<PAGE>
As filed with the Securities and Exchange Commission on December 13, 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. 24 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 26 [X]
______________________________
COMPASS CAPITAL FUNDS/SM/
(Formerly, The PNC(R) Fund)
(Exact Name of Registrant as Specified in Charter)
Bellevue Corporate Center Morgan R. Jones, Esq.
400 Bellevue Parkway Drinker Biddle & Reath
Suite 100 PNB Building
Wilmington, Delaware 19809 1345 Chestnut Street
(Address of Principal Executive Philadelphia, PA 19107
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 792-2555
____________________________
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[x] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
initial 24f-2 Notice for the fiscal year ended September 30, 1996 was filed on
November 26, 1996.
This Registration Statement has also been executed by The DFA Investment
Trust Company.
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(SERVICE SHARES OF THE MONEY MARKET PORTFOLIO,
U.S. TREASURY MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO,
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO, OHIO MUNICIPAL
MONEY MARKET PORTFOLIO, PENNSYLVANIA MUNICIPAL MONEY MARKET
PORTFOLIO, AND VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund.................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance........................... Inapplicable.
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Money Market Portfolios Service Shares
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes the Service Shares of eight of those portfolios (the
"Portfolios"):
Money Market Portfolio
U.S. Treasury Money Market Portfolio
Municipal Money Market Portfolio
New Jersey Municipal Money Market Portfolio
North Carolina Municipal Money Market Portfolio
Ohio Municipal Money Market Portfolio
Pennsylvania Municipal Money Market Portfolio
Virginia Municipal Money Market Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Commis-
sion (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 Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE THAT
THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The New Jersey, North Carolina, Ohio, Pennsylvania and Vir-
ginia Municipal Money Market Portfolios may invest a signifi-
cant percentage of their assets in a single issuer and, there-
fore, investments in these Portfolios may be riskier than an
investment in other types of money market funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 16.
COMPASS
CAPITAL
PORTFOLIO LIPPER PEER GROUP
Money Market Money Market Instrument Funds
U.S. Treasury U.S. Treasury Money Market Funds
Money Market
Municipal Tax-Exempt Money Market Funds
Money Market
NJ Municipal NJ Tax-Exempt Money Market Funds
Money Market
NC Municipal Other States Tax-Exempt Money Market Funds
Money Market
OH Municipal Ohio Tax-Exempt Money Market Funds
Money Market
PA Municipal PA Tax-Exempt Money Market Funds
Money Market
VA Municipal Other States Tax-Exempt Money Market Funds
Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. PNC Institutional Management Corporation
("PIMC") serves as the sub-adviser to the Portfolios as de-
scribed in this Prospectus.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
MONEY different directions in money market investing. You may wish to
MARKET use the table of contents on page 5 to find descriptions of the
PORTFOLIOS Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective, or that any Portfolio will be able
MONEY MARKET to maintain a stable net asset value of $1.00 per share. Cer-
INVESTING tain Portfolios may invest in U.S. dollar-denominated instru-
ments of foreign issuers or municipal securities backed by the
credit of foreign banks, which may be subject to risks in ad-
dition to those inherent in U.S. investments. Each state-spe-
cific municipal Portfolio will concentrate in the securities
of issuers located in a particular state, and is non-diversi-
fied, which means that its performance may be dependent upon
the performance of a smaller number of securities than the
other Portfolios, which are considered diversified. See "What
Additional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "HOW ARE SHARES PURCHASED AND REDEEMED?" and
CAPITAL FUNDS "WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 16
What Additional Investment Policies And Risks Apply?......... 20
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 26
Who Manages The Fund?........................................ 28
How Are Shares Purchased And Redeemed?....................... 32
What Special Purchase And Redemption Procedures May Apply?... 35
How Is Net Asset Value Calculated?........................... 37
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 38
How Are Fund Distributions Taxed?............................ 39
How Is The Fund Organized?................................... 44
How Is Performance Calculated?............................... 45
How Can I Get More Information?.............................. 46
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios after fee waivers for the fiscal year ended September 30,
1996 as a percentage of average daily net assets. The figures shown for the New
Jersey Municipal Money Market Portfolio have been restated to reflect current
expenses and fee waivers. An example based on the summary is also shown.
<TABLE>
<CAPTION>
NEW 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/) .07% .07% .06% .06% .06% .06% .06% .06%
Other operating expenses .52 .52 .53 .53 .53 .53 .53 .53
---- ---- ---- ---- ---- ---- ------ ----
Administration fees
(after fee
waivers)(/1/) .13 .13 .12 .08 .07 .10 .12 .04
Shareholder servicing
fee .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .24 .24 .26 .30 .31 .28 .26 .34
---- ---- ---- ---- ---- ---- ------ ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .59% .59% .59% .59% .59% .59% .59% .59%
==== ==== ==== ==== ==== ==== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .42% for the Money Market Portfo-
lio, .44% for the U.S. Treasury Money Market Portfolio and .45% for each of
the other Portfolios and administration fees would be .15% for the Money
Market Portfolio, .16% for the U.S. Treasury Money Market Portfolio and
.18% for each of the other Portfolios. PAMG and the Portfolios' administra-
tors 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 main-
tain the Portfolios' total operating expenses during the remainder of the
current fiscal year at the levels set forth in the table. Without waivers,
"Other operating expenses" would be .53%, .55%, .58%, .63%, .59%, .60%,
.56% and .67%, respectively, and "Total Portfolio operating expenses" would
be .95%, .99%, 1.03%, 1.08%, 1.04%, 1.05%, 1.01% and 1.12%, 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 5 19 33 74
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They do not reflect any charges that may be imposed by
affiliates of the Portfolios' investment adviser or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information, and has been audited by the
Portfolio's independent accountant. This financial information
should be read together with those financial statements. Fur-
ther information about the performance of the Portfolios is
available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7764.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 10/4/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0503 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
Net realized gain (loss)
on investments - - - - - - - - - - - - - -
---------- ---------- -------- -------- -------- -------- --------
Total from investment
operations 0.0503 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
---------- ---------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0503) (0.0534) (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
Distributions from net
realized capital gains - - - - - - - - - - - - - -
---------- ---------- -------- -------- -------- -------- --------
Total distributions (0.0503) (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 $ 1.00
========== ========== ======== ======== ======== ======== ========
Total return 5.15% 5.48% 3.37% 2.77% 4.05% 6.64% 8.07%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,575,064 $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 0.59% 0.57% 0.51% 0.59% 0.61% 0.62% 0.62%/2/
Before
advisory/administration
fee waivers 0.95% 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 5.00% 5.35% 3.35% 2.73% 3.86% 6.45% 7.83%/2/
Before
advisory/administration
fee waivers 4.64% 4.98% 2.95% 2.62% 3.81% 6.40% 7.75%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0489 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
Net realized gain (loss)
on investments - - - - - - - - - - - - - -
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 0.0489 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0489) (0.0525) (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
Distributions from net
realized capital gains - - - - - - - - - - - - - -
-------- -------- -------- -------- -------- -------- --------
Total distributions (0.0489) (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 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total return 5.00% 5.38% 3.36% 2.72% 4.01% 6.46% 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $955,454 $550,959 $372,883 $185,400 $160,269 $180,776 $146,148
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.59% 0.57% 0.52% 0.60% 0.62% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 0.99% 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 4.84% 5.27% 3.42% 2.68% 3.91% 6.27% 7.62%/2/
Before
advisory/administration
fee waivers 4.45% 4.85% 2.97% 2.55% 3.86% 6.22% 7.57%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- -------- ------- --------
Income from investment
operations
Net investment income 0.0309 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
Net realized gain (loss)
on investments - - - - - - - - - - - - - -
-------- -------- -------- ------- -------- ------- --------
Total from investment
operations 0.0309 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
-------- -------- -------- ------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0309) (0.0334) (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
Distributions from net
realized capital gains - - - - - - - - - - - - - -
-------- -------- -------- ------- -------- ------- --------
Total distributions (0.0309) (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 $ 1.00
======== ======== ======== ======= ======== ======= ========
Total return 3.10% 3.39% 2.20% 2.10% 2.85% 4.47% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $261,617 $265,629 $133,358 $93,937 $125,152 $89,312 $112,108
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.59% 0.57% 0.51% 0.61% 0.63% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 1.03% 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 3.08% 3.35% 2.18% 2.02% 2.78% 4.40% 5.31%/2/
Before
advisory/administration
fee waivers 2.64% 2.91% 1.71% 1.91% 2.73% 4.35% 5.26%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/1/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0316 0.0333 0.0225 0.0074
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0316 0.0333 0.0225 0.0074
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0316) (0.0333) (0.0225) (0.0074)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0316) (0.0333) (0.0225) (0.0074)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 3.21% 3.38% 2.27% 0.75%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 45,525 $ 49,857 $ 44,066 $ 15,239
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.59% 0.57% 0.40% 0.23%/2/
Before advisory/administration fee
waivers 1.05% 1.03% 1.04% 0.96%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.17% 3.35% 2.29% 2.23%/2/
Before advisory/administration fee
waivers 2.71% 2.89% 1.65% 1.50%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/11/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- --------
Income from investment operations
Net investment income 0.0304 0.0325 0.0221 0.0074
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- ------- --------
Total from investment operations 0.0304 0.0325 0.0221 0.0074
-------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0304) (0.0325) (0.0221) (0.0074)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- ------- --------
Total distributions (0.0304) (0.0325) (0.0221) (0.0074)
-------- -------- ------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ========
Total return 3.04% 3.33% 2.24% 0.74%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $224,197 $147,739 $60,560 $ 8,919
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.59% 0.57% 0.42% 0.32%/2/
Before advisory/administration fee
waivers 1.01% 0.99% 0.99% 1.20%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.02% 3.29% 2.31% 2.42%/2/
Before advisory/administration fee
waivers 2.59% 2.87% 1.75% 1.54%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA VIRGINIA
MUNICIPAL MONEY MUNICIPAL MONEY
MARKET PORTFOLIO MARKET PORTFOLIO
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 11/01/94/4/ 4/29/94/1/ YEAR 10/11/94/1/
ENDED THROUGH THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0308 0.0305 0.0099 0.0318 0.0330
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0308 0.0305 0.0099 0.0318 0.0330
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0308) (0.0305) (0.0099) (0.0318) (0.0330)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0308) (0.0305) (0.0099) (0.0318) (0.0330)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 3.12% 3.11% 0.99% 3.25% 3.35%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 7,463 $ 1,841 $ - - /3/ $ 14,968 $ 821
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.55% 0.55%/2/ 0.36%/2/ 0.45% 0.40%/2/
Before
advisory/administration
fee waivers 1.04% 1.08%/2/ 1.02%/2/ 1.12% 1.25%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.06% 3.34%/2/ 2.54%/2/ 3.05% 3.50%/2/
Before
advisory/administration
fee waivers 2.56% 2.81%/2/ 1.87%/2/ 2.38% 2.65%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/There were no Service Shares outstanding as of September 30, 1994.
