(k) of Post-Effective Amendment
No. 18 to Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
C-11
<PAGE>
(i) 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 Coopers & Lybrand, LLP.
(b) Consent of Deloitte & Touche LLP.
(c) Consent of Drinker Biddle & Reath.
(12) None.
(13) (a) Purchase Agreement between Registrant and Shearson
Lehman Hutton Inc. ("Shearson") relating to Classes A-
1, B-1, C-1, D-2, E-2, F-2 and G-2 is incorporated
herein by reference to Exhibit 13(a) of Post-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-1A filed on December 29, 1989.
(b) Purchase Agreement between Registrant and Shearson
relating to shares of Class H-2 is incorporated herein
by reference to Exhibit 13(b) of Post-Effective
Amendment No. 2 to Registrant's Registration Statement
on Form N-1A filed on April 30, 1990.
(c) Purchase Agreement between Registrant and Shearson
relating to shares of Class I-1, Class I-2, Class J-1,
Class J-2, Class K-2, Class L-2, Class M-2, Class N-2,
Class O-2 and Class P-2 is incorporated herein by
reference to Exhibit 13(c) of Post-Effective Amendment
No. 4 to Registrant's Registration Statement on Form N-
1A filed on December 13, 1991.
1. Filed on November 14, 1995, February 12, 1996, March 28, 1996, April 25,
1996 and May 28, 1996 under Rule 24f-2 as part of Registrant's Rule 24f-2
Notice.
C-12
<PAGE>
(d) Purchase Agreement between Registrant and Shearson
relating to shares of Class D-1, Class E-1, Class F-1,
Class G-1, Class H-1, Class K-1, Class L-1, Class M-1,
Class N-1, Class O-1, Class P-1, Class A-2, Class B-2,
Class C-2, Class I-2, Class J-2, Class A-3, Class B-3,
Class C-3, Class D-3, Class E-3, Class F-3, Class G-3,
Class H-3, Class I-3, Class J-3, Class K-3, Class L-3,
Class M-3, Class N-3, Class O-3 and Class P-3 is
incorporated herein by reference to Exhibit (13)(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(e) Purchase Agreement between the Registrant and
Pennsylvania Merchant Group Ltd relating to shares of
Class Q-1, Class Q-2, Class Q-3, Class R-1, Class R-2,
Class R-3, Class S-1, Class S-2, Class S-3, Class T-1,
Class T-2, Class T-3, Class U-1, Class U-2 and Class U-
3 is incorporated herein by reference to Exhibit
(13)(e) of Post-Effective No. 10 to Registrant's
Registration Statement on Form N-1A as filed on
November 10, 1993.
(f) Purchase Agreement dated September 30, 1994 between the
Registrant and Provident Distributors, Inc. relating to
shares of Class A-4, Class D-4, Class E-4, Class F-4,
Class G-4, Class H-4, Class K-4, Class L-4, Class M-4,
Class N-4, Class O-4, Class P-4, Class R-4, Class S-4,
Class T-4, Class U-4, Class W-4, Class X-4, Class Y-4
is incorporated herein by reference to Exhibit (13)(f)
of Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A filed on January
18, 1995.
(g) Purchase Agreement dated February 1, 1994 between the
Registrant and Provident Distributors, Inc. relating to
shares of Class V-1, Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3 is
C-13
<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) Form of Purchase Agreement between Registrant and
Provident Distributors, Inc. relating to shares of
Class AA-1, Class AA-2, Class AA-3, Class AA-4; Class
BB-1, Class BB-2, Class BB-3 and Class BB-4; and Class
CC-1, Class CC-2, Class CC-3 and Class CC-4 is
incorporated herein by reference to Exhibit (13)(i) of
Post-Effective Amendment No. 18 to Registrant's
Registration Statement on Form N-1A filed on October
12, 1995.
(14) None.
(15) Amended and Restated Distribution and Service Plan for
Service, Series A Investor, Series B Investor, Series C
Investor and Institutional Shares.
(16) Schedules for computation of performance quotations are
incorporated herein by reference to Exhibit (16) of
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A filed on February
5, 1992.
(18) Plan Pursuant to 18f-3 for Operation of a Multi-Class
Distribution System.
C-14
<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
Provident Distributors, Inc. has provided the initial capitalization
for and holds all of the outstanding shares of beneficial interest of the
following classes as of May 16, 1996: D-4, F-4, H-4, K-4, N-4, O-4, R-4, S-4,
T-4, U-4, V-2, X-1, X-3 and Y-4. 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 May 16, 1996: [ ].
With regard to the other portfolios, the following information is as
of May 16, 1996.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A-1 746
Class B-1 219
Class C-1 73
Class D-1 603
Class E-1 121
Class F-1 7
Class G-1 529
Class H-1 110
Class I-1 2
Class J-1 37
Class K-1 2
Class L-1 1
Class M-1 94
Class N-1 3608
Class O-1 1
Class P-1 8
Class Q-1 4
Class R-1 834
Class S-1 1
Class T-1 387
Class U-1 8
Class V-1 2
Class W-1 134
Class X-1 0
Class Y-1 8
Class Z-1 109
Class AA- 1473
Class BB- 1047
Class A-2 4
Class B-2 5
Class C-2 3
</TABLE>
C-15
<PAGE>
<TABLE>
<S> <C>
Class D-2 14
Class E-2 8
Class F-2 22
Class G-2 25
Class H-2 2
Class I- 6
Class J-2 22
Class K-2 8
Class L-2 3
Class M-2 1
Class N-2 33
Class O-2 7
Class P-2 34
Class Q-2 13
Class R-2 5
Class S-2 10
Class T-2 42
Class U-2 17
Class V-2 8
Class W-2 0
Class X-2 0
Class Y-2 10
Class Z-2 1
Class AA-2 0
Class BB-2 3
Class A-3 560
Class B-3 62
Class C-3 9
Class D-3 416
Class E-3 1922
Class F-3 265
Class G-3 647
Class H-3 164
Class I-3 3
Class J-3 53
Class K-3 127
Class L-3 36
Class M-3 446
Class N-3 548
Class O-3 276
Class P-3 656
Class Q-3 2
Class R-3 20
Class S-3 31
Class T-3 474
Class U-3 79
Class V-3 0
Class W-3 2
Class X-3 34
Class Y-3 95
Class Z-3 13
Class AA-3 10
</TABLE>
C-16
<PAGE>
<TABLE>
<S> <C>
Class BB-3 8
Class A-4 2
Class B-4 0
Class C-4 0
Class D-4 71
Class E-4 489
Class F-4 0
Class G-4 315
Class H-4 0
Class I-4 0
Class J-4 0
Class K-4 0
Class L-4 7
Class M-4 203
Class N-4 71
Class O-4 46
Class P-4 287
Class Q-4 0
Class R-4 0
Class S-4 0
Class T-4 218
Class U-4 15
Class V-4 0
Class W-4 2
Class X-4 591
Class Y-4 3
Class Z-4 0
Class AA-4 0
Class BB-4 15
</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 filed 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(c). Indemnification of Compass
Capital Group, Inc. in its capacity as co-administrator as provided for in
Section 7 of the Co-Administration Agreement filed herein as Exhibit 9(b).
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:
C-17
<PAGE>
Indemnification of Trustees, Officers, Representatives and
----------------------------------------------------------
Employees. The Trust shall indemnify each of its Trustees against all
---------
liabilities and expenses (including amounts paid in satisfaction of
judgments, in compromise, as fines and penalties, and as counsel fees)
reasonably incurred by him in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee except with
------
respect to any matter as to which he shall have been adjudicated to have
acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties, provided that as to any matter disposed of by a
--------
compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of bad faith had been adjudicated,
it would in the opinion of such counsel have been adjudicated in favor of
such person. The rights accruing to any person under these provisions shall
not exclude any other right to which he may be lawfully entitled, provided
--------
that no person may satisfy any right of indemnity or reimbursement hereunder
except out of the property of the Trust. The Trustees may make advance
payments in connection with the indemnification under this 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
C-18
<PAGE>
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having been a Shareholder and not because of his acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of
Shares with the same alphabetical designation as that of the Shares owned by
such Shareholder to be held harmless from and indemnified against all loss
and expense arising from such liability. The Trust shall, upon request by
the Shareholder, assume the defense of any claim made against any
Shareholder for any act or obligations of the Trust and satisfy any judgment
thereon from such assets.
Item 28. Business and Other Connections of Investment Advisers
PNC Asset Management Group, Inc. ("PAMG") performs investment advisory
services for Registrant. PAMG was organized in 1994 for the purpose of
providing advisory services to investment companies.
(a) To Registrant's knowledge, none of the directors or officers of
PAMG, except those set forth below, is, or has been at any time during
Registrant's past two fiscal years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and officers and certain executives of PAMG also hold various positions with,
and engage in business for, PNC Bank Corp, which indirectly owns all the
outstanding stock of PAMG, or other subsidiaries of PNC Bank Corp. Set forth
below are the names and principal businesses of the directors and certain
executives of PAMG who are engaged in any other business, profession, vocation
or employment of a substantial nature.
(b) To Registrant's knowledge, none of the directors or officers of
PNC Institutional Management Corporation ("PIMC"), except those set forth below,
is, or has been at any time during
C-19
<PAGE>
Registrant's past two fiscal years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and officers and certain executives of PIMC also hold various positions with,
and engage in business for, PNC Bank Corp., which indirectly owns all the
outstanding stock of PIMC, or other subsidiaries of PNC Bank Corp. Set forth
below are the names and principal businesses of the directors and certain
executives of PIMC who are engaged in any other business, profession, vocation
or employment of a substantial nature.
(c) Provident Capital Management, Inc. ("PCM") is an indirect wholly-
owned subsidiary of PNC Bank Corp. PCM currently offers investment advisory
services to institutional investors such as pension and profit-sharing plans or
trusts, insurance companies and banks. To Registrant's knowledge, none of the
directors or officers of PCM, except those set forth below, is, or has been at
any time during the Registrant's past two fiscal years, engaged in any business,
profession, vocation or employment of a substantial nature. Set forth below are
the names and principal businesses of the directors and certain executives of
PCM who are engaged in any other business, profession, vocation or employment of
a substantial nature.
(d) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
wholly-owned subsidiary of PNC Bank Corp. BlackRock currently offers investment
advisory services to institutional investors such as pension and profit-sharing
plans or trusts, insurance companies and banks. To Registrant's knowledge, none
of the directors or officers of BlackRock, except those set forth below, is, or
has been at any time during the Registrant's past two fiscal years, engaged in
any business, profession, vocation or employment of a substantial nature. Set
forth below are the names and principal businesses of the directors and certain
executives of BlackRock who are engaged in any other business, profession,
vocation or employment of a substantial nature.
(e) PNC Equity Advisors Company ("PEAC") is an indirect wholly-owned
subsidiary of PNC Bank Corp. PEAC currently offers investment advisory services
to institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. To Registrant's knowledge, none of the directors
or officers of PEAC, except those set forth below, is, or has been at any time
during the Registrant's past two fiscal years, engaged in any business,
profession, vocation or employment of a substantial nature. Set forth below are
the names and principal businesses of the directors and certain executives of
PEAC who are engaged in any other business, profession, vocation or employment
of a substantial nature.
C-20
<PAGE>
(f) Morgan Grenfell Investment Services Limited ("MGIS") is a
subsidiary of Morgan Grenfell Asset Management. The list required by this Item
28 of officers and directors of MGIS, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by MGIS pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-12880).
(g) CastleInternational Asset Management Limited
("CastleInternational") is an indirect wholly-owned subsidiary of PNC Bank Corp.
The list required by this Item 28 of officers and directors of
CastleInternational, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by CastleInternational pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-51087).
C-21
<PAGE>
PNC ASSET MANAGEMENT GROUP
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Other Business Type of
PAMG Name Connections Business
- --------------------------- ---------- ---------------- -------------
<S> <C> <C> <C>
Chairman Richard C. Executive Vice Banking
and Director Caldwell President PNC
Bank, National
Association(1)
Director Banking
PNC National
Bank(2)
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Investment
Provident Capital Advisory
Management Inc.(5)
Executive Vice Bank
President Holding
PNC Bank Corp.(14) Company
Director Banking
PNC Bank,
New Jersey,
National
Association(16)
Director Financial
PFPC Inc.(3) Related
Services
Vice-President Laurence Chairman and
and Director D. Fink Chief Executive
Officer
BlackRock
Financial
Management, Inc.
Director
PNC Asset
Management
Group, Inc.
Secretary Pamela Chief Counsel, Banking
Fraser Asset Management & Trust
Wilford
PNC Bank, National
Association(1)
Treasurer Brian Lilly None.
and Chief
Financial
Officer
Assistant Thomas R. Secretary Finanical
Secretary Moore PNC International Related
Investment Services
Corporation
Vice President
and Secretary
Pinaco, Inc.
Vice President
and Secretary
PNC Mortgage Bank,
N.A.
</TABLE>
C-22
<PAGE>
<TABLE>
<CAPTION>
Position with Other Business Type of
PAMG Name Connections Business
------------- ------------------- -------------- --------
<S> <C> <C> <C>
Secretary and
Treasurer
PNC Brokerage
Corp
Vice President Real Estate
Provcor Properties,
Inc.
Vice President Real Estate
Provident Realty
Management, Inc.
Director Vincent J. President and Financial
Ciavardini Chief Financial Related
Officer PFPC Services
Inc.(3)
Director J. Richard Executive Vice Banking
Carnall President PNC
Bank, National
Association(1)
Director Banking
PNC National
Bank(2)
Chairman and Financial-
Director Related
PFPC Inc.(3) Services
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Equipment
Hayden Bolts, Inc.*
Director Real Estate
Parkway Real
Estate Company*
Director Invest-
Provident Capital ment
Management Inc.(5) Advisory
Chief Equity Young D. Chin Chairman, President, Investment
Officer & Chief Executive Advisory
Director Officer, Chief
Investment Officer
& Director
Provident Capital
Management Inc.(5)
Chairman PNC Equity
Advisors Company
Director CastleRock
Capital Management
Director Ralph L. President BlackRock
Schlosstein Financial
Management, Inc.
Director Thomas K. Senior Vice Banking
Whitford President PNC Bank
Corp.(14)
Director Fiduciary
PNC Trust Company Activities
of New York
</TABLE>
C-23
<PAGE>
PNC INSTITUTIONAL MANAGEMENT CORPORATION
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Other Business Type of
PIMC Name Connections Business
- ------------- ------------- -------------- --------
<S> <C> <C> <C>
Chairman and J. Richard Executive Vice Banking
Director Carnall President
PNC Bank,
National
Association(1)
Director Banking
PNC National
Bank(2)
Chairman and Financial-
Director PFPC Related
Inc.(3) Services
Director Fiduciary
PNC Trust Activities
Company of
New York(11)
Director Equipment
Hayden Bolts,
Inc.*
Director Real Estate
Parkway Real
Estate Company*
Director Invest-
Provident ment
Capital Advisory
Management
Inc.(5)
Director Richard C. Executive Vice Banking
Caldwell President
PNC Bank,
National
Association(1)
Director Banking
PNC National
Bank(2)
Director Fiduciary
PNC Trust Activities
Company of New
York(11)
Director Investment
Provident Advisory
Capital
Management
Inc.(5)
Executive Vice Bank Holding
President Company
PNC Bank
Corp.(14)
Director Banking
PNC Bank, New
Jersey, National
Association(16)
Director Financial
PFPC Inc.(3) Related
Services
</TABLE>
C-24
<PAGE>
<TABLE>
<CAPTION>
Position with Other Business Type of
PIMC Name Connections Business
- ----------------- ---------------- --------------------- -----------------
<S> <C> <C> <C>
Director Laurence D. Fink Chairman and Chief
Executive Officer
BlackRock Financial
Management, Inc.
Director
PNC Asset Management
Group, Inc.
Director Richard L. Smoot President, and Chief Banking
Executive Officer
PNC Bank, National
Association
(Phila.)(1)
Senior Vice President Bank Holding
PNC Bank Corp.(14) Company
Director Financial-
PFPC Inc.(3) Related
Services
Director Fiduciary
PNC Trust Company Activities
of NY(11)
Director, Chairman Banking
and President
PNC Bank, New Jersey,
National Association
(16)
Director, Chairman, Banking
and CEO PNC National
Bank(2)
Chairman & Director Leasing
PNC Credit Corp (13)
Director and Nicholas M. Senior Vice President Banking
Chief Financial Marsini, Jr. PNC Bank, National
Officer Association(1)
Director Financial
PFPC Inc.(3) Related
Services
Senior Vice President Banking
and Chief Financial
Officer PNC Bank,
Delaware(20)
Director, Vice Banking
President and
Treasurer PNC
National Bank(2)
Director Banking
PNC Bank, New Jersey,
National Association(16)
Director Fiduciary
PNC Trust Company of Activities
New York(11)
Director and Treasurer Holding
PNC Bancorp, Inc.(9) Company
Director and Treasurer Investment
</TABLE>
C-25
<PAGE>
<TABLE>
<CAPTION>
Position with Other Business Type of
PIMC Name Connections Business
- ----------------- ---------------- --------------------- -----------------
<S> <C> <C> <C>
PNC Capital Corp.(17) Activities
Director and Treasurer Banking
PNC Holding Corp.(18)
Director and Treasurer Investment
PNC Venture Corp.(19) Activities
President and Thomas H. Nevin None.
Chief Investment
Officer
Vice President Michelle L. Chief Counsel Banking
and Secretary Petrilli PNC Bank, DE(20)
Secretary Financial-
PFPC Inc.(3) Related
Services
Executive Vice Charles B. Vice President Banking
President Landreth PNC Bank, National
Association(1)
Senior Vice Vincent J. President and Chief Financial-
President Ciavardini Financial Officer Related
PFPC Inc.(3) Services
Senior Vice Scott Moss None.
President
Senior Vice John N. None.
President Parthemore
Senior Vice Dushyant Pandit None.
President
Senior Vice James R. Smith None.
President
Vice President, Stephen M. Wynne Executive Vice Financial-
Chief Accounting President and Related
Officer, and Chief Accounting Services
Assistant Secretary PFPC Inc.(3)
</TABLE>
C-26
<PAGE>
<TABLE>
<CAPTION>
Position with Other Business Type of
PIMC Name Connections Business
- ----------------- ---------------- --------------------- -----------------
<S> <C> <C> <C>
Controller Pauline M. Vice President Financial
Heintz PFPC Inc.(3) Related
Services
Vice President John R. Antczak None.
Vice President Jeffrey W. None.
Carson
Vice President Katherine A. None.
Chuppe
Vice President Mary J. Coldren None.
Vice President Michele C. Dillon None.
Vice President Patrick J. Ford None.
Vice President Richard Hoerner None.
Vice President Michael S. None.
Hutchinson
Vice President Michael J. None.
Milligan
Vice President Wendy Powell None.
Vice President G. Keith None.
Robertshaw
Vice President W. Don Simmons None.
Vice President Charles Allen None.
Stiteler
Vice President William F. Walsh None.
Vice President Karen J. Walters None.
</TABLE>
____________________
*Information regarding these corporations can be obtained from the office of the
Secretary.
C-27
<PAGE>
PROVIDENT CAPITAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Other Business
Name Title Connections
---- ----- --------------
<S> <C> <C>
Richard C. Caldwell Director See PIMC list
Ernest E. Cecilia Director Director, CIO,
President,
CEO, PNC Equity Advisors
Company (28)
Director, Equity
Research, PNC Asset
Management Group,
Inc. (30)
Director, Equity
Research, PNC Bank,
National Association (1)
Young D. Chin Director See PAMG List.
</TABLE>
C-28
<PAGE>
<TABLE>
<CAPTION>
Other Business
Name Title Connections
- ------------------- -------------- --------------------------
<S> <C> <C>
Timothy M. Alles Treasurer Director, PNC Trust
Company of New York (11)
Treasurer, PNC Service
Corp. (4)
Vice President, PNC Bank
Corp. (14)
Vice President and
Controller, PNC Bank, FSB
(27)
Controller, Provident
National Financial Corp.*
Treasurer, Provident
Realty Inc. (8)
Treasurer, PNC New Jersey
Credit Corp. (10)
Beth Wagner-Coyne Vice President None
Lynn K. Shipman Secretary None
Earl J. Gaskins Vice President None
Larry Bernstein Vice President None
J. H. Hill, Jr. Vice President None
Susan D. Menzies Vice President None
Edwin B. Powell Vice President None
Herve Van Caloen Vice President None
</TABLE>
C-29
<PAGE>
<TABLE>
<CAPTION>
BLACKROCK FINANCIAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
Other Business
Name Title Connections
---- ----- --------------
<S> <C> <C>
Scott M. Amero Managing Director VP of 10 BlackRock closed
end funds
Keith T. Anderson Managing Director VP of 21 BlackRock closed
end funds
Richard C. Caldwell Director See PIMC List
Wesley R. Edens Managing Director COO & Director of 4
BlackRock closed end
funds
Laurence D. Fink Chairman and Director Chairman & Director of 25
BlackRock closed end
funds; and Director of
PNC Asset Management
Group, Inc.
Hugh R. Frater Managing Director None
Henry Gabbay Chief Operating Officer Treasurer of 25 BlackRock
and Managing Director closed end funds
Bennett W. Golub, Ph.D. Managing Director None
Charles S. Hallac Managing Director None
Michael C. Huebsch Managing Director VP of 21 BlackRock closed
end funds
Robert S. Kapito Managing Director VP of 21 BlackRock closed
end funds
P. Phillip Matthews Managing Director None
Barbara G. Novick Managing Director Secretary of 21 BlackRock
closed end funds
Karen H. Sabath Managing Director Assistant Secretary of 21
BlackRock closed end
funds
Ralph L. Schlosstein President & Director President & Director of
21 BlackRock closed end
funds; and President of 4
BlackRock closed end
funds
Joel M. Shaiman Managing Director None
J. Robert Small Principal & Controller Assistant Secretary of 4
BlackRock closed end
funds
Susan L. Wagner Managing Director Secretary of 4 BlackRock
closed end funds
</TABLE>
C-30
<PAGE>
PNC EQUITY ADVISORS COMPANY
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Other Business
Name Title Connections
---- ----- --------------
<S> <C> <C>
Timothy M. Alles CFO, Treasurer See Provident Capital
Management List
Richard C. Caldwell Director See PIMC List
Ernest E. Cecilia Director, CIO, See Provident Capital
President Management List
& CEO
Young D. Chin Director See Provident Capital
Management List
Robert J. Christian Chairman and Director See Provident Capital
Management List
Lisa P. Howard Chief Compl. Officer None
Leah L. Tompkins Secretary, Chief Legal Senior Counsel, PNC Bank,
Counsel National Association (1)
Thomas H. O'Brien CEO, PNC Bank Corp.
</TABLE>
C-31
<PAGE>
(1) PNC Bank, National Association, 120 S. 17th Street, Philadelphia, PA
19103; Broad & Chestnut Streets, Philadelphia, PA 19101; and 17th and
Chestnut Streets, Philadelphia, PA 19103.
(2) PNC National Bank, 103 Bellevue Parkway, Wilmington, DE 19809.
(3) PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
(4) PNC Service Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(5) Provident Capital Management, Inc., 30 S. 17th Street, Suite 1500,
Philadelphia, PA 19103.
(6) PNC Investment Corp., Broad and Chestnut Streets, Philadelphia, PA 19101.
(7) Provident Realty Management, Inc., Broad and Chestnut Streets,
Philadelphia, PA 19101.
(8) Provident Realty, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(9) PNC Bancorp, Inc., 3411 Silverside Road, Wilmington, DE 19810.
(10) PNC New Jersey Credit Corp, 1415 Route 70 East, Suite 604, Cherry Hill, NJ
08034.
(11) PNC Trust Company of New York, 40 Broad Street, New York, NY 10084.
(12) Provcor Properties, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(13) PNC Credit Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(14) PNC Bank Corp., 5th Avenue and Wood Streets, Pittsburgh, PA 15265.
(15) BlackRock Financial Management Inc., 435 Park Avenue, New York, NY 10154.
(16) PNC Bank, New Jersey, National Association, Woodland Falls Corporate Park,
210 Lake Drive East, Cherry Hill, NJ 08002.
(17) PNC Capital Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(18) PNC Holding Corp, 222 Delaware Avenue, P.O. Box 791, Wilmington, DE 19899.
(19) PNC Venture Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(20) Bank of Delaware, 200 Delaware Avenue, Wilmington, DE 19801.
(21) Bank of Delaware Corp., 300 Delaware Avenue, Wilmington, DE 19801.
(22) Del-Vest, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(23) Marand Corp., 222 Delaware Avenue, Wilmington, DE 19801.
(24) Millsboro Insurance Agency, 300 Delaware Avenue, Wilmington, DE 19801.
(25) Roney-Richards, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(26) PNC Bank, New England (f/k/a The Massachusetts Company), 125 High Street,
Boston, MA.
(27) PNC Bank, FSB, P.O. Box 4026, Vero Beach, FL.
(28) PNC Equity Advisors Company, 1835 Market Street, 15th Floor, Eleven Penn
Center, Philadelphia, PA 19103.
(29) PNC Institutional Management Corporation 400 Bellevue Parkway, Wilmington,
DE 19809.
C-32
<PAGE>
(30) PNC Asset Management Group, Inc. 1835 Market Street, 15th Floor, Eleven
Penn Center, Philadelphia, PA 19103.
(31) Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19102.
(32) Agnes Irwin School, Ithan Avenue and Conestoga Road, P. O. Box 407,
Rosemont, PA 19010.
(33) Episcopal Community Services, 225 South 3rd Street, Philadelphia, PA
19106.
(34) Greater Philadelphia Chamber of Commerce, 1234 Market Street, Philadelphia,
PA 19107.
(35) The Greater Philadelphia First Corporation, 1818 Market Street,
Philadelphia, PA 19103.
(36) Pennsylvania Ballet, 1101 South Broad Street, Philadelphia, PA 19147.
(37) The Philadelphia Orchestra, 1420 Locust Street, Philadelphia, PA 19102.
(38) Police Athletic League of Philadelphia, 3201 North 5th Street,
Philadelphia, PA 19140.
(39) Settlement Music School, 416 Queen Street, Philadelphia, PA 19147.
(40) Widener University, One University Plaza, Chester, PA 19013.
(41) United Negro College Fund Inc., 1650 Arch Street, Philadelphia, PA 19103.
(42) The Greater Philadelphia Urban Affairs Coalition, 1207 Chestnut Street,
Philadelphia, PA 19107.
C-33
<PAGE>
Item 29. Principal Underwriter
(a) Not applicable.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Compass Distributors, Inc. is incorporated by
reference to Schedule A of FORM BD filed by Compass Distributors, Inc. with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) PNC Bank, National Association, Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19102 (records relating to its
functions as custodian).
(2) Provident Capital Management, Inc., 30 South 17th Street,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
(3) Compass Distributors, Inc., 259 Radnor-Chester Road, Suite
135, Radnor, Pennsylvania 19807 (records relating to its
functions as distributor and co-administrator).
(4) PNC Asset Management Group, Inc., 1835 Market Street, 15th
Floor, Eleven Penn Center, Philadelphia, PA 19103 (records
relating to its functions as investment adviser).
(5) PNC Institutional Management Corporation, Bellevue Corporate
Center, 103 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as investment sub-
adviser).
(6) BlackRock Financial Management, Inc., 345 Park Avenue, New
York, New York 10154 (records relating to its functions as
investment sub-adviser).
(7) PNC Equity Advisors Company, 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
C-34
<PAGE>
(8) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its
functions as co-administrator, transfer agent and dividend
disbursing agent).
(9) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas,
New York, New York 10019 (records relating to its function
as sub-custodian).
(10) State Street Bank and Trust Company, P.O. Box 1631, Boston,
Massachusetts (records relating to its function as sub-
custodian).
(11) Barclays Bank PLC, 75 Wall Street, New York, New York 10265
(records relating to its function as sub-custodian).
(12) Morgan Grenfell Investment Services Limited, 20 Finsbury
Circus, London, England EC2M1NB (records relating to its
functions as investment sub-adviser).
(13) Compass Capital Group, Inc., 345 Park Avenue, New York, New
York 10154 (records relating to its functions as co-
administrator).
(14) CastleInternational Asset Management Limited, 7 Castle
Street, Edinburgh, Scotland, EH3 3AM (records relating to
its functions as investment sub-adviser).
(15) Citibank, N.A. 111 Wall Street, 23rd Floor, Zone 6, New
York, NY 10043 (records relating to its functions as sub-
custodian).
(16) Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496
(registrant's declaration of trust, code of regulations and
minute books).
Item 31. Management Services
None.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
C-35
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940, the Registrant certifies that it
meets all the requirements for effectiveness for this Post-Effective Amendment
No. 21 to its Registration Statement pursuant to Rule 485(b) under the 1933 Act,
and has duly caused this Post-Effective Amendment No. 21 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 30th day of
May, 1996.
COMPASS CAPITAL FUNDS
Registrant
By /s/ *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. 21 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ *Raymond J. Clark Trustee, President and May 30, 1996
- ---------------------------- Treasurer
(Raymond J. Clark)
/s/ *David R. Wilmerding, Jr. Chairman of the Board May 30, 1996
- ----------------------------
(David R. Wilmerding, Jr.)
/s/ *Anthony M. Santomero Vice-Chairman of May 30, 1996
- ---------------------------- the Board
(Anthony M. Santomero)
/s/ *William O. Albertini Trustee May 30, 1996
- ----------------------------
(William O. Albertini)
/s/ *Robert M. Hernandez Trustee May 30, 1996
- ----------------------------
(Robert M. Hernandez)
*By: /s/ Karen H. Sabath
-------------------
Karen H. Sabath, Attorney-in-fact
<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 May 8, 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 May 29, 1996.
---------------------------------
Morgan R. Jones
Secretary
<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>
SIGNATURES
As it relates to the Index Equity Portfolio only, The DFA Investment
Trust Company consents to the filing of this Amendment to the Registration
Statement of Compass Capital Funds which is signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica and the
State of California on this 30th day of May, 1996.
THE DFA INVESTMENT TRUST COMPANY
*/David G. Booth
-----------------------------
David G. Booth
President and Chairman-Chief
Executive Officer
The undersigned Trustees and Principal Officers of The DFA Investment
Trust Company consent to the filing of this Amendment to the Registration
Statement of Compass Capital Funds as it relates to the Index Equity Portfolio
only, on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
*/David G. Booth President, Chairman - May 30, 1996
- ---------------------------- Chief Executive Officer
David G. Booth and Trustee
*/Rex A. Sinquefield Chairman - Chief May 30, 1996
- ---------------------------- Investment Officer
Rex A. Sinquefield and Trustee
*/George M. Constantinides Trustee May 30, 1996
- ----------------------------
George M. Constantinides
*/John P. Gould Trustee May 30, 1996
- ----------------------------
John P. Gould
*/Roger G. Ibbotson Trustee May 30, 1996
- ----------------------------
Roger G. Ibbotson
*/Merton H. Miller Trustee May 30, 1996
- ----------------------------
Merton H. Miller
*/Myron S. Scholes Trustee May 30, 1996
- ----------------------------
Myron S. Scholes
*/Michael T. Scardina Vice President, Chief May 30, 1996
- ---------------------------- Financial Officer,
Michael T. Scardina Controller and Treasurer
</TABLE>
*By: /s/ Irene R. Diamant
----------------------
Irene R. Diamant
Attorney-in-fact
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
Power of Attorney
-----------------
The undersigned officers and trustees of THE DFA INVESTMENT TRUST
COMPANY (the "Fund") hereby appoint DAVID G. BOOTH, REX A. SINQUEFIELD, MICHAEL
T. SCARDINA, IRENE R. DIAMANT AND STEPHEN W. KLINE, ESQUIRE (with full power to
any of them to act) as attorney-in-fact and agent, in all capacities, to
execute, and to file any of the documents referred to below relating to a
Registration Statement under the Securities Act of 1933 and/or the Investment
Company Act of 1940, including any and all amendments thereto, covering the
registration of any registered investment company for which any Series of the
Fund serves as a master fund in a master fund-feeder fund structure, including
all exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes, as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and agents
may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 20th day of December, 1995.
/s/ David G. Booth /s/Rex A. Sinqufield
- --------------------------- -----------------------------
David G. Booth, Rex A. Sinqufield,
Chairman-Chief Executive Chief Investment Officer and
Officer, President and Trustee Trustee
/s/George M. Constantinides /s/John P. Gould
- ---------------------------- -----------------------------
George M. Constantinides, John P. Gould, Trustee
Trustee
/s/Roger G. Ibbotson /s/Merton H. Mill
- ---------------------------- -----------------------------
Roger G. Ibbotson, Trustee Merton H. Miller, Trustee
/s/ /s/
- ---------------------------- -----------------------------
Myron S. Scholes, Trustee Michael T. Scardina, Chief
Financial Officer, Treasurer
and Vice President
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ----------- ----------- --------
(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.
(5)(b) Investment Advisory Agreement between
Registrant and BlackRock Financial
Management, Inc. with respect to the
Multi-Sector Mortgage Securities
Portfolio III.
(5)(c) Sub-Advisory Agreements between PNC
Asset Management Group, Inc. and
BlackRock Financial Management, Inc./
Provident Capital Management, Inc./ PNC
Equity Advisors Company/ PNC
Institutional Management Corporation/
Morgan Grenfell Investment Services
Limited/ and CastleInternational Asset
Management Limited.
(6)(d) Amendment No. 3 to the Distribution
Agreement between Registrant and
Provident Distributors, Inc.
(9)(a) Administration Agreement among
Registrant, Compass Distributors, Inc.
Distributors, Inc. is and PFPC Inc.
(9)(b) Co-Administration Agreement between
Registrant and Compass Capital Group, Inc.
(11)(a) Consent of Coopers & Lybrand, LLP.
(11)(b) Consent of Deloitte & Touche LLP.
(11)(c) Consent of Drinker Biddle & Reath.
(15) Amended and Restated Distribution and Service Plan for Service,
Investor A, Investor B, Investor C and Institutional Shares.
C-1
<PAGE>
Investor B, Investor C and Institutional
Shares.
(18) Plan Pursuant to 18f-3 for Operation of
a Multi-Class Distribution System.
(27) Financial Data Schedules for the New
Jersey Municipal Money Market, New
Jersey Tax-Free Income, Short Government
Bond, Core Bond and International Bond
Portfolios.
-2-
<PAGE>
Exhibit (5)(a)
INVESTMENT ADVISORY AGREEMENT
-----------------------------
AGREEMENT made as of January __, 1996 between COMPASS CAPITAL FUNDS, a
Massachusetts business trust (the "Fund"), and PNC ASSET MANAGEMENT GROUP,
INC., a Delaware corporation (the "Adviser").
WHEREAS, the Fund is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Fund desires to retain Adviser to furnish investment
advisory services to the Fund and the Adviser is willing to so furnish such
services;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
-----------
a. The Fund hereby appoints Adviser to act as investment adviser
to the Fund's Money Market Portfolio; U.S. Treasury Money Market Portfolio;
Municipal Money Market Portfolio; Pennsylvania Municipal Money Market Portfolio;
North Carolina Municipal Money Market Portfolio; Virginia Municipal Money Market
Portfolio; Ohio Municipal Money Market Portfolio; New Jersey Municipal Money
Market Portfolio; Tax-Free Income Portfolio; Managed Income Portfolio;
Intermediate Government Bond Portfolio; Intermediate Bond Portfolio; Short
Government Bond Portfolio; Government Income Portfolio; Pennsylvania Tax-Free
Income Portfolio; Ohio Tax-Free Income Portfolio; New Jersey Tax-Free Income
Portfolio; Core Bond Portfolio; International Bond Portfolio; Balanced
Portfolio; International Equity Portfolio; International Emerging Markets
Portfolio; Select Equity Portfolio; Growth Equity Portfolio; Small Cap Growth
Equity Portfolio; Value Equity Portfolio; and Small Cap Value Equity Portfolio
(the "Portfolios") for the period and on the terms set forth in this Agreement.
Adviser accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
b. In the event that the Fund establishes one or more portfolios
other than the Portfolios named above with respect to which it desires to retain
Adviser to act as investment adviser hereunder, the Fund shall notify Adviser in
writing. If Adviser is willing to render such services under this Agreement, it
shall notify the Fund in writing whereupon, subject to such approval as may be
required pursuant to Paragraph 10 hereof, such portfolio shall become a
"Portfolio" hereunder and shall be subject to the provisions of this Agreement
to the
1
<PAGE>
same extent as the Portfolios named above in subparagraph (a) except to the
extent that said provisions (including those relating to the compensation
payable by the Fund to Adviser) are modified with respect to such portfolio in
writing by the Fund and Adviser at the time.
2. Sub-Contractors. It is understood that Adviser will from time to
---------------
time employ or associate with such person or persons as Adviser may believe to
be particularly fitted to assist it in the performance of this Agreement;
provided, however, that the compensation of such person or persons shall be paid
by Adviser and that Adviser shall be as fully responsible to the Fund for the
acts and omissions of any subcontractor as it is for its own acts and omissions.
Such person or persons shall be employed pursuant to sub-advisory agreements
agreeable to the Fund and approved in accordance with the provisions of the 1940
Act.
3. Delivery of Documents. The Fund has furnished Adviser with
---------------------
copies, properly certified or authenticated, of each of the following:
a. Resolutions of the Fund's Board of Trustees authorizing the
appointment of Adviser as the Portfolios' adviser and approving this
Agreement;
b. The Fund's Declaration of Trust as filed with the State
Secretary of the Commonwealth of Massachusetts and the Boston City
Clerk on December 22, 1988;
c. The Fund's Code of Regulations;
d. The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission ("SEC")
on December 23, 1988;
e. The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933 and the 1940 Act, as filed with the SEC on
December 23, 1988, and all amendments thereto (the "Registration
Statement"); and
f. The Fund's most recent prospectuses for the Portfolios (such
prospectuses together with the related statements of additional
information, as currently in effect and all amendments and supplements
thereto, are herein called "Prospectuses").
2
<PAGE>
The Fund will furnish Adviser from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Services. Subject to the supervision of the Fund's Board of
--------
Trustees, Adviser will (either directly or through the sub-advisers and other
sub-contractors employed by it in accordance with Section 2 hereof) provide a
continuous investment program for each of the Portfolios, including investment
research and management with respect to all securities, investments, cash and
cash equivalents in the Portfolios. Adviser will (either directly or through
the sub-advisers and other sub-contractors employed by it in accordance with
Paragraph 2 hereof) determine from time to time what securities and other
investments will be purchased, retained or sold by the Portfolios and will place
the daily orders for the purchase or sale of securities. Adviser will provide
the services rendered by it under this Agreement in accordance with each
Portfolio's investment objective, policies and restrictions as stated in such
Portfolio's Prospectus (as currently in effect and as it may be amended or
supplemented from time to time) and the resolutions of the Fund's Board of
Trustees. Adviser further agrees that it:
a. will comply with all applicable rules and regulations of the
SEC and will in addition conduct its activities under this Agreement
in accordance with other applicable law;
b. will place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph,
in placing orders with brokers and dealers, Adviser will attempt to
obtain the best price and the most favorable execution of its orders.