/4/Reissuance of shares.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
2/1/96 3/1/95 FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91/1/
THROUGH THROUGH ENDED ENDED ENDED TO
9/30/96 1/31/96 02/28/95 02/28/94 02/28/93 02/28/92
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.0187 0.03 0.02 0.02 0.02 0.02
Net realized gain (loss)
on investments - - - - - - - - - - - -
------- ------- ------- ------- ------- -------
Total from investment
operations 0.0187 0.03 0.02 0.02 0.02 0.02
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0187) (0.03) (0.02) (0.02) (0.02) (0.02)
Distributions from net
realized capital gains - - - - - - - - - - - -
------- ------- ------- ------- ------- -------
Total distributions (0.0187) (0.03) (0.02) (0.02) (0.02) (0.02)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
Total return 1.89% 3.23% 2.46% 1.79% 2.19% 3.53%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $68,139 $56,958 $43,610 $39,408 $38,836 $35,005
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.59%/2/ 0.70%/2/ 0.63% 0.65% 0.73% 0.47%/2/
Before
advisory/administration
fee waivers 1.08%/2/ 0.74%/2/ 0.70% 0.72% 0.76% 0.62%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.82%/2/ 3.17%/2/ 2.46% 1.77% 2.17% 3.44%/2/
Before
advisory/administration
fee waivers 2.33%/2/ 3.13%/2/ 2.39% 1.70% 2.14% 3.29%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Money Market Fund, a separate investment portfolio (the "Predecessor New
Jersey Municipal Money Market Portfolio") of Compass Capital Group, which was
organized as a Massachusetts business trust. On January 13, 1996, the assets
and liabilities of the Predecessor New Jersey Municipal Money Market Portfo-
lio were transferred to this Portfolio, and were combined with the assets of
a pre-existing portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
15
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of principal.
The Portfolio may invest in a broad range of short-term, high
quality, U.S. dollar-denominated instruments, such as govern-
ment, bank, commercial and other obligations, that are avail-
able in the money markets. In particular, the Portfolio may
invest in:
(A) U.S. dollar-denominated obligations issued or supported by
the credit of U.S. or foreign banks or savings institu-
tions with total assets in excess of $1 billion (including
obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) A-2 or higher by
Standard & Poor's Ratings Group ("S&P"), Prime-2 or higher
by Moody's Investors Service, Inc. ("Moody's"), Duff 2 or
higher by Duff & Phelps Credit Co. ("D&P"), F-2 or higher
by Fitch Investors Service, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW"), as well as high
quality corporate bonds rated (at the time of purchase) AA
or higher by S&P, D&P, Fitch or TBW or Aa or higher by
Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations
and credit card receivables);
(E) securities issued or guaranteed as to principal and inter-
est by the U.S. Government or by its agencies or instru-
mentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign governments or their political subdivisions, agencies
or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
16
<PAGE>
U.S. The investment objective of the U.S. Treasury Money Market Port-
TREASURY folio is to provide as high a level of current interest income
MONEY as is consistent with maintaining liquidity and stability of
MARKET principal. It pursues this objective by investing exclusively in
PORTFOLIO short-term bills, notes and other obligations issued or guaran-
teed by the U.S. Treasury and repurchase agreements relating to
such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfolio
PORTFOLIOS is to provide as high a level of current interest income exempt
from Federal income taxes as is consistent with maintaining li-
quidity and stability of principal. It pursues this objective by
investing substantially all of its assets in short-term obliga-
tions issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authori-
ties ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market Port-
folio (the "State-Specific Municipal Portfolios") is, for each
Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the
specific state in which a Portfolio concentrates, as is consis-
tent with maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher
by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of compa-
rable quality as determined by the Portfolios' sub-adviser
under guidelines established by the Fund's Board of Trust-
ees; and
(E) municipal bonds and notes which are guaranteed as to princi-
pal and interest by the U.S. Government or an agency or in-
strumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
17
<PAGE>
During normal market conditions, at least 80% of each Munici-
pal Portfolio's net assets will be invested in securities
which are Municipal Obligations. In addition, under normal
conditions each State-Specific Municipal Portfolio intends to
invest at least 65% of its net assets in Municipal Obligations
of issuers located in the particular state indicated by its
name ("State-Specific Obligations"). The Municipal Money Mar-
ket Portfolio intends, on the other hand, to invest less than
25% of its total assets in Municipal Obligations of issuers
located in the same state. During temporary defensive periods,
each Municipal Portfolio may invest without limitation in ob-
ligations that are not Municipal Obligations and may hold
without limitation uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest
on AMT Paper that is received by taxpayers subject to the Fed-
eral alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its assets
in Municipal Obligations the interest on which is paid solely
from revenues of similar projects. To the extent a Portfolio's
assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activ-
ity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such
projects and bonds to a greater extent than it would be if its
assets were not so invested.
QUALITY, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, under
DIVERSIFICATION guidelines established by the Fund's Board of Trustees, to
present minimal credit risks and will be "Eligible Securities"
as defined by the SEC. Eligible Securities are (a) securities
that either (i) have short-term debt ratings at the time of
purchase in the two highest rating categories by at least two
unaffiliated nationally recognized statistical rating organi-
zations ("NRSROs") (or one NRSRO if the security is rated by
only one NRSRO), or (ii) are comparable in priority and secu-
rity with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including secu-
rities of issuers that have long-term but not short-term rat-
18
<PAGE>
ings) but are of comparable quality as determined in accordance
with guidelines approved by the Board of Trustees.
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not ex-
ceed 90 days. In no event will a Portfolio purchase securities
which mature more than 397 days from the date of purchase (ex-
cept for certain variable and floating rate instruments and se-
curities collateralizing repurchase agreements). Securities in
which the Portfolios invest may not earn as high a level of in-
come as longer term or lower quality securities, which generally
have greater market risk and more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal Money
Market Portfolios are classified as diversified portfolios, and
the State-Specific Municipal Portfolios are classified as non-
diversified portfolios, under the Investment Company Act of 1940
(the "1940 Act"). Investment returns on a non-diversified port-
folio typically are dependent upon the performance of a smaller
number of securities relative to the number held in a diversi-
fied portfolio. Consequently, the change in value of any one se-
curity may affect the overall value of a non-diversified portfo-
lio more than it would a diversified portfolio. In addition, be-
cause the State-Specific Municipal Portfolios concentrate their
investments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than an
investment in other Money Market funds.
19
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign corporations and banks, and may acquire commercial obligations issued by
Canadian corporations and Canadian counterparts of U.S. corporations, as well
as Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the specific obligation or by government regulation. The Money
Market Portfolio may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of its total assets. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain agencies and instrumentalities of the U.S. Government are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
20
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time with respect
to any particular securities, be limited. In addition, Municipal Obligations
purchased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Municipal Portfolio and affect its share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal or state income tax are rendered by counsel to
the respective issuers or sponsors at the time of issuance. The Fund and its
service providers will rely on such opinions and will not review independently
the underlying proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued by
private companies. Mortgage-related securities may include collateralized mort-
gage obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or
instrumentalities or issued by private companies. In periods of falling inter-
est rates,
21
<PAGE>
the rate of mortgage prepayments tends to increase. During these periods, the
reinvestment of prepayment proceeds by the particular Portfolio will generally
be at lower rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instru-
ments may include variable amount master demand notes that permit the indebt-
edness thereunder to vary in addition to providing for periodic adjustments in
the interest rate. Issuers of unrated variable and floating rate instruments
must satisfy the same criteria as set forth above for the particular Portfo-
lio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements").
The securities held subject to a repurchase agreement may have stated maturi-
ties exceeding 13 months, so long as the repurchase agreement itself matures
in less than 13 months. Default by or bankruptcy of the seller would expose
the Portfolio to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Port-
folio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield avail-
able in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in
value to at least the market value of the loaned securities. A Portfolio may
not make such loans in excess of 33 1/3% of the value of its total assets. Se-
curities loans
22
<PAGE>
involve risks of delay in receiving additional collateral or in recovering the
loaned securities, or possibly loss of rights in the collateral if the borrower
of the securities becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, GICs, and repur-
chase agreements and time deposits that do not provide for payment within seven
days after notice, without taking a reduced price, are subject to this 10% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines that an adequate trading
market exists for the securities. This investment practice could have the ef-
fect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these re-
stricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Municipal Portfolios in State-
Specific Obligations raises special investment considerations. Changes in the
economic condition and governmental policies of a state and its political sub-
divisions could adversely affect the value of a Portfolio's shares. Certain
matters relating to some of 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.
23
<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 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. 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 State-Specific 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 four
years; as of June 30, 1995, the General Fund has a surplus of $688.3 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated. 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. Employment
growth has shifted to the trade and service sectors, with losses in more high-
paid manufacturing positions. A new governor took office in January 1995, but
the Commonwealth has continued 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.
24
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax (including instruments which are subject to
AMT), except 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.
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.
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 persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISER Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform ad-
visory services for investment companies, and has its principal
offices at 1600 Market Street, 29th Floor, Philadelphia, Penn-
sylvania 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 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>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
(other than the New Jersey Municipal Money Market Portfolio)
paid investment advisory fees at the following annual rates
(expressed as a percentage of average daily net assets) after
voluntary fee waivers: Money Market Portfolio, .07%; U.S.
Treasury Money Market Portfolio, .07%; Municipal Money Market
Portfolio, .06%; Ohio Municipal Money Market Portfolio, .06%;
Pennsylvania Municipal Money Market Portfolio, .06%; North
Carolina Municipal Money Market Portfolio, .06%; and Virginia
Municipal Money Market Portfolio, 0%. For the period from Feb-
ruary 1, 1996 to September 30, 1996, the New Jersey Municipal
Money Market Portfolio paid investment advisory fees, after
voluntary fee waivers, at the annual rate of .06% of its aver-
age 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 the next $1 billion of each Portfo-
lio'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 admin-
istration fees from a Portfolio.
28
<PAGE>
For information about the operating expenses the Portfolios paid
for the most recent fiscal year, see "What Are The Expenses Of
The Portfolios?"
TRANSFER
AGENT, PNC Bank, National Association ("PNC Bank") serves as the Port-
DIVIDEND folios' custodian and PFPC serves as their transfer agent and
DISBURSING dividend disbursing agent.
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service arrangements 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 services are
intended to supplement the services provided by the Fund's Ad-
ministrators and transfer agent to the Fund's shareholders of
record. In consideration for payment of a shareholder processing
fee of up to .15% (on an annualized 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 providing other similar
services. In consideration for payment of a separate shareholder
servicing fee of up to .15% (on an annualized basis) of the av-
erage daily net asset value of Service Shares owned beneficially
by their customers, Institutions may provide one or more of
these additional services to such customers: responding to cus-
tomer inquiries relating to the services performed by the Insti-
tution and to customer inquiries concerning their investments in
Service Shares; assisting cus- tomers in designating and chang-
ing dividend options, account designations and addresses; and
providing other similar shareholder liaison services. Customers
who are beneficial owners of Service Shares should read this
Prospectus in light of the terms and fees governing their ac-
counts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment
of fiduciary funds in Portfolio shares. Institutions, including
banks regulated by the Comptroller of the Currency, Federal Re-
serve Board and state banking commissions, and investment advis-
ers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor or state
29
<PAGE>
securities commissions, are urged to consult their legal coun-
sel 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. Under state securities laws,
banks and financial institutions that receive payments from
the Fund may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and
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.