In placing orders, Adviser will consider the experience and skill of
the firm's securities traders as well as the firm's financial
responsibility and administrative efficiency. Consistent with this
obligation, Adviser may, subject to the approval of the Fund's Board
of Trustees, select brokers on the basis of the research, statistical
and pricing services they provide to a Portfolio and other clients of
Adviser or a sub-adviser. Information and research received from such
brokers will be in addition to, and not in lieu of, the services
required to be performed by Adviser hereunder. A commission paid to
such brokers may be higher than that which another qualified broker
would have charged for effecting the same transaction, provided that
Adviser determines in good faith that such commission is reasonable in
terms of either the transaction or the overall responsibility of
Adviser and sub-advisers to the Portfolios and their
3
<PAGE>
other clients and that the total commissions paid by a Portfolio will
be reasonable in relation to the benefits to the Portfolio over the
long-term. In addition, Adviser is authorized to take into account the
sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers or dealers (including brokers and
dealers that are affiliated with Adviser, the sub-advisers or the
Fund's distributor) in compliance with applicable law. In no instance,
however, will a Portfolio's securities be purchased from or sold to
Adviser, the sub-advisers, the Fund's distributor or any affiliated
person thereof, except to the extent permitted by the SEC or by
applicable law;
c. will maintain books and records with respect to each
Portfolio's securities transactions and will furnish the Fund's Board
of Trustees such periodic and special reports as the Board may
request;
d. will maintain a policy and practice of conducting its
investment advisory services hereunder independently of the commercial
banking operations of its affiliates. When Adviser makes investment
recommendations for a Portfolio, its investment advisory personnel
will not inquire or take into consideration whether the issuer of
securities proposed for purchase or sale for the Portfolio's account
are customers of the commercial departments of its affiliates. In
dealing with commercial customers of its affiliates, Adviser and the
sub-advisers will not inquire or take into consideration whether
securities of those customers are held by the Fund; and
e. will treat confidentially and as proprietary information of
the Fund all records and other information relative to the Fund's
prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld where Adviser may be
exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Fund.
5. Services Not Exclusive. Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Adviser shall be
4
<PAGE>
free to render similar services to others so long as its services under this
Agreement are not impaired thereby.
6. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Adviser hereby agrees that all records which it
maintains for each Portfolio are the property of the Fund and further agrees to
surrender promptly to the Fund any of such records upon the Fund's request.
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
7. Expenses. During the term of this Agreement, Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolios.
8. Compensation.
------------
a. For the services provided and the expenses assumed pursuant to
this Agreement, the Fund will pay Adviser and Adviser will accept as full
compensation therefor a fee, computed daily and payable monthly, at the
following annual rates: for each of the Money Market, Municipal Money Market,
U.S. Treasury Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios (considered separately
on a Portfolio-by-Portfolio basis): .45% of the first $1 billion of each
Portfolio's average daily net assets, .40% of the next $1 billion of each
Portfolio's average daily net assets, .375% of the next $1 billion of each
Portfolio's average daily net assets and .35% of the average daily net assets of
each Portfolio in excess of $3 billion; for each of the Value Equity, Growth
Equity, Small Cap Value Equity, Balanced, Small Cap Growth Equity, Select Equity
and International Bond Portfolios (considered separately on a
Portfolio-by-Portfolio basis): .55% of the first $1 billion of each Portfolio's
average daily net assets, .50% of the next $1 billion of each Portfolio's
average daily net assets, .475% of the next $1 billion of each Portfolio's
average daily net assets and .45% of the average daily net assets of each
Portfolio in excess of $3 billion; for each of the Core Bond, Managed Income,
Tax-Free Income, Intermediate Government Bond, New Jersey Tax-Free Income, Ohio
Tax-Free Income, Pennsylvania Tax-Free Income, Short Government Bond,
Intermediate Bond and Government Income Portfolios (considered separately on a
Portfolio-by-Portfolio basis): .50% of the first $1 billion of each Portfolio's
average daily net assets, .45% of the next $1 billion of each Portfolio's
average daily net assets, .425% of the next $1 billion of each Portfolio's
average daily net assets and .40% of the average
5
<PAGE>
daily net assets of each Portfolio in excess of $3 billion; for the
International Equity Portfolio: .75% of the first $1 billion of the Portfolio's
average daily net assets, .70% of the next $1 billion of the Portfolio's average
daily net assets, .675% of the next $1 billion of the Portfolio's average daily
net assets and .65% of the average daily net assets of the Portfolio in excess
of $3 billion; and for the International Emerging Markets Portfolio: 1.25% of
the first $1 billion of the Portfolio's average daily net assets, 1.20% of the
next $1 billion of the Portfolio's average daily net assets, 1.155% of the next
$1 billion of the Portfolio's average daily net assets and 1.10% of the average
daily net assets of the Portfolio in excess of $3 billion. Such fee as is
attributable to each 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.
b. If in any fiscal year the aggregate expenses of one or more
Portfolios (as defined under the securities regulations of any state having
jurisdiction over the Fund) exceed the expense limitations of any such state,
Adviser will bear its share of the amount of such excess in proportion to the
aggregate fees otherwise payable to it hereunder and to the Fund's co-
administrators under their administration agreements with the Fund. The
obligation of the Adviser to reimburse the Fund under this Paragraph 8(b) is
limited in any fiscal year to the amount of its fees otherwise payable hereunder
attributable to the Portfolios for such fiscal year, provided, however, that
-------- -------
notwithstanding the foregoing, Adviser shall reimburse the Fund for the full
amount of its share of any such excess expenses regardless of the amount of
fees otherwise payable to it during such fiscal year to the extent that the
securities regulations of any state having jurisdiction over the Fund
so require. Such expense reimbursement, if any, will be estimated, reconciled
and paid on a monthly basis.
9. Limitation of Liability. Adviser shall not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of this Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations or duties under this Agreement.
10. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof with respect to each Portfolio listed in Section 1(a)
hereof and, with respect to any additional Portfolio, on the dated of receipt by
the Fund of notice from Adviser in accordance with Section 1(b) hereof that
Adviser is willing to serve as investment adviser with respect to
6
<PAGE>
such Portfolio, provided that this Agreement (as supplemented by the terms
specified in any notice and agreement pursuant to Section 1(b) hereof) shall
have been approved in accordance with the requirements of the 1940 Act, and,
unless sooner terminated as provided herein, shall continue in effect with
respect to each such Portfolio until March 31, 1997. Thereafter, if not
terminated, this Agreement shall continue in effect with respect to the
particular Portfolio for successive annual periods ending on March 31, provided
--------
such continuance is specifically approved at least annually (a) by vote of a
majority of those members of the Fund's Board of Trustees who are not interested
persons of any party to this Agreeement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Fund's Board of Trustees
or by vote of a majority of the outstanding voting securities of such Portfolio.
Notwithstanding the foregoing, the Agreement may be terminated with respect to
any Portfolio at any time, without the payment of any penalty, by the Fund (by
vote of the Fund's Board of Trustees or by vote of a majority of the outstanding
voting securities of the Portfolio), or by Adviser on sixty days' written
notice. This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested persons" and "assignment" shall have the same
meanings as such terms in the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
12. Release. "Compass Capital Funds" and "Trustees of Compass
-------
Capital Funds" refer respectively to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated December 22, 1988, which is hereby referred to and a
copy of which is on file at the office of the State Secretary of the
Commonwealth of Massachusetts and at the principal office of the Fund. The
obligations of "Compass Capital Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders, officers, representatives or agents of the Fund
personally, but bind only the Trust Property (as defined in the Declaration of
Trust), and all persons dealing with any class of shares of the Fund must look
solely to the Trust Property belonging to such class for the enforcement of any
claims against the Fund.
13. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define
7
<PAGE>
or delimit any of the provisions hereof or otherwise affect their construction
or effect. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto and their respective successors and
shall be governed by Delaware law.
14. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Attest: COMPASS CAPITAL FUNDS
[SEAL] By:
---------------------
PNC ASSET MANAGEMENT
GROUP, INC.
[SEAL] By:
---------------------
its:
8
<PAGE>
Exhibit (5)(b)
INVESTMENT ADVISORY AGREEMENT
-----------------------------
AGREEMENT made as of ____________________, 1996 between COMPASS
CAPITAL FUNDS, a Massachusetts business trust (the "Fund"), and BLACKROCK
FINANCIAL MANAGEMENT, INC., a Delaware corporation (the "Adviser").
WHEREAS, the Fund is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Fund desires to retain Adviser to furnish investment
advisory services to the Fund and the Adviser is willing to so furnish such
services.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
-----------
(a) The Fund hereby appoints Adviser to act as investment
advisor to the Fund's Multi-Sector Mortgage Securities Portfolio III (the
"Portfolio") for the period and on the terms set forth in this Agreement.
Adviser accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) In the event that the Fund establishes one or more
portfolios other than the Portfolio named above with respect to which it desires
to retain Adviser to act as investment adviser hereunder, the Fund shall notify
the Adviser in writing. If Adviser is willing to render such services under
this Agreement it shall notify the Fund in writing whereupon, subject to such
approval as may be required pursuant to Paragraph 10 hereof, such portfolio
shall become a "Portfolio" hereunder and shall be subject to the provisions of
this Agreement to the same extent as the Portfolio named above in subparagraph
(a) except to the extent that said provisions (including those relating to the
compensation payable by the Fund to Adviser) are modified with respect to such
portfolio in writing by the Fund and Adviser at the time.
2. Sub-Contractors. It is understood that from time to time Adviser
---------------
may, but is not required to, employ or associate with such person or persons as
Adviser may believe to be particularly fitted to assist it in the performance of
this Agreement; provided, however, that the compensation of such person or
persons shall be paid by Adviser and that Adviser shall be as fully responsible
to the Fund for the acts and omissions of any subcontractor as it is for its own
acts and omissions. Such
<PAGE>
person or persons shall be employed pursuant to sub-advisory agreements
agreeable to the Fund and approved in accordance with the provisions of the 1940
Act.
3. Delivery of Documents. The Fund has furnished the Adviser with
---------------------
copies, properly certified or authenticated, of each of the following:
(a) Resolutions of the Fund's Board of Trustees authorizing the
appointment of Adviser as the Portfolio's adviser and
approving this agreement;
(b) The Fund's Declaration of Trust as filed with the State
Secretary of the Commonwealth of Massachusetts and the
Boston City Clerk on December 22, 1988;
(c) The Fund's Code of Regulations;
(d) The Fund's Notification of Registration on Form N-8A under
the 1940 Act as filed with the Securities and Exchange
Commission ("SEC") on December 23, 1988;
(e) The Fund's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of
1933 and 1940 Act, as filed with the SEC on December 23,
1988, and all amendments thereto; and
(f) The Fund's most recent prospectus for the Portfolio (such
prospectus together with the related statement of additional
information, as currently in effect and all amendments and
supplements thereto, are herein called "Prospectus").
The Fund will furnish Adviser from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Services. Subject to the supervision of the Fund's Board of
--------
Trustees, Adviser will (either directly or through the sub-advisors and other
sub-contractors employed by it in accordance with Section 2 hereof) provide a
continuous investment program for the Portfolio, including investment research
and management with respect to all securities, investments, cash and cash
equivalents in the Portfolio. Adviser will (either directly or through the
sub-advisor and/or other sub-contractors employed by it in accordance with
Paragraph 2 hereof) determine from time to time what securities and other
investments
-2-
<PAGE>
will be purchased, retained or sold by the Portfolio and will place the daily
orders for the purchase or sale of securities. Adviser will provide the services
rendered by it under this Agreement in accordance with the Portfolio's
investment objective, policies and restrictions as stated in the Portfolio's
Prospectus (as currently in effect and as it may be amended or supplemented from
time to time) and the resolutions of the Fund's Board of Trustees. Adviser
further agrees that it:
(a) will comply with all applicable rules and regulations of the
SEC and will in addition conduct its activities under this
Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with
any broker or dealer. Subject to the other provisions of
this paragraph, in placing orders with brokers and dealers,
Adviser will attempt to obtain the best price and the most
favorable execution of its orders. In placing orders,
Adviser will consider the experience and skill of the firm's
securities traders as well as the firm's financial
responsibility and administrative efficiency. Consistent
with this obligation, Adviser may, subject to the approval
of the Fund's Board of Trustees, select brokers on the basis
of the research, statistical and pricing services they
provide to the Portfolio and other clients of Adviser or a
sub-advisor. Information and research received from such
brokers will be in addition to, and not in lieu of, the
services required to be performed by Adviser hereunder. A
commission paid to such brokers may be higher than that
which another qualified broker would have charged for
effecting the same transaction, provided that Adviser
determines in good faith that such commission is reasonable
in terms of either the transaction or the overall
responsibility of Adviser and sub-adviser (if any) to the
Portfolio and their other clients and that the total
commissions paid by the Portfolio will be reasonable in
relation to the benefits to the Portfolio over the long-
term. In addition, Adviser is authorized to take into
account the sale of shares of the Fund in allocating
purchase and sale orders for portfolio securities to brokers
or dealers (including brokers and dealers that are
affiliated with Adviser, any sub-adviser or
-3-
<PAGE>
the Fund's distributor) in compliance with applicable law.
In no instance, however, will the Portfolio's securities be
purchased from or sold to Adviser, any sub-adviser, the
Fund's distributor or any affiliated person thereof,
except to the extent permitted by the SEC or by applicable
law;
(c) will maintain books and records with respect to the
Portfolio's securities transactions and will furnish the
Fund's Board of Trustees such periodic and special reports
as the Board may request;
(d) will maintain a policy and practice of conducting its
investment advisory services hereunder independently of the
commercial banking operations of its affiliates. When
Adviser makes investment recommendations for the Portfolio,
its investment advisory personnel will not inquire or take
into consideration whether the issuer of securities proposed
for purchase or sale for the Portfolio's account are
customers of the commercial departments of its affiliates.
In dealing with commercial customers, Adviser and any sub-
adviser will not inquire or take into consideration whether
securities of those customers are held by the Fund; and
(e) will treat confidentially and as proprietary information of
the Fund all records and other information relative to the
Fund, the Portfolios and the Fund's prior, current or
potential shareholders, and will not use such records and
information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be
withheld where Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested
to divulge such information by duly constituted authorities,
or when so requested by the Fund.
5. Services Not Exclusive. Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Adviser shall be free to render similar services to
others so long as its services under this Agreement are not impaired thereby.
-4-
<PAGE>
6. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Adviser hereby agrees that all records which it
maintains for the Portfolio are the property of the Fund and further agrees to
surrender promptly to the Fund any of such records upon the Fund's request.
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
7. Expenses. During the term of this Agreement, Adviser will pay
--------
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including brokerage commissions and other transaction changes, if any)
purchased or sold for the portfolio.
8. Compensation.
------------
(a) For the services provided and the expenses assumed pursuant
to this Agreement the Fund will pay Adviser and Adviser will accept as full
compensation therefor a fee, computed daily and payable monthly, at .25% of the
Portfolio's average daily net assets,
(b) If in any fiscal year the aggregate expenses of the
Portfolio (as defined under the securities regulations of any state having
jurisdiction over the Fund) exceed the expense limitations of any such state,
Adviser will bear its share of the amount of such excess in proportion to the
aggregate fees otherwise payable to it hereunder and to the Fund's
co-administrators under their administration agreements with the Fund. The
obligation of the Adviser to reimburse the Fund under this Paragraph 8(b) is
limited in any fiscal year to the amount of its fees otherwise payable hereunder
attributable to the Portfolio for such fiscal year, provided, however, that
notwithstanding the foregoing, Adviser shall reimburse the Fund for the full
amount of its share of any such excess expenses regardless of the amount of fees
otherwise payable to it during such fiscal year to the extent that the
securities regulations of any state having jurisdiction over the Fund so
require. Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
9. Limitation of Liability. Adviser shall not be liable for any
-----------------------
error of judgement or mistake of law or for any loss suffered by the Fund in
connection with the performance of this Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
service or a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations or duties under this Agreement.
-5-
<PAGE>
10. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof with respect to the Portfolio listed in Section 1(a)
hereof and, with respect to any additional portfolio, on the date of receipt by
the Fund of notice from the Adviser in accordance with Section 1(b) hereof that
the Adviser is willing to serve as investment adviser with respect to such
portfolio, provided that this Agreement (as supplemented by the terms specified
in any notice and agreement pursuant to Section 1(b) hereof) shall have been
approved by the shareholders of the Portfolio in accordance with the
requirements of the 1940 Act, and, unless sooner terminated as provided herein,
shall continue in effect with respect to each such Portfolio until March 31,
1997. Thereafter, if not terminated, this Agreement shall continue in effect
with respect to the Portfolio for successive annual periods ending on March 31,
provided such continuance is specifically approved at least annually (a) by vote
- --------
of a majority of those members of the Fund's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Fund's Board
of Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio. Notwithstanding the foregoing, this Agreement may be terminated with
respect to the Portfolio at any time, without the payment of any penalty, by the
Fund (by vote of the Fund's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Portfolio), or by Adviser on sixty days'
written notice. This Agreement will immediately terminate in the event of its
assignment (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested persons" and "assignment" shall have the same
meaning as such terms in the 1940 Act.)
11. Amendment to this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
12. Release. "Compass Capital Funds" and "Trustees of Compass
-------
Capital Funds" refer respectively to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated December 22, 1988 which is hereby referred to and a
copy of which is on file at the office of the State Secretary of the
Commonwealth of Massachusetts and at the principal office of the Fund. The
obligations of "Compass Capital Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, Shareholders, officers, representatives or agents of the Fund
personally, but bind only the Trust Property (as defined in the
-6-
<PAGE>
Declaration of Trust), and all persons dealing with any class of shares of the
Fund must look solely to the Trust Property belonging to such class for the
enforcement of any claims against the Fund.
13. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of, the parties hereto and their respective successors and shall be
governed by Delaware law.
14. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
COMPASS CAPITAL FUNDS
By: _______________________________
BLACKROCK FINANCIAL MANAGEMENT, INC.
By: _______________________________
<PAGE>
Exhibit (5)(C)
SUB-ADVISORY AGREEMENT
(Select Equity, International Equity,
International Emerging Markets, Small Cap Value
Equity and Value Equity Portfolios)
AGREEMENT dated as of January ___, 1996, between PNC Asset Management
Group, Inc., a Delaware corporation ("Adviser"), and Provident Capital
Management, Inc., a Delaware corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to
the Select Equity, International Equity, International Emerging Markets, Small
Cap Value Equity and Value Equity Portfolios (the "Portfolios") of Compass
Capital Funds (the "Fund"), an open-end, management investment company
registered under the Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with
sub-advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolios;
WHEREAS, the advisory agreement between Adviser and the Fund of even
date herewith (such Agreement or the most recent successor agreement between
such parties relating to advisory services to the Portfolios is referred to
herein as the "Advisory Agreement") contemplates that Adviser may sub-contract
investment advisory services with respect to the Portfolios to a sub-adviser
pursuant to a sub-advisory agreement agreeable to the Fund and approved in
accordance with the provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the
provisions of the 1940 Act, and Sub-Adviser is willing to furnish such services
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-
-----------
adviser with respect to the Portfolios as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision
-----------------------
of Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-
to-day operations of each Portfolio and perform the following services:
(i) provide
<PAGE>
investment research and credit analysis concerning the Portfolios' investments,
(ii) conduct a continual program of investment of the Portfolios' assets, (iii)
determine what portion of the Portfolios' assets will be invested in cash, cash
equivalents and money market instruments, (iv) place orders for all purchases
and sales of the investments made for the Portfolios, and (v) maintain the books
and records as are required to support Fund operations (in conjunction with
record-keeping and accounting functions performed by Adviser). In addition,
Sub-Adviser will keep the Fund and Adviser informed of developments materially
affecting the Fund and shall, on its own initiative, furnish to the Fund from
time to time whatever information Sub-Adviser believes appropriate for this
purpose. Sub-Adviser will communicate to Adviser on each day that a purchase or
sale of an instrument is effected for a Portfolio (i) the name of the issuer,
(ii) the amount of the purchase or sale, (iii) the name of the broker or dealer,
if any, through which the purchase or sale will be effected, (iv) the CUSIP
number of the instrument, if any, and (v) such other information as Adviser may
reasonably require for purposes of fulfilling its obligations to the Fund under
the Advisory Agreement. Sub-Adviser will provide the services rendered by it
under this Agreement in accordance with the Portfolios' investment objectives,
policies and restrictions as stated in the Portfolios' Prospectuses and
Statements of Additional Information (as currently in effect and as they may be
amended or supplemented from time to time), and the resolutions of the Fund's
Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with
any broker or dealer. Subject to the other provisions of this paragraph, in
placing orders with brokers and dealers, Sub-Adviser will attempt to obtain the
best price and the most favorable execution of its orders. In placing orders,
Sub-Adviser will consider the experience and skill of the firm's securities
traders as well as the firm's financial responsibility and administrative
efficiency. Consistent with this obligation, Sub-Adviser may, subject to the
approval of the Fund's Board of Trustees, select brokers on the basis of the
research, statistical and pricing services they provide to a Portfolio and other
clients of Adviser or Sub-Adviser. Information and research received from such
brokers will be in addition to, and not in lieu of, the services required to be
performed by Sub-Adviser hereunder. A commission paid to such brokers may be
higher than that which another qualified broker would have
-2-
<PAGE>
charged for effecting the same transaction, provided that Sub-Adviser determines
in good faith that such commission is reasonable in terms either of the
transaction or the overall responsibility of Adviser and Sub-Adviser to the
Portfolios and their other clients and that the total commissions paid by the
Portfolios will be reasonable in relation to the benefits to the Portfolio over
the long-term. In addition, Sub-Adviser is authorized to take into account the
sale of shares of the Fund in allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers and dealers that are
affiliated with Adviser, Sub-Adviser or the Fund's distributor), provided that
Sub-Adviser believes that the quality of the transaction and the commission are
comparable to what they would be with other qualified firms. In no instance,
however, will a Portfolio's securities be purchased from or sold to the Adviser,
Sub-Adviser, the Fund's distributor or any affiliated person thereof, except to
the extent permitted by the SEC or by applicable law;
(c) will maintain or cause Adviser to maintain books and records
with respect to the Portfolios' securities transactions and will render to
Adviser and the Fund's Board of Trustees such periodic and special reports as
they may request;
(d) will maintain a policy and practice of conducting its
investment advisory services hereunder independently of the commercial banking
operations of its affiliates. When Sub-Adviser makes investment recommendations
for a Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of
the Fund all records and other information relative to the Fund, the Portfolios'
and the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
-3-
<PAGE>
5. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolios are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay
--------
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities, and other investments
(including brokerage commissions and other transaction charges, if any)
purchased or sold for the Portfolios.
7. Compensation. For the services which the Sub-Adviser will render
------------
to Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolios:
for each of the Value Equity, Small Cap Value Equity and Select Equity
(considered separately on a Portfolio-by-Portfolio basis): .40% of the
first $1 billion of each Portfolio's average daily net assets, .35% of the
next $1 billion of each Portfolio's average daily net assets, .325% of the
next $1 billion of each Portfolio's average daily net assets and .30% of
the average daily net assets of each Portfolio in excess of $3 billion; for
the International Equity Portfolio: .60% of the first $1 billion of the
Portfolio's average daily net assets, .55% of the next $1 billion of the
Portfolio's average daily net assets, .525% of the next $1 billion of the
Portfolio's average daily net assets and .50% of the average daily net
assets of the Portfolio in excess of $3 billion; and for the International
Emerging Markets Portfolio: 1.10% of the first $1 billion of the
Portfolio's average daily net assets, 1.05% of the next $1 billion of the
Portfolio's average daily net assets, 1.005% of the next $1 billion of the
Portfolio's average daily net assets and .95% of the average daily net
assets of the Portfolio in excess of $3 billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to a Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to such
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the
-4-
<PAGE>
Advisory Agreement with respect to such Portfolio. Adviser shall inform Sub-
Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by Adviser or by
the Portfolios in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof and, unless sooner terminated with respect to each
Portfolio as provided herein, shall continue in effect with respect to each
Portfolio until March 31, 1997. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to each Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to any Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected
-5-
<PAGE>
thereby. This Agreement shall be binding on, and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by
Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:_______________________________
PROVIDENT CAPITAL MANAGEMENT, INC.
By:/s/ Young D. Chin
-------------------------------
-6-
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT executed as of January 4, 1996 by and between PNC Asset
Management Group, Inc., a Delaware corporation (sometimes referred to as
Adviser), and Morgan Grenfell Investment Services Limited a London based company
and registered investment adviser ("Sub-Adviser").
WHEREAS, PNC Asset Management Group, Inc. is the investment manager for
Compass Capital Funds ("Trust"), an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act");
and
WHEREAS, PNC Asset Management Group, Inc. desires to retain Sub-Adviser to
furnish investment advisory services for the International Bond Portfolio, a
diversified investment portfolio of the Trust (the "Fund").
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Appointment. PNC Asset Management Group, Inc. hereby appoints Sub-
-----------
Adviser to provide certain sub-investment advisory services to the Fund for the
period and on the terms set forth in this Agreement. Sub-Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Document. PNC Asset Management Group, Inc. has furnished
--------------------
Sub-Adviser with copies properly certified or authenticated of each of the
following:
(a) Resolutions of the Trust's Board of Trustees authorizing the
appointment of Adviser as the Fund's advisor and approving this
Agreement;
(b) The Trust's Declaration of Trust as filed with the State Secretary of
the Commonwealth of Massachusetts and the Boston City Clerk on
December 22, 1988;
(c) The Trust's Code of Regulations;
(d) The Trust's Notification of Registration on Form N-8A under the 1940
Act as filed with the Securities and Exchange Commission ("SEC") on
December 23, 1988;
(e) The Trust's Registration Statement on Form N-1A (the "Registration
Statement") under the Securities Act of 1933 and 1940 Act, as filed
with the SEC on December 23, 1988, and all amendments thereto;
<PAGE>
(f) The Trust's most recent prospectus for the Fund (such prospectus
together with the related statement of additional information, as
currently in effect and all amendments and supplements thereto, are
herein called "Prospectus"); and
(g) Any other information reasonably needed by Sub-Adviser to satisfy its
obligations under this Agreement.
PNC Asset Management Group, Inc. will furnish Sub-Adviser from time to
time with copies of all amendments of or supplements to the foregoing.
3. Management. Subject always to the supervision of Trust's Board of
----------
Trustees and PNC Asset Management Group, Inc., Sub-Adviser will furnish an
investment program in respect of, and make investment decisions for, all assets
of the Fund and place all orders for the purchase and sale of securities, all on
behalf of the Fund. In the performance of its duties, Sub-Adviser will satisfy
its fiduciary duties to the Fund (as set forth in Section 8, below), and will
monitor the Fund's investments, and will comply with the provisions of Trust's
Declaration of Trust and By-Laws, as amended from time to time, and the stated
investment objectives, policies and restrictions of the Fund. Sub-Adviser and
PNC Asset Management Group, Inc. will each make its officers and employees
available to the other from time to time at reasonable times to review
investment policies of the Fund and to consult with each other regarding the
investment affairs of the Fund. Sub-Adviser shall also make itself reasonably
available to the Board of Trustees at such times as the Board of Trustees shall
request.
Sub-Adviser represents and warrants that it is in compliance with all
applicable Rules and Regulations of the SEC pertaining to its investment
advisory activities and agrees that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will conform with all applicable Rules and Regulations of the SEC
pertaining to its investment advisory activities;
(c) will place orders pursuant to its investment determinations for
the Fund either directly with the issuer or with any broker or dealer. In
placing orders with brokers or dealers, Sub-Adviser will attempt to obtain
the best combination of prompt execution of orders in an effective manner
and at the most favorable price. Consistent with this obligation, when the
execution and price offered by two or more brokers or dealers are
-2-
<PAGE>
comparable Sub-Adviser may, in its discretion, purchase and sell portfolio
securities to and from brokers and dealers who provide Sub-Adviser with
research advice and other services. In no instance will portfolio
securities be purchased from or sold to PNC Asset Management Group, Inc.,
Sub-Adviser or any affiliated person of either the Trust, PNC Asset
Management Group, Inc. or Sub-Adviser, except as may be permitted under the
1940 Act;
(d) will report regularly to PNC Asset Management Group, Inc. and will
make appropriate persons available for the purpose of reviewing at
reasonable times with representatives of PNC Asset Management Group, Inc.
and the Board of Trustees the management of the Fund, including, without
limitation, review of the general investment strategy of the Fund, the
performance of the Fund in relation to standard industry indices, interest
rate considerations and general conditions affecting the marketplace and
will provide various other reports from time to time as reasonably
requested by PNC Asset Management Group, Inc.;
(e) will maintain books and records with respect to Trust's securities
transactions and will furnish PNC Asset Management Group, Inc. and the
Trust's Board of Trustees such periodic and special reports as the Board or
PNC Asset Management Group, Inc. may request;
(f) will act upon instructions from PNC Asset Management Group, Inc.
not inconsistent with the fiduciary duties hereunder; and
(g) will treat confidentially and as proprietary information of Trust
all such records and other information relative to Trust maintained by the
Sub-Adviser, and will not use such records and information for any purpose
other than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by Trust, which
approval shall not be unreasonably withheld and may not be withheld where
SubAdviser may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by Trust.
Sub-Adviser shall have the right to execute and deliver, or cause its
nominee to execute and deliver, all proxies and notices of meetings and other
notices affecting or relating to the securities held by the Fund.
4. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that
-3-
<PAGE>
all records which it maintains for Trust are the property of Trust and further
agrees to surrender promptly to Trust any of such records upon Trust's request.
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31 a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
5. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for Trust.
6. Compensation. For the services provided and the expenses assumed
------------
pursuant to this Agreement, PNC Asset Management Group, Inc. will pay the Sub-
Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a
sub-advisory fee, accrued daily and payable quarterly, in accordance with
Schedule A hereto. From time to time, Sub-Adviser may voluntarily agree to
- ----------
waive or reduce some or all of the compensation to which it is entitled under
this Agreement.
7. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
8. Limitation of Liability. PNC Asset Management Group, Inc. will not
-----------------------
take any action against Sub-Adviser to hold Sub-Adviser liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of Sub-Adviser's duties under this Agreement, except a loss
resulting from Sub-Adviser's willful misfeasance, bad faith, or gross negligence
in the performance of its duties under this Agreement.
9. Indemnification. PNC Asset Management Group, Inc. and Sub-Adviser
---------------
each agree to indemnify the other against any claim against, loss or liability
to such other party (including reasonable attorneys' fees) arising out of any
action on the part of the indemnifying party which constitutes willful
misfeasance, bad faith or gross negligence.
10. Duration and Termination. This Agreement will become effective as to
------------------------
the Fund on the date first above written, provided that it has been approved by
vote of a majority of the outstanding voting securities of the Fund in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, will continue in effect until March 31, 1997.
Thereafter, if not terminated, this Agreement will continue in effect
for the Fund for successive periods of 12
-4-
<PAGE>
months, each ending on March 31, provided that such continuation is specifically
--------
approved at least annually (a) by the vote of a majority of those members of
Trust's Board of Trustees who are not interested persons of Trust, Sub-Adviser,
or PNC Asset Management Group, Inc., cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the vote of a majority of Trust's
Board of Trustees or by the vote of a majority of all votes attributable to the
outstanding Shares of the Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to the Fund at any time, without the payment of any
penalty, on sixty (60) days' written notice by PNC Asset Management Group, Inc.
or by Sub-Adviser. This Agreement will immediately terminate in the event of
its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities, "interested persons" and "assignment" have the
same meaning of such terms in the 1940 Act.)
This Agreement will terminate automatically if the advisory agreement
between the Fund and PNC Asset Management Group, Inc. is terminated.
11. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
12. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and will be governed by the
laws of the State of Delaware.
"Compass Capital Funds" and "Trustees of the Compass Capital Funds"
refer respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of The Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of
-5-
<PAGE>
shares of the Fund must look solely to the Trust Property belonging to such
class for the enforcement of any claims against the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:/s/ Richard C. Caldwell
-------------------------------
Name:Richard C Caldwell
-----------------------------
Title:Chairman
----------------------------
MORGAN GRENFELL INVESTMENT SERVICES, LTD.
By: /s/ M.A. Hall /s/ I.D. Kelbou
-------------------------------
Name:M.A Hall I.D. Kelbou
------------------------------
Title:Director Director
-----------------------------
-6-
<PAGE>
SCHEDULE A
______________, 1996
The International Bond Portfolio.
- --------------------------------
Compensation will be paid at the following annual rate of the Fund's
average annual daily net assets:
0.40% of the Fund's first $ 1 billion of average
daily net assets;
0.35% of the Fund's next $1 billion of average
daily net assets;
0.325% of the Fund's next $1 billion of average
daily net assets; and
0.30% of the Fund's average daily net assets in
excess of $3 billion.
PNC ASSET MANAGEMENT GROUP, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
MORGAN GRENFELL INVESTMENT SERVICES, LTD.
By:_______________________________
Name:_____________________________
Title:____________________________
-7-
<PAGE>
SUB-ADVISORY AGREEMENT
(International Equity Portfolio and
International Emerging Markets Portfolio)
AGREEMENT dated as of April 19,1996 between PNC Asset Management Group,
Inc., a Delaware corporation ("Adviser"), and CastleInternational Asset
Management Limited, a corporation registered in Scotland ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
International Equity Portfolio and International Emerging Markets Portfolio (the
"Portfolios") of Compass Capital Funds/SM/ (the "Fund"), an open-end, management
investment company registered under the Investment Company Act of 1940 ("1940
Act"); and
WHEREAS, Adviser wishes to retain Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolios; and
WHEREAS, the advisory agreement between Adviser and the Fund dated as of
January 4, 1996 (such Agreement or the most recent successor agreement between
such parties relating to advisory services to the Portfolios is referred to
herein as the "Advisory Agreement") contemplates that Adviser may sub-contract
investment advisory services with respect to the Portfolios to a sub-adviser
pursuant to a sub-advisory agreement agreeable to the Fund and approved in
accordance with the provisions of the 1940 Act; and
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to each Portfolio as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-
-1-
<PAGE>
Adviser will supervise the day-to-day operations of each Portfolio and perform
the following services: (i) provide investment research and credit analysis
concerning the Portfolios' investments, (ii) conduct a continual program of
investment of the Portfolios' assets, (iii) determine what portion of the
Portfolios' assets will be invested in cash, cash equivalents and money market
instruments, (iv) place orders for all purchases and sales of the investments
made for the Portfolios, and (v) maintain the books and records as are required
to support Fund operations (in conjunction with record-keeping and accounting
functions performed by Adviser). In addition, Sub-Adviser will keep the Fund
and Adviser informed of developments materially affecting the Fund and shall, on
its own initiative, furnish to the Fund from time to time whatever information
Sub-Adviser believes appropriate for this purpose. Sub-Adviser will communicate
to Adviser on each day that a purchase or sale of an instrument is effected for
a Portfolio (i) the name of the issuer, (ii) the amount of the purchase or sale,
(iii) the name of the broker or dealer, if any, through which the purchase or
sale will be effected, (iv) the CUSIP number of the instrument, if any, and (v)
such other information as Adviser may reasonably require for purposes of
fulfilling its obligations to the Fund under the Advisory Agreement. Sub-
Adviser will provide the services rendered by it under this Agreement in
accordance with the Portfolios' investment objectives, policies and restrictions
as stated in the Portfolios' Prospectuses and Statements of Additional
Information (as currently in effect and as they may be amended or supplemented
from time to time), and the resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph, in placing
orders with brokers and dealers, Sub-Adviser will attempt to obtain the best
price and the most favorable execution of its orders. In placing orders, Sub-
Adviser will consider the experience and skill of the firm's securities traders
as well as the firm's financial responsibility and administrative efficiency.
Consistent with this obligation, Sub-Adviser may, subject to the approval of the
Fund's Board of Trustees, select brokers on the basis of the research,
statistical and pricing services they provide to the Portfolios and other
clients of Adviser or Sub-Adviser. Information and research received from such
brokers will be in addition to, and
-2-
<PAGE>
not in lieu of, the services required to be performed by Sub-Adviser hereunder.
A commission paid to such brokers may be higher than that which another
qualified broker would have charged for effecting the same transaction, provided
that Sub-Adviser determines in good faith that such commission is reasonable in
terms either of the transaction or the overall responsibility of Adviser and
Sub-Adviser to the Portfolios and their other clients and that the total
commissions paid by the Portfolios will be reasonable in relation to the
benefits to the Portfolios over the long-term. In addition, Sub-Adviser is
authorized to take into account the sale of shares of the Fund in allocating
purchase and sale orders for portfolio securities to brokers or dealers
(including brokers and dealers that are affiliated with Adviser, Sub-Adviser or
the Fund's distributor), provided that Sub-Adviser believes that the quality of
the transaction and the commission are comparable to what they would be with
other qualified firms. In no instance, however, will a Portfolio's securities
be purchased from or sold to the Adviser, Sub-Adviser, the Fund's distributor or
any affiliated person thereof, except to the extent permitted by the SEC or by
applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolios' securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for a
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund, the Portfolios and
the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
-3-
<PAGE>
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolios are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolios.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolios:
for International Equity Portfolio: .60% of the first $1 billion of the
Portfolio's average daily net assets, .55% of the next $1 billion of the
Portfolio's average daily net assets, .525% of the next $1 billion of the
Portfolio's average daily net assets and .50% of the average daily net
assets of the Portfolio in excess of $3 billion; and for the International
Emerging Markets Portfolio: 1.10% of the first $1 billion of the
Portfolio's average daily net assets, 1.05% of the next $1 billion of the
Portfolio's average daily net assets, 1.005% of the next $1 billion of the
Portfolio's average daily net assets and .95% of the average daily net
assets of the Portfolio in excess of $3 billion.
If Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to a Portfolio, Sub-Adviser will bear its share of the
amount of such waiver or reimbursement by waiving fees otherwise payable to it
hereunder on a proportionate basis to be determined by comparing the aggregate
fees that would otherwise be paid to it hereunder with respect to such Portfolio
to the aggregate fees that would otherwise be paid by the Fund to Adviser under
the Advisory Agreement with respect to such Portfolio. Adviser shall inform
Sub-Adviser prior to waiving any advisory fees.