30
<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).
31
<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.
32
<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.
33
<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.
34
<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 re-
demption 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.
35
<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.
36
<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 Service Shares of
the same Portfolio which pays the dividends, unless a shareholder elects to re-
ceive 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.
37
<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
38
<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. For additional information concerning the tax
treatment of dividends and distributions by the states listed below, including
certain restrictions applicable to such treatment, see "Taxes" in the Statement
of Additional Information.
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 State-Specific Obligations or obligations issued by the U.S. Government,
its agencies, instrumentalities or territories (if the interest on such obliga-
tions is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio cor-
poration franchise tax liability to the extent that such distributions either
constitute exempt-interest dividends for Federal income tax purposes or are
properly attributable to interest on Ohio State-Specific Obligations or the
U.S. obligations described above. However, shares of the Ohio Municipal Money
Market Portfolio will be included in a corporation's net worth base for pur-
poses of calculating the Ohio corporation franchise tax. Distributions properly
attributable to gain on the sale, exchange or other disposition of Ohio State-
Specific 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 at-
tributable 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, are 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
39
<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. Dividends paid 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 generally be exempt from the Virginia income tax.
Dividends derived from interest on debt obligations of certain territories and
possessions of the United States (those issued by Puerto Rico, the Virgin Is-
lands and Guam) will also be exempt from the Virginia income tax. Dividends de-
rived from interest on debt obligations other than those described above will
be subject to the Virginia income tax even though it may be excludable from
gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. Capital gains distrib-
uted to shareholders derived from Virginia obligations issued pursuant to spe-
cial Virginia enabling legislation which provides a specific exemption for such
gains will be exempt from Virginia income tax.
40
<PAGE>
The Virginia Department of Taxation has adopted a policy of allowing sharehold-
ers to exclude from their Virginia taxable income the exempt portion of distri-
butions from a regulated investment company even though the shareholders re-
ceive distributions monthly but receive reports substantiating the exempt por-
tion of such distributions at less frequent intervals. Accordingly, if the
Portfolio receives taxable income, the Portfolio must determine the portion of
income that is exempt from Virginia income tax and provide such information to
the shareholders in accordance with the foregoing so that the shareholders may
exclude from Virginia taxable income the exempt portion of the distribution
from the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends paid by
the New Jersey Municipal Money Market Portfolio will not be subject to New 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
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
41
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Service Shares of the eight money market portfolios de-
scribed herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. Because of these "class expenses," the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The performance of each class of Investor Shares may be different. The
Fund offers various services and privileges in connection with its Investor
Shares that are not generally offered in connection with its Institutional and
Service Shares, including an automatic investment plan, automatic withdrawal
plan and checkwriting. For further information regarding the Fund's Institu-
tional 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 , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, and may be deemed a controlling person of the Fund under the 1940 Act. PNC
Bank is a subsidiary of PNC Bank Corp.
42
<PAGE>
How is Performance Calculated?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield" and "effective yield" for Service
Shares. Both yield figures are based on historical earnings and are not in-
tended to indicate future performance. "Yield" refers to the income generated
by an investment in a Portfolio's Service Shares over a seven-day period. This
income is then "annualized." That is, the amount of income generated by the in-
vestment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. "Effective yield" is
calculated similarly but, when annualized, the income earned by an investment
in a Portfolio's Service Shares is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding ef-
fect of this assumed reinvestment. A Municipal Portfolio's "tax equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to the Portfolio's tax-free yield for Service
Shares.
The performance of Service Shares of a Portfolio may be compared to the perfor-
mance of mutual funds with similar investment objectives and to relevant indi-
ces, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the yield of Service Shares of a Portfolio may be compared
to data prepared by Lipper Analytical Services, Inc., CDA Investment Technolo-
gies, Inc. and Weisenberger Investment Company Service. Performance information
may also include evaluations of the Portfolios published in nationally recog-
nized ranking services, and information as reported by financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
43
<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 (888) 4COMPASS.
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.
44
<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
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF THE MONEY MARKET PORTFOLIO,
U.S. TREASURY MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO,
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO, OHIO MUNICIPAL
MONEY MARKET PORTFOLIO, PENNSYLVANIA MUNICIPAL MONEY MARKET
PORTFOLIO, AND VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance............................ Inapplicable.
6 Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Money Market Portfolios Institutional Shares
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consist of thirty investment portfolios. This Prospectus de-
scribes the Institutional Shares of eight of those portfolios
(the "Portfolios"):
Money Market Portfolio
U.S. Treasury Money Market Portfolio
Municipal Money Market Portfolio
New Jersey Municipal Money Market Portfolio
North Carolina Municipal Money Market Portfolio
Ohio Municipal Money Market Portfolio
Pennsylvania Municipal Money Market Portfolio
Virginia Municipal Money Market Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Commis-
sion (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 Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE THAT
THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The New Jersey, North Carolina, Ohio, Pennsylvania and Vir-
ginia Municipal Money Market Portfolios may invest a signifi-
cant percentage of their assets in a single issuer and, there-
fore, investments in these Portfolios may be riskier than an
investment in other types of money market funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 15.
COMPASS LIPPER PEER GROUP
CAPITAL
PORTFOLIO
Institutional Money Market Instrument Funds
Money Market
Institutional U.S. Treasury Money Market
U.S. Treasury Funds
Money Market Institutional Tax-Exempt Money Market Funds
Municipal
Money Market NJ Tax-Exempt Money Market Funds
NJ Municipal
Money Market Other States Tax-Exempt Money Market Funds
NC Municipal
Money Market Ohio Tax-Exempt Money Market Funds
OH Municipal
Money Market PA Tax-Exempt Money Market Funds
PA Municipal
Money Market Other States Tax-Exempt Money Market Funds
VA Municipal
Money Market
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. PNC Institutional Management Corporation
("PIMC") serves as the sub-adviser to the Portfolios as de-
scribed in this Prospectus.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
MONEY We intend this document to be an effective tool as you explore
MARKET different directions in money market investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS investment objective, or that any Portfolio will be able to
IN MONEY maintain a stable net asset value of $1.00 per share. Certain
MARKET Portfolios may invest in U.S. dollar-denominated instruments of
INVESTING foreign issuers or municipal securities backed by the credit of
foreign banks, which may be subject to risks in addition to
those inherent in U.S. investments. Each state-specific munici-
pal Portfolio will concentrate in the securities of issuers lo-
cated in a particular state, and is non-diversified, which means
that its performance may be dependent upon the performance of a
smaller number of securities than the other Portfolios, which
are considered diversified. See "What Additional Investment Pol-
icies And Risks Apply?"
INVESTING For information on how to purchase and redeem shares of the
IN THE Portfolios, see "HOW ARE SHARES PURCHASED AND REDEEMED?"
COMPASS
CAPITAL
FUNDS
3
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 5
What Are The Portfolios' Financial Highlights?............... 7
What Are The Portfolios?..................................... 15
What Additional Investment Policies And Risks Apply?......... 19
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 25
Who Manages The Fund?........................................ 27
How Are Shares Purchased And Redeemed?....................... 30
How Is Net Asset Value Calculated?........................... 32
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 33
How Are Fund Distributions Taxed?............................ 34
How Is The Fund Organized?................................... 39
How Is Performance Calculated?............................... 40
How Can I Get More Information?.............................. 41
</TABLE>
4
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios after fee waivers for the fiscal year ended September
30, 1996 as a percentage of average daily net assets. The figures shown for the
New Jersey Municipal Money Market Portfolio have been restated to reflect cur-
rent expenses and fee waivers. An example based on the summary is also shown.
<TABLE>
<CAPTION>
NEW
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/) .07% .07% .06% .06%
Other operating expenses .22 .22 .23 .23
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .13 .13 .12 .08
Other expenses .09 .09 .11 .15
---- ------ ------ ----
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% .06%
Other operating expenses .23 .23 .23 .23
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .07 .10 .12 .04
Other expenses .16 .13 .11 .19
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .29% .29% .29% .29%
==== ====== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .42% for the Money Market Portfo-
lio, .44% for the U.S. Treasury Money Market Portfolio and .45% for each of
the other Portfolios and administration fees would be .15% for the Money
Market Portfolio, .16% for the U.S. Treasury Money Market Portfolio and
.18% for each of the other Portfolios. PAMG and the Portfolios' administra-
tors 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 main-
tain the Portfolios' total operating expenses during the remainder of the
current fiscal year at the levels set forth in the table. Without waivers,
"Other operating expenses" would be .23%, .25%, .28%, .33%, .29%, .30%,
.26% and .37%, respectively, and "Total Portfolio operating expenses" would
be .65%, .69%, .73%, .78%, .74%, .75%, .71%, and .82% 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 8 14 32
Ohio Municipal Money
Market 3 9 16 37
Pennsylvania Municipal
Money Market 3 9 16 37
Virginia Municipal Money
Market 3 9 16 37
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They do not reflect any charges that may be imposed by
affiliates of the Portfolios' investment adviser or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information, and has been audited by the
Portfolios' independent accountant. This financial information
should be read together with those financial statements. Further
information about the performance of the Portfolios is available
in the Fund's annual shareholder reports. Both the Statement of
Additional Information and the annual shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-7764.