-4-
<PAGE>
8. Limitation on Liability. Sub-Adviser will not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by Adviser or by
the Portfolios in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof and, unless sooner terminated with respect to a Portfolio
as provided herein, shall continue in effect with respect to each Portfolio
until March 31, 1997. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to each Portfolio for successive annual periods
ending on March 31, provided such continuance is specifically approved at least
annually (a) by the vote of a majority of those members of the Fund's Board of
Trustees who are not interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and
(b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to a Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to
-5-
<PAGE>
the benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By: /s/ Richard C. Caldwell
-----------------------------
CASTLEINTERNATIONAL ASSET
MANAGEMENT LIMITED
By: /s/ Douglas B. Waggoner
-----------------------------
-6-
<PAGE>
CO-SUB-ADVISORY AGREEMENT
(Balanced Portfolio)
AGREEMENT dated as of January 4, 1996, by and among PNC Asset Management
Group, Inc., a Delaware corporation ("Adviser"), and Provident Capital
Management, Inc., a Delaware corporation, and BlackRock Financial Management,
Inc., a Delaware corporation (jointly, "Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
Balanced Portfolio (the "Portfolio") of Compass Capital Funds (the "Fund"), an
open-end, management investment company registered under the Investment Company
Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Adviser and the Fund of even date
herewith (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolio is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolio to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolio as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of the Portfolio and perform the following services: (i)
provide
<PAGE>
investment research and credit analysis concerning the Portfolio's investments,
(ii) conduct a continual program of investment of the Portfolio's assets, (iii)
determine what portion of the Portfolio's assets will be invested in cash, cash
equivalents and money market instruments, (iv) place orders for all purchases
and sales of the investments made for the Portfolio, and (v) maintain the books
and records as are required to support Fund operations (in conjunction with
record-keeping and accounting functions performed by Adviser). In addition,
Sub-Adviser will keep the Fund and Adviser informed of developments materially
affecting the Fund and shall, on their own initiative, furnish to the Fund from
time to time whatever information Sub-Adviser believes appropriate for this
purpose. Sub-Adviser will communicate to Adviser on each day that a purchase or
sale of an instrument is effected for the Portfolio (i) the name of the issuer,
(ii) the amount of the purchase or sale, (iii) the name of the broker or dealer,
if any, through which the purchase or sale will be effected, (iv) the CUSIP
number of the instrument, if any, and (v) such other information as Adviser may
reasonably require for purposes of fulfilling its obligations to the Fund under
the Advisory Agreement. Sub-Adviser will provide the services rendered by it
under this Agreement in accordance with the Portfolio's investment objective,
policies and restrictions as stated in the Portfolio's Prospectuses and
Statement of Additional Information (as currently in effect and as they may be
amended or supplemented from time to time), and the resolutions of the Fund's
Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct
their activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph, in placing
orders with brokers and dealers, Sub-Adviser will attempt to obtain the best
price and the most favorable execution of their orders. In placing orders, Sub-
Adviser will consider the experience and skill of the firm's securities traders
as well as the firm's financial responsibility and administrative efficiency.
Consistent with this obligation, Sub-Adviser may, subject to the approval of the
Fund's Board of Trustees, select brokers on the basis of the research,
statistical and pricing services they provide to the Portfolio and other clients
of Adviser or Sub-Adviser. Information and research received from such brokers
will be in addition to, and not in lieu of, the services required to be
performed by Sub-Adviser hereunder. A commission paid to such brokers may be
-2-
<PAGE>
higher than that which another qualified broker would have charged for effecting
the same transaction, provided that Sub-Adviser determines in good faith that
such commission is reasonable in terms either of the transaction or the overall
responsibility of Adviser and Sub-Adviser to the Portfolio and their other
clients and that the total commissions paid by the Portfolio will be reasonable
in relation to the benefits to the Portfolio over the long-term. In addition,
Sub-Adviser is authorized to take into account the sale of shares of the Fund in
allocating purchase and sale orders for portfolio securities to brokers or
dealers (including brokers and dealers that are affiliated with Adviser, Sub-
Adviser or the Fund's distributor), provided that Sub-Adviser believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified firms. In no instance, however, will a Portfolio's
securities be purchased from or sold to the Adviser, Sub-Adviser, the Fund's
distributor or any affiliated person thereof, except to the extent permitted by
the SEC or by applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolio's securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting their investment
advisory services hereunder independently of the commercial banking operations
of their respective affiliates. When Sub-Adviser makes investment
recommendations for the Portfolio, its investment advisory personnel will not
inquire or take into consideration whether the issuer of securities proposed for
purchase or sale for the Portfolio's account are customers of the commercial
department of its affiliates; and
(e) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund, the Portfolio's and
the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
-3-
<PAGE>
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolios are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolios.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolio: .40%
of the first $1 billion of each Portfolio's average daily net assets; .35% of
the next $1 billion of the Portfolio's average daily net assets; .325% of the
next $1 billion of the Portfolio's average daily net assets; and .30% of the
average daily net assets of the Portfolio in excess of $3 billion; for the
International Equity Portfolio.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to the Portfolio, Sub-Adviser will bear its share of the
amount of such waiver or reimbursement by waiving fees otherwise payable to it
hereunder on a proportionate basis to be determined by comparing the aggregate
fees that would otherwise be paid to it hereunder with respect to the Portfolio
to the aggregate fees that would otherwise be paid by the Fund to the Adviser
under the Advisory Agreement with respect to the Portfolio. Adviser shall
inform each Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any error
-----------------------
of judgment or mistake of law or for any loss suffered by Adviser or by the
Portfolio in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as of
------------------------
the date hereof and, unless sooner terminated with respect to the Portfolio as
provided herein,
-4-
<PAGE>
shall continue in effect with respect to the Portfolio until March 31, 1997.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to the Portfolio for successive annual periods ending on March 31,
provided such continuance is specifically approved at least annually (a) by the
vote of a majority of those members of the Fund's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Fund's Board
of Trustees or by a vote of a majority of the outstanding voting securities of
the Portfolio. Notwithstanding the foregoing, this Agreement may be terminated
with respect to the Portfolio at any time, without the payment of any penalty,
by the Fund (by vote of the Fund's Board of Trustees or by vote of a majority of
the outstanding voting securities of the Portfolio), or by Adviser or Sub-
Adviser on 60 days' written notice, and will terminate automatically upon any
termination of the Advisory Agreement between the Fund and Adviser. This
Agreement will also immediately terminate in the event of its assignment. (As
used in this Agreement, the terms "majority of the outstanding voting
securities," "interested person" and "assignment" shall have the same meanings
of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by the
------------
parties hereto, each of which shall constitute an original counterpart, and all
of which, together, shall constitute one Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PNC ASSET MANAGEMENT GROUP, INC.
By:/s/Richard C. Caldwell
----------------------------------
PROVIDENT CAPITAL MANAGEMENT, INC.
By:/s/ Young D. Chin
----------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
By:/s/ Ralph Schlosstein
----------------------------------
-6-
<PAGE>
SUB-ADVISORY AGREEMENT
(Municipal Money Market, New Jersey Municipal
Money Market, Pennsylvania Municipal
Money Market, Money Market, Ohio Municipal
Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market and
U.S. Treasury Money Market Portfolios)
AGREEMENT dated as of January 4, 1996, between PNC Asset Management Group,
Inc., a Delaware corporation ("Adviser"), and PNC Institutional Management
Corporation, a Delaware corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
Municipal Money Market, New Jersey Municipal Money Market, Pennsylvania
Municipal Money Market, Money Market, Ohio Municipal Money Market, North
Carolina Municipal Money Market, Virginia Municipal Money Market and U.S.
Treasury Money Market Portfolios (the "Portfolios") of Compass Capital Funds
(the "Fund"), an open-end, management investment company registered under the
Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolios;
WHEREAS, the advisory agreement between Adviser and the Fund of even date
herewith (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolios is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolios to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolios as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such
<PAGE>
appointment and agrees to render the services herein set forth for the
compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of each Portfolio and perform the following services: (i)
provide investment research and credit analysis concerning the Portfolios'
investments, (ii) conduct a continual program of investment of the Portfolios'
assets, (iii) determine what portion of the Portfolios' assets will be invested
in cash, cash equivalents and money market instruments, (iv) place orders for
all purchases and sales of the investments made for the Portfolios, and (v)
maintain the books and records as are required to support Fund operations (in
conjunction with record-keeping and accounting functions performed by Adviser).
In addition, Sub-Adviser will keep the Fund and Adviser informed of developments
materially affecting the Fund and shall, on its own initiative, furnish to the
Fund from time to time whatever information Sub-Adviser believes appropriate for
this purpose. Sub-Adviser will communicate to Adviser on each day that a
purchase or sale of an instrument is effected for a Portfolio (i) the name of
the issuer, (ii) the amount of the purchase or sale, (iii) the name of the
broker or dealer, if any, through which the purchase or sale will be effected,
(iv) the CUSIP number of the instrument, if any, and (v) such other information
as Adviser may reasonably require for purposes of fulfilling its obligations to
the Fund under the Advisory Agreement. Sub-Adviser will provide the services
rendered by it under this Agreement in accordance with the Portfolios'
investment objectives, policies and restrictions as stated in the Portfolios'
Prospectuses and Statements of Additional Information (as currently in effect
and as they may be amended or supplemented from time to time), and the
resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph, in placing
orders with brokers and dealers, Sub-Adviser will attempt to obtain the best
price and the most favorable execution of its orders. In placing orders, Sub-
Adviser will consider the experience and skill of the firm's securities traders
as well as the firm's financial responsibility and administrative efficiency.
Consistent with this obligation, Sub-Adviser may, subject to the approval of the
Fund's Board of
-2-
<PAGE>
Trustees, select brokers on the basis of the research, statistical and pricing
services they provide to a Portfolio and other clients of Adviser or Sub-
Adviser. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by Sub-
Adviser hereunder. A commission paid to such brokers may be higher than that
which another qualified broker would have charged for effecting the same
transaction, provided that Sub-Adviser determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of Adviser and Sub-Adviser to the Portfolios and their other
clients and that the total commissions paid by the Portfolios will be reasonable
in relation to the benefits to the Portfolio over the long-term. In addition,
Sub-Adviser is authorized to take into account the sale of shares of the Fund in
allocating purchase and sale orders for portfolio securities to brokers or
dealers (including brokers and dealers that are affiliated with Adviser, Sub-
Adviser or the Fund's distributor), provided that Sub-Adviser believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified firms. In no instance, however, will a Portfolio's
securities be purchased from or sold to the Adviser, Sub-Adviser, the Fund's
distributor or any affiliated person thereof, except to the extent permitted by
the SEC or by applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolios' securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for a
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund, the Portfolios' and
the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to
-3-
<PAGE>
divulge such information by duly constituted authorities, or when so requested
by the Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolios are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolios.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolios:
for each of the Money Market, Municipal Money Market, U.S. Treasury Money
Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market and
New Jersey Municipal Money Market Portfolios (considered separately on a
Portfolio-by-Portfolio basis): .40% of the first $1 billion of each
Portfolio's average daily net assets, .35% of the next $1 billion of each
Portfolio's average daily net assets, .325% of the next $1 billion of each
Portfolio's average daily net assets and .30% of the average daily net
assets of each Portfolio in excess of $3 billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to a Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to such
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the
-4-
<PAGE>
Advisory Agreement with respect to such Portfolio. Adviser shall inform Sub-
Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by Adviser or by
the Portfolios in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof and, unless sooner terminated with respect to each
Portfolio as provided herein, shall continue in effect with respect to each
Portfolio until March 31, 1997. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to each Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to any Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected
-5-
<PAGE>
thereby. This Agreement shall be binding on, and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by
Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:/s/ Richard C. Caldwell
-----------------------------
PNC INSTITUTIONAL MANAGEMENT CORPORATION
By:/s/ Thomas H. Nevin
-----------------------------
-6-
<PAGE>
SUB-ADVISORY AGREEMENT
(Tax-Free Income, New Jersey Tax-Free Income,
Pennsylvania Tax-Free Income, Managed Income,
Intermediate Government Bond, Ohio Tax-Free Income,
Short Government Bond, Intermediate Bond,
Government Income and Core Bond Portfolios)
AGREEMENT dated as of January 4, 1996, between PNC Asset Management Group,
Inc., a Delaware corporation ("Adviser"), and BLACKROCK FINANCIAL MANAGEMENT,
INC., a Delaware limited corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
Tax-Free Income, New Jersey Tax-Free Income, Pennsylvania Tax-Free Income,
Managed Income, Intermediate Government Bond, Ohio Tax-Free Income, Short
Government Bond, Intermediate Bond, Government Income and Core Bond Portfolios
(the "Portfolios") of Compass Capital Funds (the "Fund"), an open-end,
management investment company registered under the Investment Company Act of
1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolios;
WHEREAS, the advisory agreement between Adviser and the Fund of even date
herewith (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolios is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolios to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolios as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
<PAGE>
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of each Portfolio and perform the following services: (i)
provide investment research and credit analysis concerning the Portfolios'
investments, (ii) conduct a continual program of investment of the Portfolios'
assets, (iii) determine what portion of the Portfolios' assets will be invested
in cash, cash equivalents and money market instruments, (iv) place orders for
all purchases and sales of the investments made for the Portfolios, and (v)
maintain the books and records as are required to support Fund operations (in
conjunction with record-keeping and accounting functions performed by Adviser).
In addition, Sub-Adviser will keep the Fund and Adviser informed of developments
materially affecting the Fund and shall, on its own initiative, furnish to the
Fund from time to time whatever information Sub-Adviser believes appropriate for
this purpose. Sub-Adviser will communicate to Adviser on each day that a
purchase or sale of an instrument is effected for a Portfolio (i) the name of
the issuer, (ii) the amount of the purchase or sale, (iii) the name of the
broker or dealer, if any, through which the purchase or sale will be effected,
(iv) the CUSIP number of the instrument, if any, and (v) such other information
as Adviser may reasonably require for purposes of fulfilling its obligations to
the Fund under the Advisory Agreement. Sub-Adviser will provide the services
rendered by it under this Agreement in accordance with the Portfolios'
investment objectives, policies and restrictions as stated in the Portfolios'
Prospectuses and Statements of Additional Information (as currently in effect
and as they may be amended or supplemented from time to time), and the
resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph, in placing
orders with brokers and dealers, Sub-Adviser will attempt to obtain the best
price and the most favorable execution of its orders. In placing orders, Sub-
Adviser will consider the experience and skill of the firm's securities traders
as well as the firm's financial responsibility and administrative efficiency.
Consistent with this obligation, Sub-Adviser may, subject to the approval of the
Fund's Board of Trustees, select brokers on the basis of the research,
statistical and pricing services they provide to a Portfolio and other clients
of Adviser or Sub-Adviser. Information and
-2-
<PAGE>
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by Sub-Adviser hereunder. A commission
paid to such brokers may be higher than that which another qualified broker
would have charged for effecting the same transaction, provided that Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall responsibility of Adviser and Sub-Adviser to the
Portfolios and their other clients and that the total commissions paid by the
Portfolios will be reasonable in relation to the benefits to the Portfolio over
the long-term. In addition, Sub-Adviser is authorized to take into account the
sale of shares of the Fund in allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers and dealers that are
affiliated with Adviser, Sub-Adviser or the Fund's distributor), provided that
Sub-Adviser believes that the quality of the transaction and the commission are
comparable to what they would be with other qualified firms. In no instance,
however, will a Portfolio's securities be purchased from or sold to the Adviser,
Sub-Adviser, the Fund's distributor or any affiliated person thereof, except to
the extent permitted by the SEC or by applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolios' securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for a
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund, the Portfolios' and
the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
-3-
<PAGE>
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolios are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolio.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolios:
for each of the Tax-Free Income, New Jersey Tax-Free Income, Pennsylvania
Tax-Free Income, Managed Income, Intermediate Government Bond, Ohio Tax-
Free Income, Short Government Bond, Intermediate Bond, Government Income
and Core Bond Portfolios (considered separately on a Portfolio-by-Portfolio
basis): .35% of the first $1 billion of each Portfolio's average daily net
assets, .30% of the next $1 billion of each Portfolio's average daily net
assets, .275% of the next $1 billion of each Portfolio's average daily net
assets and .25% of the average daily net assets of each Portfolio in excess
of $3 billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to a Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to such
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the Advisory Agreement with respect to such Portfolio. Adviser
shall inform Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any
-----------------------
error of judgment or mistake of law or for any
-4-
<PAGE>
loss suffered by Adviser or by the Portfolios in connection with the performance
of this Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations or
duties under this Agreement.
9. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof and, unless sooner terminated with respect to each
Portfolio as provided herein, shall continue in effect with respect to each
Portfolio until March 31, 1997. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to each Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to any Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
-5-
<PAGE>
12. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:/s/ Richard C. Caldwell
------------------------------
BLACKROCK FINANCIAL MANAGEMENT INC.
By:/s/ Ralph Schlosstein
------------------------------
-6-
<PAGE>
SUB-ADVISORY AGREEMENT
(Growth Equity and Small Cap Growth Equity Portfolios)
AGREEMENT dated as of January 4, 1996, between PNC Asset Management Group,
Inc., a Delaware corporation ("Adviser"), and PNC Equity Advisors Company, a
Delaware corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to the
Growth Equity and Small Cap Growth Equity Portfolios (the "Portfolios") of
Compass Capital Funds (the "Fund"), an open-end, management investment company
registered under the Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolios;
WHEREAS, the advisory agreement between Adviser and the Fund of even date
herewith (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolios is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolios to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolios as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of each Portfolio and perform the following services: (i)
provide investment research and credit analysis concerning the
<PAGE>
Portfolios' investments, (ii) conduct a continual program of investment of the
Portfolios' assets, (iii) determine what portion of the Portfolios' assets will
be invested in cash, cash equivalents and money market instruments, (iv) place
orders for all purchases and sales of the investments made for the Portfolios,
and (v) maintain the books and records as are required to support Fund
operations (in conjunction with record-keeping and accounting functions
performed by Adviser). In addition, Sub-Adviser will keep the Fund and Adviser
informed of developments materially affecting the Fund and shall, on its own
initiative, furnish to the Fund from time to time whatever information Sub-
Adviser believes appropriate for this purpose. Sub-Adviser will communicate to
Adviser on each day that a purchase or sale of an instrument is effected for a
Portfolio (i) the name of the issuer, (ii) the amount of the purchase or sale,
(iii) the name of the broker or dealer, if any, through which the purchase or
sale will be effected, (iv) the CUSIP number of the instrument, if any, and (v)
such other information as Adviser may reasonably require for purposes of
fulfilling its obligations to the Fund under the Advisory Agreement. Sub-
Adviser will provide the services rendered by it under this Agreement in
accordance with the Portfolios' investment objectives, policies and restrictions
as stated in the Portfolios' Prospectuses and Statements of Additional
Information (as currently in effect and as they may be amended or supplemented
from time to time), and the resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph, in placing
orders with brokers and dealers, Sub-Adviser will attempt to obtain the best
price and the most favorable execution of its orders. In placing orders, Sub-
Adviser will consider the experience and skill of the firm's securities traders
as well as the firm's financial responsibility and administrative efficiency.
Consistent with this obligation, Sub-Adviser may, subject to the approval of the
Fund's Board of Trustees, select brokers on the basis of the research,
statistical and pricing services they provide to a Portfolio and other clients
of Adviser or Sub-Adviser. Information and research received from such brokers
will be in addition to, and not in lieu of, the services required to be
performed by Sub-Adviser hereunder. A commission paid to such brokers may be
higher than that which another qualified broker would have charged for effecting
the same transaction, provided that Sub-
-2-
<PAGE>
Adviser determines in good faith that such commission is reasonable in terms
either of the transaction or the overall responsibility of Adviser and Sub-
Adviser to the Portfolios and their other clients and that the total commissions
paid by the Portfolios will be reasonable in relation to the benefits to the
Portfolio over the long-term. In addition, Sub-Adviser is authorized to take
into account the sale of shares of the Fund in allocating purchase and sale
orders for portfolio securities to brokers or dealers (including brokers and
dealers that are affiliated with Adviser, Sub-Adviser or the Fund's
distributor), provided that Sub-Adviser believes that the quality of the
transaction and the commission are comparable to what they would be with other
qualified firms. In no instance, however, will a Portfolio's securities be
purchased from or sold to the Adviser, Sub-Adviser, the Fund's distributor or
any affiliated person thereof, except to the extent permitted by the SEC or by
applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolios' securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for a
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund, the Portfolios' and
the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
-3-
<PAGE>
5. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolios are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay
--------
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities, and other investments
(including brokerage commissions and other transaction charges, if any)
purchased or sold for the Portfolios.
7. Compensation. For the services which the Sub-Adviser will render
------------
to Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolios:
for each of the Growth Equity and Small Cap Growth Equity Portfolios
(considered separately on a Portfolio-by-Portfolio basis): .40% of the
first $1 billion of each Portfolio's average daily net assets, .35% of the
next $1 billion of each Portfolio's average daily net assets, .325% of the
next $1 billion of each Portfolio's average daily net assets and .30% of
the average daily net assets of each Portfolio in excess of $3 billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to a Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to such
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the Advisory Agreement with respect to such Portfolio. Adviser
shall inform Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by Adviser or by
the Portfolios in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
-4-
<PAGE>
9. Duration and Termination. This Agreement will become effective as
------------------------
of the date hereof and, unless sooner terminated with respect to each Portfolio
as provided herein, shall continue in effect with respect to each Portfolio
until March 31, 1997. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to each Portfolio for successive annual periods
ending on March 31, provided such continuance is specifically approved at least
annually (a) by the vote of a majority of those members of the Fund's Board of
Trustees who are not interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Fund's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Portfolio. Notwithstanding the foregoing, this
Agreement may be terminated with respect to any Portfolio at any time, without
the payment of any penalty, by the Fund (by vote of the Fund's Board of Trustees
or by vote of a majority of the outstanding voting securities of the Portfolio),
or by Adviser or Sub-Adviser on 60 days' written notice, and will terminate
automatically upon any termination of the Advisory Agreement between the Fund
and Adviser. This Agreement will also immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested person" and "assignment" shall have the same
meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:/s/ Richard C. Caldwell
-----------------------------
PNC EQUITY ADVISORS COMPANY
By:/s/ Ernest E. Cecilia
-----------------------------
-6-
<PAGE>
EXHIBIT 6(d)
COMPASS CAPITAL FUNDS(R)
(PREVIOUSLY THE PNC(R) FUND)
AMENDMENT NO. 3 TO THE DISTRIBUTION AGREEMENT
This Amendment dated as of the __th day of January, 1996, is entered
into by and among COMPASS CAPITAL FUNDS, a Massachusetts business trust (the
"Company"), Provident Distributors, Inc. ("PDI"), a Delaware corporation ("PDI")
and Compass Distributor, Inc., a wholly-owned subsidiary of PDI ("CDI").
WHEREAS, the Company and PDI have entered into a Distribution
Agreement dated as of January 31, 1994, and amended as of September 23, 1994 and
October 18, 1994 (the "Distribution Agreement"), pursuant to which the Company
appointed PDI to act as distributor to the Company;
WHEREAS, the parties hereto desire to amend the Distribution Agreement
as provided herein; and
WHEREAS, except to the extent amended hereby, the Distribution
Agreement, as previously amended, shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as amended hereby.
NOW, THEREFORE, the parties hereby, intending
to be legally bound, hereby agree as follows:
1. Paragraph (f) of Section 2 (relating to the delivery of
documents) is amended to read in its entirety as follows:
"(f) The Company's Amended and Restated Distribution and Service
Plan relating to the Company's respective Share classes."
2. Paragraph 3A is amended to read in its entirety as follows:
"3A. Payments Relating to Distribution Plans. Payments by the
---------------------------------------
Company relating to any distribution plan within the meaning of
Rule 12b-1 under the 1940 Act (a "Plan") adopted by the Company's
Board of Trustees may be payable to the Distributor or its
assignees, all in accordance with the terms and conditions of
such Plan."
3. Paragraph 3B is amended to read in its entirety as follows:
<PAGE>
"3B. Payments of Sales Charges. Any front-end sales charges or
-------------------------
deferred sales charges payable in connection with purchases of
Series A Investor Class Shares, Series B Investor Class Shares
and Series C Investor Class Shares, respectively, shall be
payable to the Distributor or its assignees, all in accordance
with the Company's registration statement."
4. CDI is hereby substituted for PDI as a party to the Distribution
Agreement. All references to the "Distributor" in the Agreement shall be deemed
to refer to CDI for all periods beginning on or after the date hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first written above.
Compass Capital Funds(R)
By: ____________________________
Name: __________________________
Title: _________________________
Provident Distributors, Inc.
By: ____________________________
Name: __________________________
Title: _________________________
Compass Distributors, Inc.
By: ____________________________
Name: __________________________
Title: _________________________
<PAGE>
EXHIBIT 9 (a)
COMPASS CAPITAL FUNDS
ADMINISTRATION AGREEMENT
------------------------
AGREEMENT dated as of January __, 1996 between COMPASS CAPITAL
FUNDS(R), a Massachusetts business trust (the "Company"), PFPC INC. ("PFPC"), a
Delaware corporation, and COMPASS DISTRIBUTORS, INC. ("CDI"), a Delaware
corporation (collectively, the "Administrators").
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company desires to retain the Administrators to provide,
as co-administrators, certain administration services and PFPC agrees to provide
certain accounting services for each class and series of units of beneficial
interest ("shares") in each of the Company's investment portfolios
(individually, a "Fund," collectively, the "Funds") as listed on Appendix A (as
such Appendix may, from time to time, be supplemented (or amended)) and the
Administrators are willing to furnish such administration services, and PFPC is
willing to furnish such accounting services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound, it is agreed between the
parties hereto as follows:
1. APPOINTMENT OF ADMINISTRATORS. The Company hereby appoints each
-----------------------------
of the Administrators jointly to provide administration services, and PFPC to
provide accounting services, for each class and series of shares in each of the
Company's Funds on the terms and for the period set forth in this Agreement.
The Administrators and PFPC each accept such respective appointments and agree
to perform the services and duties set forth in Section 3 below in return for
the compensation provided in Section 5 below. In the event that the Company
establishes additional classes or investment portfolios other than the Funds
listed on Appendix A with respect to which it desires to retain the
Administrators to act as co-administrators and PFPC to act as fund accountant
hereunder, the Company shall notify the Administrators and PFPC, whereupon such
Appendix A shall be supplemented (or amended) and such portfolio shall become a
Fund hereunder and shall be subject to the provisions of this Agreement to the
same extent as the Funds (except to the extent that said provisions, including
the compensation payable on behalf of such new Fund, may be modified in writing
by the Company and Administrators at the time).
1
<PAGE>
2. DELIVERY OF DOCUMENTS. The Company has furnished each of the
---------------------
Administrators with copies, properly certified or authenticated, of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
a. The Company's Declaration of Trust, filed with the Secretary of
State of the Commonwealth of Massachusetts on December 22, 1988, as amended (the
"Charter");
b. The Company's Code of Regulations, as amended ("Code");
c. Resolutions of the Company's Board of Trustees authorizing the
execution and delivery of this Agreement;
d. The Company's most recent amendment to its Registration Statement
under the Securities Act of 1933, as amended, and under the 1940 Act on Form N-
1A as filed with the Securities and Exchange Commission (the "Commission") on
December 1, 1992 relating to its Funds (the Registration Statement, as presently
in effect and as amended or supplemented from time to time, is herein called the
"Registration Statement");
e. The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented, are
herein called the "Prospectuses"); and
f. The Company's Amended and Restated Distribution and Service Plan
relating to the respective share classes of the Company's investment portfolios
(collectively, the "Plan").
3. SERVICES AND DUTIES. The Administrators enter into the following
-------------------
covenants jointly and severally with respect to their administration and PFPC's
accounting services and duties:
a. Subject to the supervision and control of the Company's Board of
Trustees, the Administrators shall assist in supervising all aspects of the
Funds' operations, other than those investment advisory functions which are to
be performed by the Company's investment advisers pursuant to the Advisory
Agreements and those advisory and other services to be performed by any sub-
adviser or the custodian pursuant to the Company's Sub-Advisory Agreements and
Custodian Agreement, as amended from time to time, services to be performed by
the distributor
2
<PAGE>
pursuant to the Company's Distribution Agreement and the transfer agent pursuant
to the Company's Transfer Agency Agreement, as amended from time to time. In
this regard, the Administrators' responsibilities include:
(1) Providing personnel and supervising a facility in Wilmington,
Delaware (or in such other location as the Company shall reasonably
request) to receive purchase and redemption orders via the Company's toll-
free in-WATS telephone lines and transmitting such requests to the
Company's transfer agent as promptly as practicable;
(2) Providing for the preparing, supervising and mailing of
confirmations for all purchase and redemption orders to shareholders of
record;
(3) Providing and supervising the operation of an automated data
processing system to process purchase and redemption orders (the
Administrators assume responsibility for the accuracy of the data
transmitted for processing or storage);
(4) Maintaining a procedure external to the transfer agent's
system to reconstruct lost purchase and redemption data;
(5) Providing information and distributing written communications
concerning the Funds to their shareholders of record; handling shareholder
problems and calls;
(6) Supervising the services of individuals ("shareholder
representatives") provided by CDI whose principal responsibility and
function shall be to preserve and strengthen the Company's relationships
with its shareholders;
(7) Monitoring the Company's arrangements with respect to
services provided by certain institutional shareholders ("Service
Organizations") under the Plan, including monitoring and reviewing the
services rendered by Service Organizations to their customers who
beneficially own shares, pursuant to agreements between the Company and
such Service Organizations ("Servicing Agreements"); reviewing the
qualifications of Service Organizations wishing to enter into Servicing
Agreements with the Company; assisting in the execution and delivery of
Servicing Agreements; monitoring the Distributor's operations under the
Plan; monitoring the activities of the Company's transfer agent relating to
the calculation of front-end sales charges and deferred sales charges
payable in connection with the purchase of Shares, and the payment of
3
<PAGE>
all such sales charges to the Distributor or others (subject to the
applicable limitations of the National Association of Securities Dealers,
Inc. on asset-based sales charges); reporting to the Company's Board of
Trustees with respect to the amounts paid or payable by the Company from
time to time under the Plan and the nature of the services provided by
Service Organizations; and maintaining appropriate records in connection
with such duties; and
(8) Calculating the amount of distribution fees payable with respect
to the Plan on a daily basis and remitting such distribution fees pursuant to
the Plan.
b. The Administrators shall prepare or review, and provide
advice with respect to, all sales literature (advertisements, brochures and
shareholder communications) for each of the Funds and any class of shares
thereof.
c. The Administrators shall participate to the extent requested
by the Company and its counsel in the periodic updating of the Company's
Registration Statement; compile data and accumulate information for and
coordinate with the Company's Treasurer the preparation of reports to
shareholders of record and the Commission (e.g., Annual and Semi-Annual Reports
----
on Form N-SAR), it being understood that the preparation and filing of timely
Notices pursuant to Rule 24f-2 shall be performed by the Company's Treasurer
with the assistance and advice of the Company's counsel; and file with the
Commission and other federal and state agency, subject to the approval of the
Company's Treasurer, reports and documents including, without limitation, Annual
and Semi-Annual Reports on Form N-SAR and federal and state tax returns and
required tax filings other than those required to be filed by the Company's
custodian or transfer agent.
d. For so long as the Company maintains an office in
Wilmington, Delaware, the Administrators shall pay the Company on the first day
of each month during such period an amount not to exceed $1,500 (or such lesser
amount as is appropriate in the event that the combined annual expenses of the
Company, Trust for Federal Securities, Municipal Fund for California Investors,
Inc., Municipal Fund for New York Investors, Inc., Municipal Fund for Temporary
Investment and Temporary Investment Fund, Inc. (collectively, herein called the
"Companies") in maintaining their offices in Wilmington, Delaware total less
than $18,000 divided by the number of Companies which have maintained an office
in Wilmington, Delaware during the previous month).
e. The Administrators, after consultation with the distributor
and counsel for the Company, shall determine the jurisdictions in which the
Company's shares shall be registered
4
<PAGE>
or qualified for sale. The Administrators shall be responsible for maintaining
the registration or qualification of shares for sale under the securities laws
of any state and for preparing compliance filings pursuant to state securities
laws with the advice of the Company's counsel. Payment of share registration
fees and any fees for qualifying or continuing the qualification of the Company
or any Fund as a dealer or broker shall be made by the Company or Fund involved.
f. Monitor, and assist in developing compliance procedures for
each of the classes of the Company's Funds, which will include without
limitation, procedures to monitor compliance with each Fund's investment
objective, policies and limitations, tax matters, and applicable laws and
regulations.
g. The Administrators shall assist in monitoring of regulatory
and legislative developments which may affect the Company; assist in counseling
the Company with respect to regulatory examinations or investigations of the
Company; and work with the Company's counsel in connection with regulatory
matters or litigation.
h. PFPC agrees to maintain all financial accounts, records,
journals, ledgers and schedules for each Fund (other than those maintained by
the Company's Custodian and its Transfer Agent), and to install and maintain a
system of internal controls appropriate for entities of the size and complexity
of each Fund, and to provide reports, financial statements and other statistical
data as requested from time to time by the Administrators or by the Company. In
addition, PFPC shall compute each Fund's net asset value, net income and net
capital gain (loss) in accordance with the Company's Prospectus and resolutions
of its Board of Trustees. PFPC shall, together with the Company's Treasurer,
act as liaison with the Company's independent public accountants and shall
provide account analyses, fiscal year summaries and other audit related
schedules. PFPC shall take all reasonable action in the performance of its
obligations under this Agreement to assure that the necessary information is
made available to such accountants for the expression of their opinion, as such
may be required by the Company from time to time.
i. In compliance with the requirements of Rule 31a-3 under the
1940 Act, the Administrators agree that all records which they maintain for the
Company are the property of the Company and further agree to surrender promptly
to the Company any of such records upon the Company's request. The
Administrators further agree to preserve for the periods prescribed by Rule 31a-
2 under the 1940 Act the records required to be maintained by Rule 31a-1 under
said Act.
5
<PAGE>
j. If the expenses borne by any Fund in any fiscal year exceed the
applicable expense limitations imposed by the securities regulations of any
state in which the Fund's shares are registered or qualified for sale to the
public, the Administrators jointly and severally agree to reimburse such Fund
for a portion of any such excess expense in an amount equal to the portion that
the administration fees otherwise payable by the Fund to the Administrators bear
to the total amount of the investment advisory and administration fees otherwise
payable by the Fund. The expense reimbursement obligation of the Administrators
is limited to the amount of their fees hereunder for such fiscal year, provided,
--------
however, that notwithstanding the foregoing, the Administrators shall reimburse
- -------
such Fund for a portion of any such excess expenses in an amount equal to the
proportion that the fees otherwise payable to the Administrators bear to the
total amount of investment advisory and administration fees otherwise payable by
the Fund regardless of the amount of fees paid to the Administrators during such
fiscal year to the extent that the securities regulations of any state having
jurisdiction over the Fund so require. Such expense reimbursement, if any, will
be estimated, reconciled and paid on a monthly basis.
k. In the event of equipment failures beyond PFPC's control,
PFPC shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions but shall have no liability with respect thereto.
PFPC shall enter into and shall maintain in effect with appropriate parties one
or more agreements making reasonable provision for emergency use of electronic
data processing equipment to the extent appropriate equipment is available.
l. In performing all of their services and duties as co-
administrators, the Administrators will act in conformity with the Charter,
Code, Prospectuses and resolutions and other instructions of the Company's Board
of Trustees and will comply with the requirements of the 1940 Act and other
applicable federal or state law.
4. EXPENSES ASSUMED AS ADMINISTRATORS. The Administrators will
----------------------------------
bear all expenses incurred by them in performing their services and duties as
co-administrators, except as otherwise expressly provided herein. Other
expenses to be incurred in the operation of the Funds, including taxes,
interest, brokerage fees and commissions, if any, salaries and fees of officers
and trustees who are not officers, directors, shareholders or employees of the
Administrators, or the Company's investment adviser or distributor for the
Funds, Commission fees and state Blue Sky qualification fees, advisory and
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, outside
6
<PAGE>
auditing and legal expenses, costs of maintaining corporate existence,
typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Funds, costs of shareholders'
reports and corporate meetings and any extraordinary expenses, will be borne by
the Company, provided, however, that the Company will not bear, directly or
-------- -------
indirectly, the cost of any activity which is primarily intended to result in
the sale of shares of the Funds otherwise than pursuant to the Plan.
5. COMPENSATION.
------------
a. For the services provided and the expenses assumed as
Administrators pursuant to Section 4 above, the Company will pay to PFPC, as
agent for itself and CDI, a monthly fee based on the net assets of each Fund,
initially in the amounts or at rates set forth on Appendix B hereto, and as
modified by agreement of the Administrators and the Company from time to time.
The fee attributable to each Fund shall be the several (and not joint or joint
and several) obligation of each portfolio.
b. For the purpose of determining fees payable to the Administrators
for administration services and PFPC for accounting services, the value of each
Fund's net assets shall be computed as required by its Prospectuses, generally
accepted accounting principles and resolutions of the Company's Board of
Trustees. The fee attributable to each Fund shall be the several (and not joint
or joint and several) obligation of each such Fund.
c. The Administrators will from time to time employ or associate with
themselves such person or persons as they may believe to be fitted to assist
them in the performance of this Agreement. Such person or persons may be
officers and employees who are employed by both the Company and either of the
Administrators. The compensation of such person or persons shall be paid by the
Administrators, and no obligation shall be incurred on behalf of the Company in
such respect.
6. PROPRIETARY AND CONFIDENTIAL INFORMATION. The Administrators
----------------------------------------
agree on behalf of themselves and their employees to treat confidentially and as
proprietary information of the Company all records and other information
relative to the Company and its Funds and prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of their responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be withheld where the
Administrators may be exposed to civil or criminal contempt proceedings for
failure to comply,
7
<PAGE>
when requested to divulge such information by duly constituted authorities, or
when so requested by the Company.
7. LIMITATIONS OF LIABILITY. Neither Administrator shall be liable
------------------------
for any error of judgment or mistake of law or for any loss suffered by the
Company in connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, director, employee or agent of either of the Administrators, who may be
or become an officer, employee or agent of the Company, shall be deemed, when
rendering services to the Company or acting on any business of the Company
(other than services or business in connection with the Administrators' duties
as co-administrator hereunder) to be rendering such services to or acting solely
for the Company and not as an officer, director, employee or agent or one under
the control or direction of the Administrators even though paid by either of
them. The Administrators agree that their liability under this Agreement, as
set forth herein, shall be joint and several.
8. DURATION AND TERMINATION. Unless sooner terminated as provided
------------------------
herein, this Agreement shall continue in effect with respect to the Fund until
March 31, 1997. Thereafter, if not terminated, this Agreement shall continue
automatically for successive terms of one year, provided such that continuance
is specifically approved at least annually (a) by a vote of a majority of those
members of the Company's Board of Trustees who are not parties to this Agreement
or "interested persons" of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (b) by the Company's Board of
Trustees or by vote of a "majority of the outstanding voting securities" of the
Company; provided, however, that this Agreement may be terminated by the Company
-------- -------
at any time, without the payment of any penalty, by vote of a majority of the
entire Board of Trustees or a vote of a "majority of the outstanding voting
securities" of the Company, on 60-days' written notice to the Administrators, or
by the Administrators at any time, without the payment of any penalty, on 90-
days' written notice to the Company. This Agreement will automatically and
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 Act.)
8
<PAGE>
9. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may
---------------------------
be changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, discharge
or termination is sought.