7
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 8/2/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0533 0.0564 0.0359 0.0054
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0533 0.0564 0.0359 0.0054
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0533) (0.0564) (0.0359) (0.0054)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0533) (0.0564) (0.0359) (0.0054)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 5.46% 5.79% 3.64% 0.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $587,730 $654,157 $502,972 $435,586
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.29% 0.27% 0.25% 0.27%/2/
Before advisory/administration fee
waivers 0.65% 0.64% 0.66% 0.38%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.34% 5.66% 3.64% 3.01%/2/
Before advisory/administration fee
waivers 4.98% 5.28% 3.23% 2.90%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
8
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 8/2/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0519 0.0555 0.0357 0.0049
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0519 0.0555 0.0357 0.0049
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0519) (0.0555) (0.0357) (0.0049)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0519) (0.0555) (0.0357) (0.0049)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 5.32% 5.69% 3.63% 0.49%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $167,193 $120,540 $ 37,519 $ 13,513
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.29% 0.27% 0.25% 0.25%/2/
Before advisory/administration fee
waivers 0.69% 0.69% 0.70% 0.38%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.18% 5.64% 3.69% 3.01%/2/
Before advisory/administration fee
waivers 4.78% 5.22% 3.24% 2.88%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 8/2/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- --------
Income from investment operations
Net investment income 0.0339 0.0364 0.0246 0.0040
Net realized gain (loss) on
investments - - - - - - - -
------- -------- -------- --------
Total from investment operations 0.0339 0.0364 0.0246 0.0040
------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0339) (0.0364) (0.0246) (0.0040)
Distributions from net realized
capital gains - - - - - - - -
------- -------- -------- --------
Total distributions (0.0339) (0.0364) (0.0246) (0.0040)
------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ========
Total return 3.41% 3.70% 2.48% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $43,936 $ 53,778 $ 30,608 $ 39,148
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.29% 0.27% 0.25% 0.25%/2/
Before advisory/administration fee
waivers 0.73% 0.71% 0.73% 0.36%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.37% 3.64% 2.48% 2.45%/2/
Before advisory/administration fee
waivers 2.93% 3.20% 2.01% 2.34%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/10/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- --------
Income from investment operations
Net investment income 0.0346 0.0363 0.0252 0.0073
Net realized gain (loss) on
investments - - - - - - - -
------- -------- -------- --------
Total from investment operations 0.0346 0.0363 0.0252 0.0073
------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0346) (0.0363) (0.0252) (0.0073)
Distributions from net realized
capital gains - - - - - - - -
------- -------- -------- --------
Total distributions (0.0346) (0.0363) (0.0252) (0.0073)
------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ========
Total return 3.52% 3.69% 2.55% 0.73%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $32,944 $ 23,679 $ 10,521 $ 12,026
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.29% 0.27% 0.13% 0.10%/2/
Before advisory/administration fee
waivers 0.75% 0.73% 0.77% 0.83%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.47% 3.66% 2.56% 2.45%/2/
Before advisory/administration fee
waivers 3.01% 3.20% 1.93% 1.72%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/1/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0334 0.0355 0.0247 0.0078
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0334 0.0355 0.0247 0.0078
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0334) (0.0355) (0.0247) (0.0078)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0334) (0.0355) (0.0247) (0.0078)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 3.40% 3.61% 2.49% 0.78%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $198,822 $233,414 $158,102 $ 2,242
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.29% 0.26% 0.16% 0.09%/2/
Before advisory/administration fee
waivers 0.71% 0.68% 0.73% 0.97%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.34% 3.54% 2.64% 2.15%/2/
Before advisory/administration fee
waivers 2.92% 3.12% 2.07% 1.27%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NORTH CAROLINA MUNICIPAL VIRGINIA MUNICIPAL
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 5/4/93/1/ YEAR YEAR 7/25/94/1/
ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- -------- --------
Income from investment
operations
Net investment income 0.0338 0.0359 0.0249 0.0097 0.0348 0.0368 0.0053
Net realized gain (loss)
on investments - - - - - - - - - - - - - -
-------- -------- -------- -------- ------- -------- --------
Total from investment
operations 0.0338 0.0359 0.0249 0.0097 0.0348 0.0368 0.0053
-------- -------- -------- -------- ------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0338) (0.0359) (0.0249) (0.0097) (0.0348) (0.0368) (0.0053)
Distributions from net
realized capital gains - - - - - - - - - - - - - -
-------- -------- -------- -------- ------- -------- --------
Total distributions (0.0338) (0.0359) (0.0249) (0.0097) (0.0348) (0.0368) (0.0053)
-------- -------- -------- -------- ------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======= ======== ========
Total return 3.43% 3.65% 2.52% 0.97% 3.54% 3.74% 0.53%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $112,097 $ 76,673 $ 69,673 $ 34,135 $38,553 $ 24,409 $ 13,831
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.25% 0.21% 0.10% 0.10%/2/ 0.14% 0.10% 0.10%/2/
Before
advisory/administration
fee waivers 0.74% 0.74% 0.76% 0.81%/2/ 0.82% 0.95% 1.02%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.33% 3.61% 2.53% 2.35%/2/ 3.47% 3.71% 2.89%/2/
Before
advisory/administration
fee waivers 2.84% 3.08% 1.87% 1.64%/2/ 2.79% 2.86% 1.97%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
2/1/96 1/16/96/1/
THROUGH THROUGH
9/30/96 1/31/96
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00
------- ------
Income from investment
operations
Net investment income 0.0207 0.00
Net realized gain (loss)
on investments - - - -
------- ------
Total from investment
operations 0.0207 0.00
------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0207) (0.00)
Distributions from net
realized capital gains - - - -
------- ------
Total distributions (0.0207) (0.00)
------- ------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00
======= ======
Total return 2.09% 3.07%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 614 $4,195
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.29%/2/ 0.29%/2/
Before
advisory/administration
fee waivers 0.78%/2/ 0.78%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.07%/2/ 3.07%/2/
Before
advisory/administration
fee waivers 2.58%/2/ 2.58%/2/
</TABLE>
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Money Market Fund, a separate investment portfolio (the "Predecessor New Jersey
Municipal Money Market Portfolio") of Compass Capital Group, which was orga-
nized as a Massachusetts business trust. On January 13, 1996, the assets and
liabilities of the Predecessor New Jersey Municipal Money Market Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-ex-
isting portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY The investment objective of the Money Market Portfolio is to
MARKET provide as high a level of current interest income as is consis-
PORTFOLIO tent with maintaining liquidity and stability of principal. The
Portfolio may invest in a broad range of short-term, high quali-
ty, U.S. dollar-denominated instruments, such as government,
bank, commercial and other obligations, that are available in
the money markets. In particular, the Portfolio may invest in:
(A) U.S. dollar-denominated obligations issued or supported by
the credit of U.S. or foreign banks or savings institutions
with total assets in excess of $1 billion (including obliga-
tions of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other is-
suers rated (at the time of purchase) A-2 or higher by Stan-
dard & Poor's Ratings Group ("S&P"), Prime-2 or higher by
Moody's Investors Service, Inc. ("Moody's"), Duff 2 or
higher by Duff & Phelps Credit Co. ("D&P"), F-2 or higher by
Fitch Investors Service, Inc. ("Fitch") or TBW-2 or higher
by Thomson BankWatch, Inc. ("TBW"), as well as high quality
corporate bonds rated (at the time of purchase) AA or higher
by S&P, D&P, Fitch or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of com-
parable quality as determined by the Portfolio's sub-adviser
under guidelines established by the Fund's Board of Trust-
ees;
(D) asset-backed securities (including interests in pools of as-
sets such as mortgages, installment purchase obligations and
credit card receivables);
(E) securities issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentali-
ties and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign governments or their political subdivisions, agencies
or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated U.S.
insurance companies;
(H) securities issued or guaranteed by state or local governmen-
tal bodies; and
(I) repurchase agreements relating to the above instruments.
15
<PAGE>
U.S. TREASURY The investment objective of the U.S. Treasury Money Market
MONEY MARKET Portfolio is to provide as high a level of current interest
PORTFOLIO income as is consistent with maintaining liquidity and stabil-
ity of principal. It pursues this objective by investing ex-
clusively in short-term bills, notes and other obligations is-
sued or guaranteed by the U.S. Treasury and repurchase agree-
ments relating to such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfo-
PORTFOLIOS lio is to provide as high a level of current interest income
exempt from Federal income taxes as is consistent with main-
taining liquidity and stability of principal. It pursues this
objective by investing substantially all of its assets in
short-term obligations issued by or on behalf of states, ter-
ritories and possessions of the United States, the District of
Columbia, and their political subdivisions, agencies, instru-
mentalities and authorities ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money
Market Portfolio, North Carolina Municipal Money Market Port-
folio, Ohio Municipal Money Market Portfolio, Pennsylvania Mu-
nicipal Money Market Portfolio and Virginia Municipal Money
Market Portfolio (the "State-Specific Municipal Portfolios")
is, for each Portfolio, to seek as high a level of current in-
come exempt from Federal, and to the extent possible, state
income tax of the specific state in which a Portfolio concen-
trates, as is consistent with maintaining liquidity and sta-
bility of principal.
The Municipal Money Market Portfolio and the State-Specific
Municipal Portfolios (together, the "Municipal Portfolios")
seek to achieve their investment objectives by primarily in-
vesting in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2
or A-2 or higher by S&P, AA or higher by D&P or F-2 or
higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of com-
parable quality as determined by the Portfolios' sub-ad-
viser under guidelines established by the Fund's Board of
Trustees; and
(E) municipal bonds and notes which are guaranteed as to prin-
cipal and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly
or indirectly on the credit of the United States.
16
<PAGE>
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are
Municipal Obligations. In addition, under normal conditions each
State-Specific Municipal Portfolio intends to invest at least
65% of its net assets in Municipal Obligations of issuers lo-
cated in the particular state indicated by its name ("State-Spe-
cific Obligations"). The Municipal Money Market Portfolio in-
tends, on the other hand, to invest less than 25% of its total
assets in Municipal Obligations of issuers located in the same
state. During temporary defensive periods, each Municipal Port-
folio may invest without limitation in obligations that are not
Municipal Obligations and may hold without limitation uninvested
cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest on
AMT Paper that is received by taxpayers subject to the Federal
alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its assets in
Municipal Obligations the interest on which is paid solely from
revenues of similar projects. To the extent a Portfolio's assets
are invested in Municipal Obligations payable from the revenues
of similar projects or are invested in private activity bonds,
the Portfolio will be subject to the peculiar risks presented by
the laws and economic conditions relating to such projects and
bonds to a greater extent than it would be if its assets were
not so invested.
QUALITY, MATURITY AND DIVERSIFICATION. All securities acquired
by the Portfolios will be determined at the time of purchase by
the Portfolios' sub-adviser, under guidelines established by the
Fund's Board of Trustees, to present minimal credit risks and
will be "Eligible Securities" as defined by the SEC. Eligible
Securities are (a) securities that either (i) have short-term
debt ratings at the time of purchase in the two highest rating
categories by at least two unaffiliated nationally recognized
statistical rating organizations ("NRSROs") (or one NRSRO if the
security is rated by only one NRSRO), or (ii) are comparable in
priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (in-
cluding securities of issuers that have long-term but not short-
term ratings) but are of comparable quality as determined in ac-
cordance with guidelines approved by the Board of Trustees.
17
<PAGE>
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not
exceed 90 days. In no event will a Portfolio purchase securi-
ties which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments and
securities collateralizing repurchase agreements). Securities
in which the Portfolios invest may not earn as high a level of
income as longer term or lower quality securities, which gen-
erally have greater market risk and more fluctuation in market
value.
The Money Market, U.S. Treasury Money Market and Municipal
Money Market Portfolios are classified as diversified portfo-
lios, and the State-Specific Municipal Portfolios are classi-
fied as non-diversified portfolios, under the Investment Com-
pany Act of 1940 (the "1940 Act"). Investment returns on a
non-diversified portfolio typically are dependent upon the
performance of a smaller number of securities relative to the
number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall
value of a non-diversified portfolio more than it would a di-
versified portfolio. In addition, because the State-Specific
Municipal Portfolios concentrate their investments in obliga-
tions of issuers located in particular states, investments in
these Portfolios may be riskier than an investment in other
money market funds.
18
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign corporations and banks, and may acquire commercial obligations issued by
Canadian corporations and Canadian counterparts of U.S. corporations, as well
as Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the specific obligation or by government regulation. The Money
Market Portfolio may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of its total assets. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain agencies and instrumentalities of the U.S. Government are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
19
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal or state income tax are rendered by counsel to
the respective issuers or sponsors at the time of issuance. The Fund and its
service providers will rely on such opinions and will not review independently
the underlying proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued by
private companies. Mortgage-related securities may include collateralized mort-
gage obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or
instrumentalities or issued by private companies. In periods of falling inter-
est rates, the rate of mortgage prepayments tends to increase. During these pe-
riods, the reinvestment of
20
<PAGE>
prepayment proceeds by the particular Portfolio will generally be at lower
rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the in-
terest rate. Issuers of unrated variable and floating rate instruments must
satisfy the same criteria as set forth above for the particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements"). The
securities held subject to a repurchase agreement may have stated maturities
exceeding 13 months, so long as the repurchase agreement itself matures in less
than 13 months. Default by or bankruptcy of the seller would expose the Portfo-
lio to possible loss because of adverse market action or delays in connection
with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield available
in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans 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.
21
<PAGE>
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, GICs, and repur-
chase agreements and time deposits that do not provide for payment within seven
days after notice, without taking a reduced price, are subject to this 10% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines that an adequate trading
market exists for the securities. This investment practice could have the ef-
fect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these re-
stricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Municipal Portfolios in State-
Specific Obligations raises special investment considerations. Changes in the
economic condition and governmental policies of a state and its political sub-
divisions could adversely affect the value of a Portfolio's shares. Certain
matters relating to some of 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,
22
<PAGE>
general economic activity in Ohio, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Agriculture is an important segment of the Ohio economy with over
half the State's area devoted to farming and approximately 16% of total employ-
ment in agribusiness. In past years, the State's overall unemployment rate has
been somewhat higher than the national figure. 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 State-Specific 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 four
years; as of June 30, 1995, the General Fund has a surplus of $688.3 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated. 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. Employment
growth has shifted to the trade and service sectors, with losses in more high-
paid manufacturing positions. A new governor took office in January 1995, but
the Commonwealth has continued 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.
23
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax (including instruments which are subject to
AMT), except 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).
24
<PAGE>
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S. Government securities and related repurchase
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 investments in Eligible Securities that are not
in the highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO) or, if unrated, are not of comparable
quality, to 5% of its total assets, with investments in any one such issuer be-
ing 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.
25
<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 persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISER Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform
advisory services for investment companies, and has its prin-
cipal offices at 1600 Market Street, 29th Floor, Philadelphia,
Pennsylvania 19103. PAMG is an indirect wholly-owned subsidi-
ary of PNC Bank Corp., a multi-bank holding company. PNC In-
stitutional 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.
26
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH
PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Average Daily Net Investment Sub-Advisory
Assets Advisory Fee Fee
----------------- ------------ ------------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
(other than the New Jersey Municipal Money Market Portfolio)
paid investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after vol-
untary fee waivers: Money Market Portfolio, .07%; U.S. Treasury
Money Market Portfolio, .07%; Municipal Money Market Portfolio,
.06%; Ohio Municipal Money Market Portfolio, .06%; Pennsylvania
Municipal Money Market Portfolio, .06%; North Carolina Municipal
Money Market Portfolio, .06%; and Virginia Municipal Money Mar-
ket Portfolio, .06%. For the period from February 1, 1996 to
September 30, 1996, the New Jersey Municipal Money Market Port-
folio paid investment advisory fees, after voluntary fee waiv-
ers, at the annual rate of .06% of its average daily net assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the Fund's co-administrators. CCG and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned
subsidiary of Provident Distributors, Inc. ("PDI"). A majority
of the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .15% of the first $500
million of each Portfolio's average daily net assets, .13% of
the next $500 million of each Portfolio's average daily net as-
sets, .11% of
27
<PAGE>
the next $1 billion of each Portfolio's average daily net as-
sets and .10% of each Portfolio's average daily net assets in
excess of $2 billion. From time to time the Administrators may
waive some or all of their administration fees from a Portfo-
lio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, National Association ("PNC Bank") serves as the
DIVIDEND Portfolios' custodian and PFPC serves as their transfer agent
DISBURSING and dividend disbursing agent.
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, fees and expenses in registering
and qualifying the Portfolios and their shares for distribu-
tion under Federal and state securities laws, expenses of pre-
paring prospectuses and statements of additional information
and of printing and distributing prospectuses and statements
of additional information to existing shareholders, expenses
relating to shareholder reports, shareholder meetings and
proxy solicitations, insurance premiums, the expense of inde-
pendent pricing services, and other expenses which are not ex-
pressly assumed by PAMG or the Fund's service providers under
their agreements with the Fund. Any general expenses of the
Fund that do not belong to a particular investment portfolio
will be allocated among all investment portfolios by or under
the direction of the Board of Trustees in a manner the Board
determines to be fair and equitable.
28
<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.
29
<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.
30
<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.
31
<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.
32
<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
33
<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. For additional information concerning the tax
treatment of dividends and distributions by the states listed below, including
certain restrictions applicable to such treatment, see "Taxes" in the Statement
of Additional Information.
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 State-Specific Obligations or obligations issued by the U.S. Government,
its agencies, instrumentalities or territories (if the interest on such obliga-
tions is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio cor-
poration franchise tax liability to the extent that such distributions either
constitute exempt-interest dividends for Federal income tax purposes or are
properly attributable to interest on Ohio State-Specific Obligations or the
U.S. obligations described above. However, shares of the Ohio Municipal Money
Market Portfolio will be included in a corporation's net worth base for pur-
poses of calculating the Ohio corporation franchise tax. Distributions properly
attributable to gain on the sale, exchange or other disposition of Ohio State-
Specific 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 at-
tributable 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, are subject to, or included in the measure of, special taxes im-
posed by the Commonwealth of Pennsylvania on
34
<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. Dividends paid 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 generally be exempt from the Virginia income tax.
Dividends derived from interest on debt obligations of certain territories and
possessions of the United States (those issued by Puerto Rico, the Virgin Is-
lands and Guam) will also be exempt from the Virginia income tax. Dividends are
derived from interest on debt obligations other than those described above will
be subject to the Virginia income tax even though it may be excludable from
gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. Capital gains distrib-
uted to shareholders derived from Virginia obligations issued pursuant to spe-
cial Virginia enabling legislation which provides a specific exemption for such
gains will be exempt from Virginia income tax.
35
<PAGE>
The Virginia Department of Taxation has adopted a policy of allowing sharehold-
ers to exclude from their Virginia taxable income the exempt portion of distri-
butions from a regulated investment company even though the shareholders re-
ceive distributions monthly but receive reports substantiating the exempt por-
tion of such distributions at less frequent intervals. Accordingly, if the
Portfolio receives taxable income, the Portfolio must determine the portion of
income that is exempt from Virginia income tax and provide such information to
the shareholders in accordance with the foregoing so that the shareholders may
exclude from Virginia taxable income the exempt portion of the distribution
from the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends paid by
the New Jersey Municipal Money Market Portfolio will not be subject to New 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
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
36
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Institutional Shares of the eight money market portfo-
lios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. Because of these "class expenses", the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The performance of each class of Investor Shares may be different. The
Fund offers various services and privileges in connection with its Investor
Shares that are not generally offered in 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 or
Investor Share classes, contact PFPC at (800) 441-7764 (Service Shares) or
(800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, and may be deemed a controlling person of the Fund under the 1940 Act. PNC
Bank is a subsidiary of PNC Bank Corp.
37
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield" and "effective yield" for Institu-
tional Shares. Both yield figures are based on historical earnings and are not
intended to indicate future performance. "Yield" refers to the income generated
by an investment in a Portfolio's Institutional Shares over a seven-day period.
This income is then "annualized." That is, the amount of income generated by
the investment during that week is assumed to be generated each week over a 52-
week period and is shown as a percentage of the investment. "Effective yield"
is calculated similarly but, when annualized, the income earned by an invest-
ment in a Portfolio's Institutional Shares is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the com-
pounding effect of this assumed reinvestment. A Municipal Portfolio's "tax
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to the Portfolio's tax-free yield for
a particular class of Investor Shares.
The performance of Institutional Shares of a Portfolio may be compared to the
performance of mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the yield of Institutional Shares of a Portfolio may be
compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service. Performance in-
formation may also include evaluations of the Portfolios published in nation-
ally recognized ranking services, and information as reported by financial pub-
lications such as Business Week, Fortune, Institutional Investor, Money Maga-
zine, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
38
<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 (888) 4COMPASS.
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.
39
<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
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR A, INVESTOR B AND INVESTOR C SHARES OF THE MONEY MARKET
PORTFOLIO, U.S. TREASURY MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO,
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO, OHIO MUNICIPAL
MONEY MARKET PORTFOLIO, PENNSYLVANIA MUNICIPAL MONEY MARKET
PORTFOLIO, AND VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance............................ Inapplicable
6. Capital Stock and Other
Securities............................... How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered.................................. How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Money Market Portfolios Investor Shares
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Investor Shares of eight of those portfolios (the
"Portfolios"):
Money Market Portfolio
U.S. Treasury Money Market Portfolio
Municipal Money Market Portfolio
New Jersey Municipal Money Market Portfolio
North Carolina Municipal Money Market Portfolio
Ohio Municipal Money Market Portfolio
Pennsylvania Municipal Money Market Portfolio
Virginia Municipal Money Market Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Com-
mission (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 Information, as supple-
mented from time to time, is incorporated by reference into
this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE THAT
THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The New Jersey, North Carolina, Ohio, Pennsylvania and Vir-
ginia Municipal Money Market Portfolios may invest a signifi-
cant percentage of their assets in a single issuer and, there-
fore, investments in these Portfolios may be riskier than an
investment in other types of money market funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Money Market Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Money Market Portfolios of COMPASS CAPITAL FUNDS consist of
eight short-term investment alternatives. Two of these Portfo-
lios invest solely in taxable instruments, and six of these
Portfolios invest in tax-exempt instruments. A detailed descrip-
tion of each Portfolio begins on page 18.
COMPASS
CAPITAL
PORTFOLIO LIPPER PEER GROUP
Money Market Money Market Instrument Funds
U.S. Treasury
Money Market U.S. Treasury Money Market Funds
Municipal
Money Market Tax-Exempt Money Market Funds
NJ Municipal
Money Market NJ Tax-Exempt Money Market Funds
NC Municipal
Money Market Other States Tax-Exempt Money Market Funds
OH Municipal
Money Market Ohio Tax-Exempt Money Market Funds
PA Municipal
Money Market PA Tax-Exempt Money Market Funds
VA Municipal
Money Market Other States Tax-Exempt Money Market Funds
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. PNC Institutional Management Corporation
("PIMC") serves as the sub-adviser to the Portfolios as de-
scribed in this Prospectus.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
MONEY We intend this document to be an effective tool as you explore
MARKET different directions in money market investing.