10. NOTICES. Notices of any kind to be given to the Company
-------
hereunder by the Administrators shall be in writing and shall be duly given if
mailed or delivered to the Company at Suite 100, 400 Bellevue Parkway,
Wilmington, Delaware 19809, Attention: Mr. Edward J. Roach, Treasurer, with a
copy to PNB Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-
3496, Attention: Morgan R. Jones, Secretary, or at such other address or to
such individual as shall be so specified by the Company to the Administrators.
Notices of any kind to be given to the Administrators hereunder by the Company
shall be in writing and shall be duly given if mailed or delivered to Compass
Distributors, Inc. 259 Radnor-Chester Road, Suite 135, Radnor, Pennsylvania
19087, Attention: Monroe J. Haegele and to PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809, Attention: Vincent J. Ciavardini, or at such other
address or to such other individual as shall be so specified by an Administrator
to the Company.
11. MISCELLANEOUS.
-------------
a. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors.
b. The names "Compass Capital Funds" and "Trustees of Compass
Capital Funds" refer specifically to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated December 22, 1988, which is hereby referred to and a
copy of which is on file at the office of the State Secretary of the
Commonwealth of Massachusetts and at the principal office of the Company. The
obligations of "Compass Capital Funds" entered into in the name or on behalf
thereof by any of the Trustees, officers, representatives or agents are not made
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders, representatives or agents of the Company personally, but
bind only the Trust property (as defined in the Declaration of Trust), and all
persons dealing with any Fund or
9
<PAGE>
class of shares of the Company must look solely to the Trust property belonging
to such Fund or class for the enforcement of any claims against the Company.
12. COUNTERPARTS. This Agreement may be executed in counterparts,
------------
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
COMPASS CAPITAL FUNDS
By:_______________________
PFPC INC.
By:________________________
COMPASS DISTRIBUTORS, INC.
By:_________________________
10
<PAGE>
Exhibit (9)(b)
THE PNC/R/ FUND
CO-ADMINISTRATION AGREEMENT
AGREEMENT dated as of December 1, 1995 between THE PNC/R/ FUND, a
Massachusetts business trust (the "Company"), and COMPASS CAPITAL GROUP, INC., a
Delaware corporation (the "Co-Administrator").
WHEREAS, the Company is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Company desires to retain the Co-Administrator to provide
certain administration services and the Co-Administrator is willing to furnish
such administration services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound, it is agree between the
parties hereto as follows:
1. Appointment of Co-Administrator. The Company hereby appoints the
-------------------------------
Co-Administrator to provide certain administration services, as more fully
described herein, for each class and series of shares in each of the Company's
investment portfolios set forth in Appendix A hereto (the "Portfolios") on the
terms and for the period set forth in this Agreement. The Co-Administrator
accepts such appointment and agrees to perform the services and duties set forth
in Section 3 below in return for the compensation provided in Section 5 below.
In the event that the Company establishes additional classes or investment
portfolios other than the Portfolios listed on Appendix A with respect to which
it desires to retain the Co-Administrator to Act as an administrator hereunder,
the Company shall notify the Co-Administrators, whereupon such Appendix A shall
be supplemented (or amended) and such portfolio shall become a Portfolio
hereunder and shall be subject to the provisions of this Agreement to the same
extent as the Portfolios (except to the extent that said provisions, including
the compensation payable on behalf of such new Portfolio, may be modified in
writing by the Company and the Co-Administrator at the time).
2. Delivery of Documents. The Company has furnished the
---------------------
Co-Administrator with copies, properly certified or authenticated, of each of
the following documents and will deliver to it all future amendments and
supplements, if any:
a. The Company's Declaration of Trust, filed with the Secretary
of State of the Commonwealth of Massachusetts on December 22, 1988, as amended
(the "Charter");
<PAGE>
b. The Company's Code of Regulations, as amended ("Code");
c. Resolutions of the Company's Board of Trustees authorizing
the execution and delivery of this Agreement ;
d. The Company's most recent amendment to its Registration
Statement under the Securities Act of 1933, as amended, and under the 1940 Act
on Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") relating to its Portfolios (the Registration Statement, as
presently in effect and as amended or supplemented from time to time, is herein
called the "Registration Statement"); and
e. The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented, are
herein called the "Prospectuses").
3. Services and Duties.
-------------------
a. Subject to the supervision and control of the Company's Board
of Trustees, the Co-Administrator shall be responsible for the performance of
the following services:
(1) The oversight and coordination of the performance of each
of the service providers to the Company, including without
limitation, its investment advisers, sub-advisers, other
administrators, transfer agent, custodian, distributor,
shareholder servicing agents, legal counsel and independent
auditors;
(2) The negotiation of service contracts and arrangements
between the Company and each of its service providers;
(3) Acting as liaison between the Company's Board of Trustees
and its service providers;
(4) Assisting in the preparation of materials for meetings
of the Company's Board of Trustees and shareholders; and
(5) Providing general ongoing business management and support
services in connection with the Company's operations.
-2-
<PAGE>
b. In performing all of its services and duties hereunder, the
Co-Administrator will act in conformity with the Charter, Code, Prospectuses and
resolutions and other instructions of the Company's Board of Trustees and will
comply with the requirements of the 1940 Act and other applicable federal or
state law.
4. Expenses Assumed as Co-Administrator. The Co-Administrator will
bear all expenses incurred by it in performing its services and duties
hereunder, except as otherwise expressly provided herein. Other expenses to be
incurred in the operation of the Portfolios, including taxes, interest,
brokerage fees and commissions, if any; salaries and fees of officers and
trustees who are not officers, directors, shareholders or employees of the
Company's administrators or of the distributor for the Portfolios; Commission
fees and state Blue Sky qualification fees; advisory and administration fees;
charges of custodians; transfer and dividend disbursing agents' fees; certain
insurance premiums; outside auditing and legal expenses; costs of maintaining
corporate existence; typesetting and printing of Prospectuses for regulatory
purposes and for distribution to current shareholders of the Portfolios; costs
of shareholders' reports and corporate meetings; and any extraordinary expenses,
will be borne by the Company, provided, however, that the Company will not bear,
directly or indirectly, the cost of any activity which is primarily intended to
result in the sale of shares of the Portfolios otherwise than pursuant to its
Amended and Restated Distribution and Service Plan.
5. Compensation.
------------
a. For the services provided and the expenses assumed as
Co-Administrator pursuant to Section 4 above, the Company will pay to the
Co-Administrator a monthly fee at an annual rate equal to 0.03% of the average
daily net assets of each Portfolio, as modified by agreement of the
C0-Administrator and the Company from time to time. The fee attributable to
each Portfolio shall be the several (and not joint or joint and several)
obligation of each Portfolio.
b. For the purpose of determining fees payable to the
Co-Administrator for the services provided hereunder, the value of each
Portfolio's net assets shall be computed as required by its Prospectuses,
generally accepted accounting principles and resolutions of the Company's Board
of Trustees. THe fee attributable to each Portfolio shall be the several (and
not joint or joint and several) obligation of each such Portfolio.
c. The Co-Administrator will from time to time employ or
associate with itself such person or persons as it may
-3-
<PAGE>
believe to be fitted to assist it in the performance of this Agreement. Such
person or persons may be officers and employees who are employed by both the
Company and the Co-Administrator. The compensation of such person or persons
shall be paid by the Co-Administrator, and no obligation shall be incurred on
behalf of the Company in such respect.
d. It the expenses borne by any Portfolio in any fiscal year
exceed the applicable expense limitations imposed by the securities regulations
of any state in which the Portfolio's shares are registered or qualified for
sale to the public, the Co-Administrator agrees to reimburse such Portfolio for
a portion of any such excess expense in an amount equal to the proportion that
the fees otherwise payable by the Portfolio to the Co-Administrator hereunder
bears to the total amount of the investment advisory and administration fees
otherwise payable by the Portfolio. The expense reimbursement obligation of
theCo-Administrator shall reimburse such Portfolio for a portion of any such
excess expenses in an amount equal to the proportion that the fees otherwise
payable to the Co-Administrator bears to the total amount of investment advisory
and administration fees otherwise payable by the Portfolio regardless of the
amount of fees paid to the Co-Administrator during such fiscal year to the
extent that the securities regulations of any state having jurisdiction over the
Portfolio so require. Such expense reimbursement, if any, will be estimated,
reconciled and paid on a monthly basis.
6. Proprietary and Confidential Information. The Co-Administrator
----------------------------------------
agrees on behalf of itself and its employees to treat confidentially and as
proprietary information of the Company all records and other information
relative to the Company and its Portfolios and prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of their responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be withheld where the
Co-Administrator may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Company.
7. Limitations of Liability. The Co-Administrator shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Company in connection with the matters to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though also
an officer, director, employee or agent
-4-
<PAGE>
of the Co-Administrator, who may be or become an officer, employee or agent of
the Company, shall be deemed, when rendering services to the Company or acting
on any business of the Company (other than services or business in connection
with the Co-Administrator's duties hereunder), to be rendering such services to
or acting solely for the Company and not as an officer, director, employee or
agent or one under the control or direction of the Co-Administrator even though
paid by the Co-Administrator.
8. Duration and Termination. This Agreement shall become effective
------------------------
upon its execution as of the date first written above and, unless sooner
terminated as provided herein, shall continue until March 31, 1997. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
terms of one year, provided that such continuance is specifically approved at
least annually (a) by a vote of a majority of those members of the Company's
Board of Trustees who are not parties to this Agreement or "interested persons"
of any such party, cast in person at a meeting called for the purpose of voting
on such approval, and (b) by the Company's Board of Trustees or by vote of a
"majority of the outstanding voting securities" of the Company; provided,
however, that this Agreement may be terminated by the Company at any time,
without the payment of any penalty, by vote of a majority of the entire Board of
Trustees or a vote of a "majority of the outstanding voting securities" of the
Company, on 60-days' written notice to the Co-Administrator, or by the Co-
Administrator at any time, without the payment of any penalty, on 90-days'
written notice to the Company. (As used in this Agreement, the terms "majority
of the outstanding voting securities" and "interested person" shall have the
same meaning as such terms have in the 1940 Act.)
9. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, discharge
or termination is sought.
10. Notices. Notices of any kind to be given to the Company
hereunder by the Co-Administrator shall be in writing and shall be duly given if
mailed or delivered to the Company at Bellevue Park Corporate Center, Suite 100,
400 Bellevue Parkway, Wilmington, Delaware 19809, Attention: Mr. Edward J.
Roach, Treasurer, with a copy to Drinker Biddle & Reath, Philadelphia National
Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496,
Attention: Morgan R. Jones, Secretary, or at such other address or to such
individual as shall be so specified by the Company to the Co-Administrator.
Notices of any kind to be given to the Co-Administrator hereunder by the Company
shall be in writing and shall be duly given if mailed or delivered to Compass
Capital Group, Inc., 345 Park Avenue, 30th Floor, New York, New York 10154,
Attention: Karen H. Sabath, or
-5-
<PAGE>
at such other address or to such other individual as shall be so specified by
the Co-Administrator to the Company.
11. Miscellaneous.
-------------
a. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors.
b. The names "The PNC(R) Fund" and "Trustees of The PNC(R) Fund"
refer specifically to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988, which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"The PNC(R) Fund" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are not made individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders,
representatives or agents of the Company personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any Portfolio or class of shares of the Company must look solely to the Trust
Property belonging to such Portfolio or class for the enforcement of any claims
against the Company.
12. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
13. Counterparts. This Agreement may be executed in counterparts, all
------------
of which together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
THE PNC(R) FUND
By:
-------------------------------------
COMPASS CAPITAL GROUP, INC.
By:
-------------------------------------
-7-
<PAGE>
APPENDIX A
to the
Co-Administration Agreement
between The PNC(R) Fund
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 Value 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
-8-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
International Equity
Portfolio..................... Institutional
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
Short Government 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
-9-
<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
-10-
<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
-11-
<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
Agreed to and accepted as of December 1, 1995:
THE PNC(R) FUND
By:
-------------------------
COMPASS CAPITAL GROUP, INC.
By:
-------------------------
-12-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the following with respect to Post-Effective Amendment No. 21
pursuant to the Securities Act of 1933 to the Registration Statement on Form N-
1A of Compass Capital Funds, formerly The PNC Fund (File No. 33-26305):
. The incorporation by reference of our report dated November 22, 1995 on
our audits of the financial statements and financial highlights of The PNC
Fund as of September 30, 1995.
. The incorporation by reference of our report dated March 15, 1996 on our
audits of the financial statements and financial highlights of the New
Jersey Municipal Money Market and the New Jersey Tax-Free Income Portfolios
of the Compass Capital Funds as of January 31, 1996.
. The incorporation by reference of our report dated March 15, 1996 on our
audits of the financial statements and financial highlights of the
International Fixed Income Fund Portfolio of The Compass Capital Group of
Funds as of January 31, 1996.
. The incorporation by reference of our report dated May 17, 1996 on our
audit of the financial statements and financial highlights of the Core Bond
and Short Government Bond Portfolios of the Compass Capital Funds as of
March 31, 1996 and for the period from July 1, 1995 through March 31, 1996.
. The incorporation by reference of our report dated January 19, 1996 on our
audits of the financial statements and financial highlights of DFA
Investment Trust Company as of November 30, 1995.
. The reference to our Firm under the heading "Miscellaneous - Independent
Accountants" and the reference to our Firm as experts under the heading
"Financial Statements" in the Statement of Additional Information in the
Compass Capital Funds.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 30, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 21 to Registration Statement No. 33-26305 and Amendment No. 23 to
Registration Statement No. 811-5742 of Compass Capital Funds on Form N-1A of our
reports dated August 7, 1995 on the financial statements of The Short Duration
Portfolio, The Core Fixed Income Portfolio and The Multi-Sector Mortgage
Securities Portfolio III of The BFM Institutional Trust Inc. appearing in the
Annual Reports of The BFM Institutional Trust Inc. for the year ended June 30,
1995.
We also consent to the reference to us as "Experts" in the Statement of
Additional Information which is a part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
May 30, 1996
<PAGE>
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. 21 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
Philadelphia, Pennsylvania
May 30, 1996
<PAGE>
Exhibit (15)(a)
COMPASS CAPITAL FUNDS(R)
AMENDED AND RESTATED
DISTRIBUTION AND SERVICE PLAN
-----------------------------
January 16, 1996
This Distribution and Service Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Compass Capital Funds, a Massachusetts
business trust (the "Fund"), with respect to the various classes of shares
(each, a "Class") of the portfolios of the Fund (each, a "Portfolio") listed on
Appendix A hereto, as amended from time to time, subject to the terms and
conditions set forth herein. The Service Fees and Shareholder Processing Fees
(each as defined herein) payable pursuant to the Plan are fees payable for the
administration and servicing of shareholder accounts, as more fully described in
Section 2 below, and not costs which are primarily intended to result in the
sale of the Fund's shares and which would require approval pursuant to the Rule.
Section 1. Distribution Fees
-----------------
(a) Pursuant to the Plan, the Fund may pay to (i) the
Distributor of its shares, Compass Distributors, Inc., or any entity that may
in the future act as a distributor for its shares (collectively, the
"Distributor"), and/or (ii) Compass Capital Group, Inc. or any other affiliate
of PNC Bank, National Association (collectively, "CCG"), with respect to and at
the expense of each Class of each Portfolio listed on Appendix A hereto, a fee
for distribution and sales support services, as applicable, and as more fully
described in Section 1(b) hereof (the "Distribution Fee"), such fee in the
aggregate to be at the annual rate specified with respect to such Class of such
Portfolio under the column "Distribution Fee" on Appendix A hereto.
(b) Payments of the Distribution Fee under the Plan shall be
used primarily to compensate the Distributor for distribution services and sales
support services provided, and/or to CCG for sales support services provided,
respectively, in connection with the offering and sale of shares of the
applicable Class of the applicable Portfolio, and to reimburse the Distributor
and/or CCG for related expenses incurred, including payments by the Distributor
and/or CCG to compensate or reimburse brokers, dealers, other financial
institutions or other industry professionals (collectively, "Selling Agents"),
for sales support services provided and related expenses incurred by such
Selling
<PAGE>
Agents. The services and expenses described in this Section 1(b) may include,
but are not limited to, the following: (i) the development, formulation and
implementation of marketing and promotional activities, including direct mail
promotions and television, radio, magazine, newspaper, electronic and other mass
media advertising; (ii) the preparation, printing and distribution of
prospectuses and reports (other than prospectuses or reports used for regulatory
purposes or for distribution to existing shareholders); (iii) the preparation,
printing and distribution of sales literature; (iv) expenditures for sales or
distribution support services such as for telephone facilities and in-house
telemarketing; (v) preparation of information, analyses and opinions with
respect to marketing and promotional activities; (vi) commissions, incentive
compensation or other compensation to, and expenses of, account executives or
other employees of the Distributor, CCG or Selling Agents, attributable to
distribution or sales support activities, as applicable, including interest
expenses and other costs associated with financing of such commissions,
compensation and expenses; (vii) travel, equipment, printing, delivery
and mailing costs, overhead and other office expenses of the Distributor, CCG or
Selling Agents, attributable to distribution or sales support activities, as
applicable; (viii) the costs of administering the Plan; (ix) expenses of
organizing and conducting sales seminars; and (x) any other costs and expenses
relating to distribution or sales support activities.
(c) Payments of the Distribution Fee on behalf of a particular
Portfolio must be in consideration of services rendered for or on behalf of such
Portfolio. However, joint distribution or sales support financing with respect
to the shares of the Portfolios (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a person,
or affiliated persons of the Distributor or CCG) shall be permitted in
accordance with applicable law. Payments of the Distribution Fee under Section
1 of the Plan may be made without regard to expenses actually incurred.
(d) It is acknowledged that the Distributor, CCG and other
affiliates of PNC Bank, National Association and other parties that receive fees
from the Fund may each make payments without limitation as to amount relating to
distribution or sales support activities, as applicable, in connection with each
Class of each Portfolio out of its past profits or any additional sources other
than the Distribution Fee which are available to it.
Section 2. Service Fees and Shareholder Processing Fees
--------------------------------------------
(a) Pursuant to the Plan, the Fund shall pay to CCG, with
respect to and at the expense of each Class of each
-2-
<PAGE>
Portfolio listed on Appendix A hereto, (i) a fee in respect of the provision of
personal services to shareholders of such Class of such Portfolio, as more fully
described in Section 2(b) hereof (the "Service Fee"), such fee to be at the
annual rate specified with respect to such Class of such Portfolio under the
column "Service Fee" on Appendix A hereto, and (ii) a fee in respect of the
provision of certain activities relating to the processing and administration of
shareholder accounts in such Class of such Portfolio, as more fully described in
Section 2(c) hereof (the "Shareholder Processing Fee"), such fee to be at the
annual rate specified with respect to such Class of such Portfolio under the
column "Shareholder Processing Fee" on Appendix A hereto. CCG shall determine
the amount of the Service Fee and the Shareholder Processing Fee to be paid to
one or more brokers, dealers, other financial institutions or other industry
professionals (collectively, "Service Agents") and the basis on which such
payments will be made. Payments to a Service Agent will be subject to
compliance by the Service Agent with the terms of any related Plan agreement
entered into by the Service Agent.
(b) Payments of the Service Fee shall be used to compensate CCG
and Service Agents for general shareholder liaison services provided with
respect to shareholders in the related Class of the related Portfolio,
including, but not limited to, (i) answering shareholder inquiries regarding
account status and history, the manner in which purchases, exchanges and
redemptions of shares may be effected and certain other matters pertaining to
the shareholders' investments; and (ii) assisting shareholders in designating
and changing dividend options, account designations and addresses.