PORTFOLIOS
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective, or that any Portfolio will be able
MONEY MARKET to maintain a stable net asset value of $1.00 per share. Cer-
INVESTING tain Portfolios may invest in U.S. dollar-denominated instru-
ments of foreign issuers or municipal securities backed by the
credit of foreign banks, which may be subject to risks in ad-
dition to those inherent in U.S. investments. Each state-spe-
cific municipal Portfolio will concentrate in the securities
of issuers located in a particular state, and is non-diversi-
fied, which means that its performance may be dependent upon
the performance of a smaller number of securities than the
other Portfolios, which are considered diversified. See "What
Additional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are Shares
CAPITAL FUNDS Redeemed?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 7
What Are The Portfolios' Financial Highlights?............... 10
What Are The Portfolios?..................................... 18
What Additional Investment Policies And Risks Apply?......... 22
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 28
Who Manages The Fund?........................................ 30
How Are Shares Purchased?.................................... 34
How Are Shares Redeemed?..................................... 36
What Are The Shareholder Features Of The Fund?............... 38
How Is Net Asset Value Calculated?........................... 41
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 42
How Are Fund Distributions Taxed?............................ 43
How Is The Fund Organized?................................... 48
How Is Performance Calculated?............................... 49
How Can I Get More Information?.............................. 50
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor
Shares of the Portfolios after fee waivers for the fiscal year ended September
30, 1996 as a percentage of average daily net assets. The figures shown for
the New Jersey Municipal Money Market Portfolio have been restated to reflect
current expenses and fee waivers. Because no Investor A, B or C Shares of the
Virginia Municipal Money Market Portfolio, no Investor C Shares of the Money
Market Portfolio and no Investor B or C Shares of the other Portfolios were
outstanding during the fiscal year ended September 30, 1996, the figures shown
for these share classes under "Other Expenses" are estimates for the current
fiscal year. 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/) .07% .07% .07% .07% .07% .07% .06% .06% .06%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75 .10 .75 .75
Other operating
expenses (after
fee
waivers)(/1/) .69 .54 .54 .69 .54 .54 .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 .29 .29 .29 .29 .29 .29 .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 .42% for each class of the
Money Market Portfolio, .44% for each class of the U.S. Treasury Money
Market Portfolio and .45% for each class of the Municipal Money Market
Portfolio and administration fees would be .15% for each class of the
Money Market Portfolio, .16% for each class of the U.S. Treasury Money
Market Portfolio and .18% for each class of the Municipal Money Market
Portfolio. PAMG and the Portfolios' administrators are under no obligation
to waive or continue waiving their fees, but have informed the Fund that
they expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the remainder of the current fiscal year at the
levels set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .58%, .65% and .66%, respectively, for Investor A Shares;
(ii) .56%, .57% and .61%, respectively, for Investor B Shares; and (iii)
.56%, .57% and .61%, respectively, for Investor C Shares; and "Total Port-
folio Operating Expenses" would be: (iv) 1.10%, 1.19% and 1.21%, respec-
tively, for Investor A Shares; (v) 1.73%, 1.76% and 1.80%, respectively,
for Investor B Shares; and (vi) 1.73%, 1.76% 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/) .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
expenses (after
fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .72%, .70% and
.71%, respectively, for Investor A Shares; (ii) .65%, .66% and .63%, re-
spectively, for Investor B Shares; and (iii) .65%, .66% and .63%, respec-
tively, for Investor C Shares; and "Total Portfolio operating expenses"
would be: (iv) 1.27%, 1.25% and 1.25%, respectively, for Investor A Shares;
(v) 1.85%, 1.86% and 1.83%, respectively, for Investor B Shares; and (vi)
1.85%, 1.86% and 1.83%, 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% .06% .06% .06%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75
Other operating expenses
(after fee
waivers)(/1/) .70 .55 .55 .70 .50 .50
----- ------ ------ ----- ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .00 .00 .15 .00 .00
Other expenses .30 .30 .30 .25 .25 .25
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .86% 1.36% 1.36% .86% 1.36% 1.36%
===== ====== ====== ===== ====== ======
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .71% and .94%,
respectively, for Investor A Shares; (ii) .61% and .79%, respectively, for
Investor B Shares; and (iii) .61 and .79%, respectively, for Investor C
Shares; and "Total Portfolio operating expenses" would be: (iv) 1.23% and
1.49%, respectively, for Investor A Shares; (v) 1.81% and 1.99%, respec-
tively, for Investor B Shares; and (vi) 1.81% and 1.99%, respectively, for
Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the NASD.
8
<PAGE>
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market
A Shares $ 9 $27 $48 $106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
U.S. Treasury Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
New Jersey Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
North Carolina Municipal Money
Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Ohio Municipal Money Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Pennsylvania Municipal Money
Market
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
Virginia Municipal Money
Portfolio
A Shares 9 27 48 106
B Shares* 14 43 74 150**/143***
C Shares* 14 43 74 164
</TABLE>
* These expense figures do not reflect the imposition of the deferred sales
charge which may be deducted upon the redemption of Investor B or Investor C
Shares of a Portfolio received in an exchange transaction for Investor B or
Investor C Shares of a non-money market investment portfolio of the Fund.
See "What Are The Shareholder Features Of The Fund?--Exchange Privilege."
** Based on the conversion of Investor B Shares to Investor A Shares after
eight years (applies to shares received in an exchange transaction for In-
vestor B Shares of an equity portfolio of the Fund).
*** Based on the conversion of Investor B Shares to Investor A Shares after
seven years (applies to shares received in an exchange transaction for In-
vestor B Shares of a fixed income portfolio of the Fund).
The foregoing Tables and Example are intended to assist investors in under-
standing the expenses the Portfolios pay. Investors bear these expenses either
directly or indirectly. They do not reflect any charges that may be imposed by
brokers or other institutions directly on their customer accounts in connection
with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
9
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information, and has been audited by the
Portfolios' independent accountants. This financial informa-
tion should be read together with those financial statements.
For the period shown, no Investor A, B or C Shares of the Vir-
ginia Municipal Money Market Portfolio, Investor C Shares of
the Money Market Portfolio and Investor B or C Shares of the
other Portfolios were outstanding. Further information about
the performance of the Portfolios is available in the 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.
10
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 1/13/93/1/ YEAR 9/15/95/1/
ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- --------
Income from investment
operations
Net investment income 0.0485 0.0511 0.0308 0.0188 0.0426 0.0020
Net realized gain (loss)
on investments - - - - - - - - - - - -
-------- -------- -------- -------- ------- --------
Total from investment
operations 0.0485 0.0511 0.0308 0.0188 0.0426 0.0020
-------- -------- -------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0485) (0.0511) (0.0308) (0.0188) (0.0426) (0.0020)
Distributions from net
realized capital gains - - - - - - - - - - - -
-------- -------- -------- -------- ------- --------
Total distributions (0.0485) (0.0511) (0.0308) (0.0188) (0.0426) (0.0020)
-------- -------- -------- -------- ------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======= ========
Total return 4.96% 5.23% 3.12% 1.89% 4.34% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $162,099 $ 10,185 $ 4,342 $ 49 $ 138 $ 27
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.74% 0.81% 0.75% 0.67%/2/ 1.36% 1.34%/2/
Before
advisory/administration
fee waivers 1.10% 1.19% 1.16% 0.78%/2/ 1.73% 1.72%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.81% 5.15% 3.39% 2.62%/2/ 4.18% 4.58%/2/
Before
advisory/administration
fee waivers 4.45% 4.78% 2.98% 2.51%/2/ 3.82% 4.20%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 11/2/92/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0288 0.0311 0.0193 0.0181
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0288 0.0311 0.0193 0.0181
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0288) (0.0311) (0.0193) (0.0181)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0288) (0.0311) (0.0193) (0.0181)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 2.88% 3.15% 1.95% 1.83%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 1,851 $ 20 $ 41 $ 15
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.77% 0.79% 0.75% 0.72%/2/
Before advisory/administration fee
waivers 1.21% 1.23% 1.23% 0.83%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 2.80% 3.08% 2.05% 2.23%/2/
Before advisory/administration fee
waivers 2.36% 2.64% 1.58% 2.12%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
(FORMERLY, THE GOVERNMENT MONEY MARKET PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 1/14/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0467 0.0501 0.0309 0.0183
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0467 0.0501 0.0309 0.0183
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0467) (0.0501) (0.0309) (0.0183)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0467) (0.0501) (0.0309) (0.0183)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 4.77% 5.13% 3.11% 1.85%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 10,630 $ 1,285 $ 1,656 $ 50
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.79% 0.80% 0.75% 0.65%/2/
Before advisory/administration fee
waivers 1.19% 1.21% 1.20% 0.78%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 4.60% 5.03% 3.60% 2.57%/2/
Before advisory/administration fee
waivers 4.20% 4.62% 3.14% 2.44%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 10/5/93/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0293 0.0310 0.0199
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0293 0.0310 0.0199
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0293) (0.0310) (0.0199)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0293) (0.0310) (0.0199)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 2.98% 3.15% 2.01%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 5,672 $ 75 $ 28
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.79% 0.80% 0.62%/2/
Before advisory/administration fee waivers 1.25% 1.26% 1.26%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 2.88% 3.02% 1.94%/2/
Before advisory/administration fee waivers 2.42% 2.56% 1.30%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 12/28/93/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
------- -------- --------
Income from investment operations
Net investment income 0.0281 0.0302 0.0153
Net realized gain (loss) on investments - - - - - -
------- -------- --------
Total from investment operations 0.0281 0.0302 0.0153
------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0281) (0.0302) (0.0153)
Distributions from net realized capital
gains - - - - - -
------- -------- --------
Total distributions (0.0281) (0.0302) (0.0153)
------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======= ======== ========
Total return 2.90% 3.06% 1.58%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $63,424 $ 750 $ 139
Ratios of expenses to average net assets
After advisory/administration fee
waivers 0.81% .82% 0.65%/2/
Before advisory/administration fee
waivers 1.23% 1.24% 1.22%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 2.81% 3.03% 2.11%/2/
Before advisory/administration fee
waivers 2.39% 2.61% 1.54%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR 2/14/95/1/
ENDED THROUGH
9/30/96 9/30/95
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00
------- --------
Income from investment operations
Net investment income 0.0286 0.0194
Net realized gain (loss) on investments - - - -
------- --------
Total from investment operations 0.0286 0.0194
------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0286) (0.0194)
Distributions from net realized capital gains - - - -
------- --------
Total distributions (0.0286) (0.0194)
------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00
======= ========
Total return 2.90% 1.95%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 111 $ 53
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.76% 0.83%/2/
Before advisory/administration fee waivers 1.25% 1.36%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 2.83% 3.05%/2/
Before advisory/administration fee waivers 2.34% 2.52%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
2/1/96 1/16/96/1/
THROUGH THROUGH
9/30/96 1/31/96
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00
-------- -------
Income from investment operations
Net investment income 0.0175 0.00
Net realized gain (loss) on investments - - - -
-------- -------
Total from investment operations 0.0175 0.00
-------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0175) 0.00
Distributions from net realized capital gains - - - -
-------- -------
Total distributions (0.0175) 0.00
-------- -------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00
======== =======
Total return 1.76% 2.66%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 17,314 $21,662
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.78%/2/ 0.71%/2/
Before advisory/administration fee waivers 1.27%/2/ 1.20%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 2.63%/2/ 2.66%/2/
Before advisory/administration fee waivers 2.15%/2/ 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 orga-
nized as a Massachusetts business trust. On January 13, 1996, the assets and
liabilities of the Predecessor New Jersey Municipal Money Market Portfolio were
transferred to this Portfolio, and were combined with the assets of a pre-ex-
isting portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of principal.
The Portfolio may invest in a broad range of short-term, high
quality, U.S. dollar-denominated instruments, such as govern-
ment, bank, commercial and other obligations, that are avail-
able in the money markets. In particular, the Portfolio may
invest in:
(A) U.S. dollar-denominated obligations issued or supported by
the credit of U.S. or foreign banks or savings institu-
tions with total assets in excess of $1 billion (including
obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) A-2 or higher by
Standard & Poor's Ratings Group ("S&P"), Prime-2 or higher
by Moody's Investors Service, Inc. ("Moody's"), Duff 2 or
higher by Duff & Phelps Credit Co. ("D&P"), F-2 or higher
by Fitch Investors Service, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW"), as well as high
quality corporate bonds rated (at the time of purchase) AA
or higher by S&P, D&P, Fitch or TBW or Aa or higher by
Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obligations
and credit card receivables);
(E) securities issued or guaranteed as to principal and inter-
est by the U.S. Government or by its agencies or instru-
mentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by for-
eign governments or their political subdivisions, agencies
or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
18
<PAGE>
U.S. The investment objective of the U.S. Treasury Money Market Port-
TREASURY folio is to provide as high a level of current interest income
MONEY as is consistent with maintaining liquidity and stability of
MARKET principal. It pursues this objective by investing exclusively in
PORTFOLIO short-term bills, notes and other obligations issued or guaran-
teed by the U.S. Treasury and repurchase agreements relating to
such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Portfolio
PORTFOLIOS is to provide as high a level of current interest income exempt
from Federal income taxes as is consistent with maintaining li-
quidity and stability of principal. It pursues this objective by
investing substantially all of its assets in short-term obliga-
tions issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authori-
ties ("Municipal Obligations").
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market Port-
folio (the "State-Specific Municipal Portfolios") is, for each
Portfolio, to seek as high a level of current income exempt from
Federal, and to the extent possible, state income tax of the
specific state in which a Portfolio concentrates, as is consis-
tent with maintaining liquidity and stability of principal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or
A-2 or higher by S&P, AA or higher by D&P or F-2 or higher
by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of compa-
rable quality as determined by the Portfolios' sub-adviser
under guidelines established by the Fund's Board of Trust-
ees; and
(E) municipal bonds and notes which are guaranteed as to princi-
pal and interest by the U.S. Government or an agency or in-
strumentality thereof or which otherwise depend directly or
indirectly on the credit of the United States.
19
<PAGE>
During normal market conditions, at least 80% of each Munici-
pal Portfolio's net assets will be invested in securities
which are Municipal Obligations. In addition, under normal
conditions each State-Specific Municipal Portfolio intends to
invest at least 65% of its net assets in Municipal Obligations
of issuers located in the particular state indicated by its
name ("State-Specific Obligations"). The Municipal Money Mar-
ket Portfolio intends, on the other hand, to invest less than
25% of its total assets in Municipal Obligations of issuers
located in the same state. During temporary defensive periods,
each Municipal Portfolio may invest without limitation in ob-
ligations that are not Municipal Obligations and may hold
without limitation uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest
on AMT Paper that is received by taxpayers subject to the Fed-
eral alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its assets
in Municipal Obligations the interest on which is paid solely
from revenues of similar projects. To the extent a Portfolio's
assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activ-
ity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such
projects and bonds to a greater extent than it would be if its
assets were not so invested.
QUALITY, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, under
DIVERSIFICATION guidelines established by the Fund's Board of Trustees, to
present minimal credit risks and will be "Eligible Securities"
as defined by the SEC. Eligible Securities are (a) securities
that either (i) have short-term debt ratings at the time of
purchase in the two highest rating categories by at least two
unaffiliated nationally recognized statistical rating organi-
zations ("NRSROs") (or one NRSRO if the security is rated by
only one NRSRO), or (ii) are comparable in priority and secu-
rity with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including secu-
rities of issuers that have long-term but not short-term rat-
ings) but are of comparable quality as determined in accor-
dance with guidelines approved by the Board of Trustees.
20
<PAGE>
Each Portfolio is managed so that the average maturity of all
instruments held by it (on a dollar-weighted basis) will not ex-
ceed 90 days. In no event will a Portfolio purchase securities
which mature more than 397 days from the date of purchase (ex-
cept for certain variable and floating rate instruments and se-
curities collateralizing repurchase agreements). Securities in
which the Portfolios invest may not earn as high a level of in-
come as longer term or lower quality securities, which generally
have greater market risk and more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal Money
Market Portfolios are classified as diversified portfolios, and
the State-Specific Municipal Portfolios are classified as non-
diversified portfolios, under the Investment Company Act of 1940
(the "1940 Act"). Investment returns on a non-diversified port-
folio typically are dependent upon the performance of a smaller
number of securities relative to the number held in a diversi-
fied portfolio. Consequently, the change in value of any one se-
curity may affect the overall value of a non-diversified portfo-
lio more than it would a diversified portfolio. In addition, be-
cause the State-Specific Municipal Portfolios concentrate their
investments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than an
investment in other money market funds.
21
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign corporations and banks, and may acquire commercial obligations issued by
Canadian corporations and Canadian counterparts of U.S. corporations, as well
as Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the specific obligation or by government regulation. The Money
Market Portfolio may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of its total assets. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain agencies and instrumentalities of the U.S. Government are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
22
<PAGE>
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase at the Portfolio's option specific Municipal Obligations at a speci-
fied price. The acquisition of a stand-by commitment may increase the cost, and
thereby reduce the yield, of the Municipal Obligation to which such commitment
relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal or state income tax are rendered by counsel to
the respective issuers or sponsors at the time of issuance. The Fund and its
service providers will rely on such opinions and will not review independently
the underlying proceedings relating to the issuance of Municipal Obligations or
the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued by
private companies. Mortgage-related securities may include collateralized mort-
gage obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or
instrumentalities or issued by private companies. In periods of falling inter-
est rates, the rate of mortgage prepayments tends to increase. During these pe-
riods, the reinvestment of
23
<PAGE>
prepayment proceeds by the particular Portfolio will generally be at lower
rates than the rates on the prepaid obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the in-
terest rate. Issuers of unrated variable and floating rate instruments must
satisfy the same criteria as set forth above for the particular Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements"). The
securities held subject to a repurchase agreement may have stated maturities
exceeding 13 months, so long as the repurchase agreement itself matures in less
than 13 months. Default by or bankruptcy of the seller would expose the Portfo-
lio to possible loss because of adverse market action or delays in connection
with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the price or yield ob-
tained in a transaction may be less favorable than the price or yield available
in the market when the delivery takes place.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans
24
<PAGE>
involve risks of delay in receiving additional collateral or in recovering the
loaned securities, or possibly loss of rights in the collateral if the borrower
of the securities becomes insolvent.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 10% of the
value of its net assets in securities that are illiquid. Variable and floating
rate instruments that cannot be disposed of within seven days, GICs, and repur-
chase agreements and time deposits that do not provide for payment within seven
days after notice, without taking a reduced price, are subject to this 10% lim-
it. Each Portfolio may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accor-
dance with Rule 144A under the 1933 Act. These securities will not be consid-
ered illiquid so long as the sub-adviser determines that an adequate trading
market exists for the securities. This investment practice could have the ef-
fect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these re-
stricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Municipal Portfolios in State-Spe-
cific Obligations raises special investment considerations. Changes in the eco-
nomic condition and governmental policies of a state and its political subdivi-
sions could adversely affect the value of a Portfolio's shares. Certain matters
relating to some of the states in which the State-Specific Municipal Portfolios
invest are described below. For further information, see "Special Considera-
tions Regarding State-Specific Obligations" in the Statement of Additional In-
formation.
25
<PAGE>
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cycli-
cal than in some other states and in the nation as a whole. Agriculture is an
important segment of the Ohio economy with over half the State's area devoted
to farming and approximately 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. 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 State-Specific 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
four years; as of June 30, 1995, theGeneral Fund has a surplus of $688.3 mil-
lion. The deficit in the Commonwealth's unreserved/undesignated funds also has
been eliminated. Rising unemployment, a relatively high proportion of persons
65 and older in the Commonwealth and court ordered increases in healthcare re-
imbursement rates place increased pressures on the tax resources of the Com-
monwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains mod-
erate. Employment growth has shifted to the trade and service sectors, with
losses in more high-paid manufacturing positions. A new governor took office
in January 1995, but the Commonwealth has continued 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 com-
mercial agriculture, insurance, tourism, petroleum refining and manufacturing,
although New Jersey's manufacturing industry has experienced a downward trend
in the last few years. New Jersey is a major recipient of Federal assistance
and, of all the states, is among the highest in the amount of Federal aid re-
ceived. Therefore, a decrease in Federal financial assistance may adversely
affect the financial condition of New Jersey and its political subdivisions
and instrumentalities. While New Jersey's economic base has become more diver-
sified over time and thus its economy appears to be less vulnerable during re-
cessionary periods, a recurrence of high levels of unemployment could ad-
versely affect New Jersey's overall economy and the ability of New Jersey and
its political subdivisions and instrumentalities to meet their financial obli-
gations. In addition, New Jersey maintains a balanced budget which restricts
total appropriation increases to only 5% annually with respect to any munici-
pality or county, the balanced budget plan may actually adversely affect a
particular municipality's or county's ability to repay its obligations.
26
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax (including instruments which are subject to
AMT), except 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.
27
<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.
28
<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 persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
INVESTMENT
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISER Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform ad-
visory services for investment companies, and has its principal
offices at 1600 Market Street, 29th Floor, Philadelphia, Penn-
sylvania 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 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.
29
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
SUB-
AVERAGE DAILY NET INVESTMENT ADVISORY
ASSETS ADVISORY FEE FEE
----------------- ------------ --------
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfo-
lios (other than the New Jersey Municipal Money Market Port-
folio) paid investment advisory fees at the following annual
rates (expressed as a percentage of average daily net assets)
after voluntary fee waivers: Money Market Portfolio, .07%;
U.S. Treasury Money Market Portfolio, .07%; Municipal Money
Market Portfolio, .06%; Ohio Municipal Money Market Portfo-
lio, .06%; Pennsylvania Municipal Money Market Portfolio,
.06%; North Carolina Municipal Money Market Portfolio, .06%;
and Virginia Municipal Money Market Portfolio, 0%. For the
period from February 1, 1996 to September 30, 1996, the New
Jersey Municipal Money Market Portfolio paid investment advi-
sory fees, after voluntary fee waivers, at the annual rate of
.06% of its average daily net assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC"), and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). A majority of the outstanding stock of PDI is owned
by its officers and the remaining outstanding stock is owned
by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters relat-
ing to the maintenance of financial records and fund account-
ing. As compensation for these services, CCG is entitled to
receive a fee, computed daily and payable monthly, at an an-
nual rate of .03% of each Portfolio's average daily net as-
sets, and PFPC and CDI are entitled to receive a combined
fee, computed daily and payable monthly, at an annual rate of
.15% of the first $500 million of each Portfolio's average
daily net assets, .13% of the next $500 million of each Port-
folio's average daily net assets, .11% of 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.