(c) Payments of the Shareholder Processing Fee shall be used to
compensate CCG and Service Agents for certain services relating to the
processing and administration of shareholder accounts with respect to
shareholders in the related Class of the related Portfolio, which may include
some or all of the following: (i) providing necessary personnel and facilities
to establish and maintain shareholder accounts and records; (ii) assisting in
aggregating and processing purchase, exchange and redemption transactions; (iii)
placing net purchase and redemption orders with the Distributor; (iv) arranging
for wiring of funds; (v) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (vi) processing dividend payments;
(vii) verifying and guaranteeing shareholder signatures in connection with
redemption orders and transfers and changes in shareholder-designated accounts,
as necessary; (viii) providing periodic statements showing a customer's account
balance and, to the extent practicable, integrating such information with other
customer transactions otherwise effected through or with a Service Agent;
(ix) furnishing (either separately or on an integrated basis with other reports
sent to a shareholder by a Service Agent) monthly and year-end statements
-3-
<PAGE>
and confirmations of purchases, exchanges and redemptions; (x) transmitting on
behalf of the Fund, proxy statements, annual reports, updating prospectuses and
other communications from the Fund to the shareholders; (xi) receiving,
tabulating and transmitting to the Fund proxies executed by shareholders with
respect to shareholder meetings; (xii) providing subaccounting with respect to
shares beneficially owned by customers or the information to the Fund necessary
for subaccounting; (xiii) sub-transfer agency services; and (xiv) providing such
other similar services as the Fund or a shareholder may request. It is intended
that none of the services provided in consideration of the Shareholder
Processing Fee be of a nature so as to render the Shareholder Processing Fee a
"service fee" as defined in Article III, Section 26, of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
(d) Payments of the Service Fee and the Shareholder Processing
Fee under Section 2 of the Plan may be made without regard to expenses actually
incurred.
Section 3. Calculation and Payment of Fees
-------------------------------
The amount of the Distribution Fee, Service Fee and Shareholder
Processing Fee payable with respect to each Class of each Portfolio listed on
Appendix A hereto shall be calculated daily and paid monthly, at the applicable
annual rates indicated on Appendix A. The Distribution Fee, Service Fee and
Shareholder Processing Fee shall be calculated and paid separately for each
Class of each Portfolio.
Section 4. Approval of Plan
----------------
The Plan will become effective immediately, as to any Class of any
Portfolio, upon its approval by (a) a majority of the Board of Trustees,
including a majority of the trustees who are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements entered into in
connection with the Plan, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of the Plan, and (b) with respect to
Section 1 of the Plan only, a majority of the outstanding shares of such Class
of such Portfolio.
Section 5. Continuance of the Plan
-----------------------
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Trustees in the
manner described in Section 4 above.
-4-
<PAGE>
Section 6. Additional Classes and Portfolios
---------------------------------
The Plan shall become effective with respect to Classes of Portfolios
not currently listed on Appendix A hereto upon obtaining the requisite approvals
with respect to such Classes of Portfolios in accordance with Section 4 above.
Section 7. Termination
-----------
The Plan may be terminated at any time with respect to any Class of
any Portfolio without penalty at any time by (a) a vote of a majority of the
Trustees who are not "interested persons" (as defined in the Act) of the Fund
and who have no direct or indirect financial interest in the operation of the
Plan or in any agreements entered into in connection with the Plan, or (b) a
vote of a majority of the outstanding shares of such Class of such Portfolio.
The termination of the Plan with respect to any Class of any Portfolio shall
not result in the termination of the Plan with respect to any other Class of
that Portfolio or any other Portfolio.
Section 8. Amendments
----------
The Plan may not be amended with respect to any Class of any Portfolio
so as to increase materially the amount of the Distribution Fee described in
Section 1 above with respect to such Class of such Portfolio unless the
amendment is approved by a vote of at least a majority of the outstanding shares
of such Class of such Portfolio and otherwise complies with Rule 18f-3(e)(2)
under the Act or any successor provision as in effect at the time of such
amendment. In addition, no material amendment to the Plan may be made unless
approved by the Fund's Board of Trustees in the manner described in Section 4
above.
Section 9. Section of Certain Trustees
---------------------------
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not "interested persons" of the Fund (as defined in the
Act) will be committed to the discretion of the Trustees then in office who are
not "interested persons" (as so defined) of the Fund.
Section 10. Written Reports
---------------
While the Plan is in effect, the Fund's Board of Trustees shall
receive, and the Trustees shall review, at least quarterly, written reports
complying with the requirements of the Rule, which set out the amounts expended
under the Plan and the purposes for which those expenditures were made.
-5-
<PAGE>
Section 11. Preservation of Materials
-------------------------
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 10 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 12. Limitation of Liability
-----------------------
The names "Compass Capital Funds" and "Trustees of Compass Capital
Funds" refer respectively to the trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.
Section 13. Miscellaneous
-------------
The captions in the Plan are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
IN WITNESS WHEREOF, the Fund has executed the Plan as of January 16,
1996 on behalf of each Class of each Portfolio listed on Appendix A hereto.
COMPASS CAPITAL FUND
By:____________________________
Vice President and Treasurer
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Small Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Small Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Growth Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Value Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Select Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Index Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Emerging Service 0% .15% .15%
Markets Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Balanced Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Short Government Institutional 0% 0% 0%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Government Bond Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Bond Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Managed Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Tax-Free Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Pennsylvania Institutional 0% 0% 0%
Tax-Free Service 0% .15% .15%
Income Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Tax- Institutional 0% 0% 0%
Free Income Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Tax-Free Institutional 0% 0% 0%
Income Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Money Market Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Municipal Money Institutional 0% 0% 0%
Market Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Municipal Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Pennsylvania Institutional 0% 0% 0%
Municipal Money Service 0% .15% .15%
Market Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
North Carolina Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Virginia Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Multi-Sector Institutional 0% 0% 0%
Mortgage
Securities
Portfolio III
</TABLE>
A-4
<PAGE>
Exhibit 18
COMPASS CAPITAL FUNDS/SM/
(the "Fund")
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18f-3 FOR OPERATION OF
A MULTI-CLASS DISTRIBUTION SYSTEM
-------------------------------------------------
I. INTRODUCTION
----------------
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") promulgated Rule 18f-3 under the Investment Company Act of 1940,
as amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution system without the need to obtain an exemptive order
under Section 18 of the 1940 Act. Rule 18f-3, which became effective on April
3, 1995, requires an investment company to file with the Commission a written
plan specifying all of the differences among the classes, including the various
services offered to shareholders, the different distribution arrangements for
each class, the methods for allocating expenses relating to those differences
and any conversion features or exchange privileges. Previously, the Fund
operated a multi-class distribution system pursuant to an exemptive order
granted by the Commission on August 9, 1994. On September 29, 1995, the Board
of Trustees of the Fund authorized the Fund to operate its current multi-class
distribution system in compliance with Rule 18f-3. This Plan pursuant to Rule
18f-3 became effective on October 6, 1995 when it was filed with the Commission,
and is hereby amended and restated as of January 13, 1996.
II. ATTRIBUTES OF CLASSES
--------------------------
A. Generally
---------
Each investment portfolio of the Fund (each a "Portfolio" and,
collectively, the "Portfolios") may offer five classes of shares: (i) Service
Shares; (ii) Series A Investor Shares; (iii) Series B Investor Shares; (iv)
Series C Investor Shares; and (v) Institutional Shares.
In general, shares of each class shall be identical except for
different expense variables (which will result in different yields or total
returns for each class), certain related rights and certain shareholder
services. More particularly, Series A Investor, Series B Investor, Series C
Investor, Service and Institutional Shares of each Portfolio shall represent
equal pro rata interests in the assets of the
<PAGE>
particular Portfolio, and shall be identical in all respects, except for: (a)
the impact of (i) distribution, shareholder servicing and shareholder processing
expenses under the Fund's Amended and Restated Distribution and Service Plan
assessed to each particular share class; and (ii) any incremental expenses
identified from time to time that should be properly allocated to each
particular share class so long as any changes in expense allocations are
reviewed and approved by a vote of the Board of Trustees, including a majority
of the non-interested trustees; (b) the fact that each class shall vote
separately on any matter submitted to shareholders that pertains to (i) the
Fund's Amended and Restated Distribution and Service Plan applicable to such
class and (ii) the class expenses borne by such class; (c) the exchange
privileges and/or conversion features of each class of shares; (d) the sales
charge(s) applicable to certain classes of shares; (e) the designation of each
class of shares of a Portfolio; and (f) the different shareholder services
relating to each class of shares.
B. Sales Charges; Distribution Arrangements; Other Expenses
--------------------------------------------------------
Series A Investor Shares
Series A Investor Shares shall be available for purchase through
securities brokers, dealers or financial institutions or through the Fund's
transfer agent.
Series A Investor Shares of the Fund's equity portfolios (the "Equity
Portfolios") and bond portfolios (the "Bond Portfolios") generally shall be
subject to a front-end sales charge at the rates (and subject to the reductions
and exemptions) described in their prospectus. When the aggregate offering
price of Series A Investor Shares of the Equity and Bond Portfolios purchased by
an investor qualifies the investor to purchase such shares without paying a
front-end sales charge, a contingent deferred sales charge may be imposed at the
rates (and subject to the reductions and exemptions) described in the
prospectus. Series A Investor Shares of the Fund's money market portfolios (the
"Money Market Portfolios") shall not be subject to a sales load.
Series A Investor Shares of a Portfolio shall bear the expense of
distribution, shareholder servicing and shareholder processing fees described in
the prospectus.
Distribution fees shall be payable to the Fund's distributor and/or to
Compass Capital Group, Inc. or any other affiliate of PNC Bank, National
Association (collectively, "CCG") primarily: (i) to compensate the distributor
for distribution and sales support services and to reimburse the distributor for
related expenses, including payments to brokers, dealers, other financial
institutions or other industry professionals
-2-
<PAGE>
(collectively, "Selling Agents") for sales support services; and (ii) to
compensate CCG for sales support services and to reimburse CCG for related
expenses, including payments to Selling Agents for sales support services. The
Fund's distributor, CCG and other parties that receive fees from the Fund may
each make payments without limitation as to amount in connection with
distribution or sales support activities relating to Series A Investor Shares
out of its past profits or any additional sources (other than distribution fees)
which are available to it.
Shareholder servicing fees shall be payable to CCG primarily to
compensate CCG and brokers, dealers, other financial institutions or other
industry professionals (collectively, "Service Agents") for general shareholder
liaison services.
Shareholder processing fees shall be payable to CCG primarily to
compensate CCG and Service Agents for services relating to the processing and
administration of shareholder accounts.
Series B and Series C Investor Shares
Series B and Series C Investor Shares of the Equity and Bond
Portfolios shall be available for purchase through securities brokers, dealers
or financial institutions or through the Fund's transfer agent. Series B and
Series C Investor Shares of the Equity and Bond Portfolios generally shall be
subject to a contingent deferred sales charge at the rates (and subject to the
reductions and exemptions) described in their prospectus.
Series B Investor Shares of the Money Market Portfolios shall be
available only to holders of Series B Investor Shares in the Equity or Bond
Portfolios who exchange their Series B Investor Shares in such Portfolios for
Series B Investor Shares in the Money Market Portfolios.
Series C Investor Shares of the Money Market Portfolios shall be
available only to holders of Series C Investor Shares in the Equity or Bond
Portfolios who exchange their Series C Investor Shares in such Portfolios for
Series C Investor Shares in the Money Market Portfolios.
Series B and Series C Investor Shares of a Portfolio shall bear the
expense of distribution, shareholder servicing and shareholder processing fees
described in the prospectus.
Distribution fees shall be payable to the Fund's distributor and/or to
CCG primarily: (i) to compensate the distributor for distribution and sales
support services and to reimburse the distributor for related expenses,
including
-3-
<PAGE>
payments to Selling Agents for sales support services; and (ii) to compensate
CCG for sales support services and to reimburse CCG for related expenses,
including payments to Selling Agents for sales support services. The Fund's
distributor, CCG and other parties that receive fees from the Fund may each make
payments without limitation as to amount in connection with distribution or
sales support activities relating to Series B and Series C Investor Shares out
of its past profits or any additional sources (other than distribution fees)
which are available to it.
Shareholder servicing fees shall be payable to CCG primarily to
compensate CCG and Service Agents for general shareholder liaison services.
Shareholder processing fees shall be payable to CCG primarily to
compensate CCG and Service Agents for services relating to the processing and
administration of shareholder accounts.
Service Shares
Service Shares shall be available for purchase by institutions which
act on behalf of their customers maintaining accounts with such institutions and
which provide their customers with certain shareholder services. Service Shares
shall also be available to investors acquiring Service Shares in connection with
certain business combinations ("Direct Service Investors"). Service Shares of a
Portfolio shall not be subject to a sales load.
Service Shares of a Portfolio shall bear the expense of shareholder
servicing and shareholder processing fees described in the prospectus.
Shareholder servicing fees shall be payable to CCG primarily to
compensate CCG and Service Agents for general shareholder liaison services.
Shareholder processing fees shall be payable to CCG primarily to
compensate CCG and Service Agents for services relating to the processing and
administration of shareholder accounts.
The Fund's distributor, CCG and other parties that receive fees from
the Fund may each make payments without limitation as to amount in connection
with distribution or sales support activities relating to Service Shares out of
its past profits or any sources which are available to it.
-4-
<PAGE>
Institutional Shares
Institutional Shares shall be available from the distributor for
purchase by institutional investors and by individuals meeting certain minimum
investment requirements described in the prospectus. Institutional Shares shall
not be subject to a sales load or a separate fee payable pursuant to any
distribution plan, shareholder servicing plan or shareholder processing plan.
The Fund's distributor, CCG and other parties that receive fees from the Fund
may each make payments without limitation as to amount in connection with
distribution or sales support activities relating to Institutional Shares out of
its past profits or any sources which are available to it.
C. Exchange Privileges
-------------------
Series A Investor Shares
A holder of Series A Investor Shares in an Equity or Bond Portfolio
generally shall be permitted to exchange his shares for Series A Investor Shares
of any other Portfolio of the Fund at the net asset value of such shares next
determined after the transfer agent's receipt of a request for an exchange, plus
any applicable sales charge. A holder of Series A Investor Shares in a Money
Market Portfolio generally shall be permitted to exchange his shares for Series
A Investor Shares of another Money Market Portfolio, or for Series A Investor
Shares or Series B Investor Shares or Series C Investor Shares of any Equity or
Fixed Income Portfolio of the Fund at the net asset value of such shares next
determined after the transfer agent's receipt of a request for an exchange, plus
any applicable sales charge.
Series B Investor Shares
A holder of Series B Investor Shares of a Portfolio generally shall be
permitted to exchange his shares for Series B Investor Shares of any other
Portfolio of the Fund at the net asset value of such shares next determined
after the transfer agent's receipt of a request for an exchange.
Series C Investor Shares
A holder of Series C Investor Shares of a Portfolio generally shall be
permitted to exchange his shares for Series C Investor Shares of any other
Portfolio of the Fund at the net asset value of such shares next determined
after the transfer agent's receipt of a request for an exchange.
Service Shares
Unless he is a Direct Service Investor, a holder of Service Shares in
a Portfolio generally shall be permitted to
-5-
<PAGE>
exchange his shares for Service Shares of any other Portfolio of the Fund at the
net asset value of such shares next determined after the transfer agent's
receipt of a request for an exchange. To the extent permitted from time to time
by the Fund, at the election of Direct Service Investors, Service Shares of a
Portfolio may be exchanged for Series A Investor Shares of the same Portfolio on
the basis of the net asset values of each class of shares next determined after
the transfer agent's receipt of an exchange request. Except as stated above,
Direct Service Investors initially shall have no exchange privileges.
Institutional Shares
A holder of Institutional Shares in a Portfolio generally shall be
permitted to exchange his shares for Institutional Shares of any other Portfolio
of the Fund at the net asset value of such shares next determined after the
transfer agent's receipt of a request for an exchange.
D. Conversion Features
-------------------
Series A Investor Shares
The Fund initially shall not offer Series A Investor Shares with a
conversion feature.
Series B Investor Shares
A certain number of years (specified in the prospectus) after the date
of purchase, Series B Investor Shares of a Portfolio shall automatically convert
to Series A Investor Shares of the same Portfolio at the net asset value of each
class of shares at the time of conversion. Upon each conversion of Series B
Investor Shares of a Portfolio that were not acquired through reinvestment of
dividends or distributions, a proportionate amount of Series B Investor Shares
of such Portfolio that were acquired through reinvestments of dividends or
distributions will likewise automatically convert to Series A Investor Shares of
the same Portfolio.
Series C Investor Shares
The Fund initially shall not offer Series C Investor Shares with a
conversion feature.
Service Shares
The Fund initially shall not offer Service Shares with a conversion
feature.
-6-
<PAGE>
Institutional Shares
The Fund initially shall not offer Institutional Shares with a
conversion feature.
E. Shareholder Services
--------------------
1. Redemption by Check
-------------------
Holders of Series A Investor Shares in the Fund's Money Market
Portfolios shall be able to redeem such shares by check. The checkwriting
option shall not be available in connection with the redemption of Series B or
Series C Investor Shares of the Money Market Portfolios, Service Shares or
Institutional Shares of the Money Market Portfolios or shares of any class of
the Equity and Fixed Income Portfolios.
2. Systematic Withdrawal Program
-----------------------------
The Fund initially shall offer a systematic withdrawal program
whereby, in general: (i) investors may arrange to have Series A Investor Shares,
Series B Investor Shares or Series C Investor Shares redeemed automatically; and
(ii) Direct Service Investors may arrange to have Service Shares redeemed
automatically.
The Fund initially shall not offer a systematic withdrawal program to
investors in Institutional Shares or to investors in Service Shares who are not
Direct Service Investors.
3. Automatic Investing Program
---------------------------
The Fund shall initially offer an automatic investing program whereby,
in general: (i) an investor may arrange to have Series A Investor Shares, Series
B Investor Shares or Series C Investor Shares purchased automatically by
authorizing the Fund's transfer agent to withdraw funds from the investor's bank
account; and (ii) a Direct Service Investor may arrange to have Service Shares
purchased automatically by authorizing the Fund's transfer agent to withdraw
funds from the Direct Service Investor's bank account.
The Fund initially shall not offer the automatic investment program to
investors in Institutional Shares or to investors in Service Shares who are not
Direct Service Investors.
F. Methodology for Allocating Expenses Among Classes
-------------------------------------------------
Class-specific expenses of a Portfolio shall be allocated to the
specific class of shares of that Portfolio. Non-class-specific expenses of a
Portfolio shall be allocated in accordance with Rule 18f-3(c).
-7-
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<PAGE>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 059
<NAME> CORE BOND PORTFOLIO - INSTITUTIONAL CLASS
<S> <C>
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<PERIOD-END> MAR-31-1996
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<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (13,985)
<ACCUMULATED-NET-GAINS> 4,991,457
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,357,673)
<NET-ASSETS> 296,904,356
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,315,543
<OTHER-INCOME> 0
<EXPENSES-NET> 693,316
<NET-INVESTMENT-INCOME> 4,622,227
<REALIZED-GAINS-CURRENT> 6,070,648
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<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> 778,214
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<SHARES-REINVESTED> 67,715
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 55,045
<GROSS-EXPENSE> 899,539
<AVERAGE-NET-ASSETS> 82,154,510
<PER-SHARE-NAV-BEGIN> 9.91
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> (.19)
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .10
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<PER-SHARE-NAV-END> 9.60
<EXPENSE-RATIO> .66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<CIK> 0000844779
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<PERIOD-END> MAR-31-1996
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> SHORT GOVERNMENT BOND PORTFOLIO - INVESTOR A CLASS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> NEW JERSEY TAX FREE INCOME - INVESTOR A CLASS
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