30
<PAGE>
For information about the operating expenses the Portfolios paid
for the most recent fiscal year, see "What Are The Expenses Of
The Portfolios?"
TRANSFER
AGENT, PNC Bank, National Association ("PNC Bank") serves as the Port-
DIVIDEND folios' custodian and PFPC serves as their transfer agent and
DISBURSING dividend disbursing agent.
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"), In-
PLAN vestor Shares of the Portfolios bear the expense of payments
("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank for distribution
and sales support services. The distribution fees may be used to
compensate the Distributor for distribution services and to com-
pensate the Distributor and PNC Bank affiliates for sales sup-
port services provided in connection with the offering and sale
of Investor Shares. The distribution fees may also be used to
reimburse the Distributor and PNC Bank affiliates for related
expenses, including payments to brokers, dealers, financial in-
stitutions and industry professionals ("Service Organizations")
for sales support services and related expenses. Distribution
fees payable under the Plan will not exceed .10% (annualized) of
the average daily net asset value of each Portfolio's outstand-
ing 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 recipients as they choose (for example, to defray
their overhead expenses). The Plan also permits the Distributor,
PAMG, the Administrators and other companies that receive fees
from the Fund to make payments relating to distribution and
sales support activities out of their past profits or other
sources available to them.
Under the Plan, the Fund intends to enter into service arrange-
ments with Service Organizations (including PNC Bank and its af-
filiates) with respect to each class of Investor Shares pursuant
to which Service Organizations will render certain support serv-
ices to their customers who are the beneficial owners of In-
vestor Shares. In consideration for a shareholder servicing fee
of up to .25% (annualized) of the average daily net asset value
of Investor Shares owned by their customers, Service Organiza-
tions may provide one or more of the following services: re-
sponding to customer inquiries relating to the services per-
formed by the Service Organization and to customer inquiries
concerning their investments in Investor Shares; assisting cus-
tomers in designating and
31
<PAGE>
changing dividend options, account designations and address-
es; and providing other similar shareholder liaison services.
In consideration for a separate shareholder processing fee of
up to .15% (annualized) of the average daily net asset value
of Investor Shares owned by their customers, Service Organi-
zations may provide one or more of these additional services
to such customers: processing purchase and redemption re-
quests from customers and placing orders with the Fund's
transfer agent or the Distributor; processing dividend pay-
ments from the Fund on behalf of customers; providing sub-ac-
counting with respect to Investor Shares beneficially owned
by customers or the information necessary for sub-accounting;
and providing other similar services.
Service Organizations may charge their clients additional
fees for account services. Customers who are beneficial 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. Under state securi-
ties laws, banks and financial institutions that receive pay-
ments from the Fund may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses 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, distribution fees, fees and expenses
in registering and qualifying the Portfolios and their shares
for distribution under Federal and state securities laws, ex-
penses of preparing prospectuses and statements of additional
information and of printing and distributing prospectuses and
statements of additional information to existing sharehold-
ers, expenses relating to shareholder reports, shareholder
meetings and proxy solicitations, insurance premiums, the ex-
pense 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 in-
vestment 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.
32
<PAGE>
How Are Shares Purchased?
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GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor Shares through a
broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$100 minimum for subsequent investments. Purchases through the Automatic In-
vestment Plan described below are subject to a lower initial purchase minimum.
In addition, the minimum initial investment for employees of the Fund, the
Fund's investment adviser, sub-advisers, Distributor or transfer agent or em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
PURCHASES THROUGH BROKERS. Shares may be purchased through brokers which have
entered into dealer agreements with the Distributor.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described below,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its 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, the name
of the account registration and the shareholder account number. Before wiring
any funds, an investor must call PFPC at (800) 441-7762 in order to confirm the
wire instructions.
OTHER PURCHASE INFORMATION. Purchase orders for Investor Shares of the Portfo-
lios that are in proper form are executed at their net asset value per share
next determined after receipt by the Fund; however, orders will not be executed
until payments not made in Federal funds are converted to Federal funds (which
normally occurs within two Business Days of receipt) unless a creditworthy fi-
nancial 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 order
for shares.
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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 In-
vestor A Shares will take place at the net asset value of each class of shares
at the time of the conversion. After such conversion, an investor would hold
Investor A Shares subject to the operating expenses for Investor A Shares.
Upon each conversion of Investor B Shares that were not acquired through rein-
vestment 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 Distrib-
utor. 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 Phila-
delphia are open for business (a "Business Day"). Payment for orders which are
not received or accepted will be returned after prompt inquiry. The issuance
of shares is recorded on the books of the Fund. No certificates will be issued
for shares. Payments for shares of a Portfolio may, in the discretion of the
Fund's investment adviser, be made in the form of securities that are permis-
sible investments for that Portfolio. Compass Capital reserves the right to
reject any purchase order or to modify or waive the minimum initial or subse-
quent investment requirement.
34
<PAGE>
How Are Shares Redeemed?
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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. If a redeeming shareholder owns both Investor B Shares and In-
vestor C Shares in the same Portfolio, the redemption order will be processed
to minimize the amount of the contingent deferred sales charge that will be
charged unless the shareholder indicates otherwise. Except as noted below, a
request for redemption must be signed by all persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption would exceed $25,000, or if the proceeds are not
to be paid to the record owner at the record address, or if the shareholder is
a corporation, partnership, trust or fiduciary, signature(s) must be guaranteed
by any eligible guarantor institution. Eligible guarantor institutions gener-
ally include banks, broker/dealers, credit unions, national securities ex-
changes, registered securities associations, clearing agencies and savings as-
sociations.
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
35
<PAGE>
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 ac-
count to cover the amount of the check. If an insufficient number of Investor A
Shares is held or if checks are not properly endorsed, they may not be honored
and a service charge may be incurred. Checks may not be presented for cash pay-
ments 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 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 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
36
<PAGE>
What Are The Shareholder Features Of The Fund?
- --------------------------------------------------------------------------------
$1.00, the proceeds paid on redemption may be more or less than the amount in-
vested depending on a share's net asset value at the time of redemption. Pro-
ceeds from the redemption of Investor B and Investor C Shares will be reduced
by the amount of any applicable contingent deferred sales charge. Unless an-
other 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, howev-
er, 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 determina-
tion 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.
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 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 applica-
ble sales charge.
Unless an exemption applies, a front-end sales charge will be charged in con-
nection with exchanges for Investor A Shares of the Fund's non-money market in-
vestment portfolios. Similarly, exchanges of Investor A Shares of a Portfolio
for Investor B or Investor C Shares of a non-money market portfolio of the Fund
will also be subject to a CDSC, unless an exemption applies. Investor B Shares
of the Portfolios are only exchangeable for Investor B Shares of the Fund's
other investment portfolios, and Investor C Shares of the Portfolios are only
exchangeable for Investor C Shares of the Fund's other investment portfolios.
Investor B and Investor C Shares are exchangeable without the payment of any
contingent deferred sales charge at the time the exchange is made. In determin-
ing the holding period for calculating the contingent deferred sales charge
payable on redemption of Investor B and Investor C Shares, the holding period
of the Investor B or Investor C Shares originally held will be added to the
holding period of the Investor B or Investor C Shares acquired through ex-
change. No exchange fee is imposed by the Fund.
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<PAGE>
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. During periods of sub-
stantial economic or market change, telephone exchanges may be difficult to
complete and shareholders may have to submit exchange requests to PFPC in writ-
ing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
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.
38
<PAGE>
The Fund, the Administrators and the Distributor will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions reason-
ably 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, Wilmington, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may
arrange for periodic investments in that Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs 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. 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.
39
<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.
40
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are subject
to change by the Fund's Board of Trustees. The Portfolios do not expect to re-
alize net long-term capital gains.
Dividends are reinvested in additional full and fractional Investor Shares of
the same class on which the dividends are paid, unless a shareholder elects to
receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.
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 (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-
42
<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. For additional information concerning the tax treatment of div-
idends and distributions by the states listed below, including certain restric-
tions applicable to such treatment, see "Taxes" in the statement of Additional
Information.
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 State-Specific Obligations or obligations issued by the U.S. Government,
its agencies, instrumentalities or territories (if the interest on such obliga-
tions is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio cor-
poration franchise tax liability to the extent that such distributions either
constitute exempt-interest dividends for Federal income tax purposes or are
properly attributable to interest on Ohio State-Specific Obligations or the
U.S. obligations described above. However, shares of the Ohio Municipal Money
Market Portfolio will be included in a corporation's net worth base for pur-
poses of calculating the Ohio corporation franchise tax. Distributions properly
attributable to gain on the sale, exchange or other disposition of Ohio State-
Specific 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 at-
tributable 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, are 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
43
<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. Dividends paid 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 generally be exempt from the Virginia income tax.
Dividends derived from interest on debt obligations of certain territories and
possessions of the United States (those issued by Puerto Rico, the Virgin Is-
lands and Guam) will also be exempt from the Virginia income tax. Dividends de-
rived from interest on debt obligations other than those described above will
be subject to the Virginia income tax even though it may be excludable from
gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. Capital gains distrib-
uted to shareholders derived from Virginia obligations issued pursuant to spe-
cial Virginia enabling legislation which provides a specific exemption for such
gains will be exempt from Virginia income tax.
44
<PAGE>
The Virginia Department of Taxation has adopted a policy of allowing sharehold-
ers to exclude from their Virginia taxable income the exempt portion of distri-
butions from a regulated investment company even though the shareholders re-
ceive distributions monthly but receive reports substantiating the exempt por-
tion of such distributions at less frequent intervals. Accordingly, if the
Portfolio receives taxable income, the Portfolio must determine the portion of
income that is exempt from Virginia income tax and provide such information to
the shareholders in accordance with the foregoing so that the shareholders may
exclude from Virginia taxable income the exempt portion of the distribution
from the Portfolio.
NEW JERSEY TAXES. It is anticipated that substantially all dividends paid by
the New Jersey Municipal Money Market Portfolio will not be subject to New 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
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
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 SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Investor Shares of the eight money market portfolios
described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. Because of these "class expenses", the
performance of a Portfolio's Institutional Shares is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of both
the Institutional Shares and Service Shares of a Portfolio is expected to be
higher than the performance of the Portfolio's three classes of Investor
Shares. The performance of each class of Investor Shares may be different. The
Fund offers various services and privileges in connection with its Investor
Shares that are not generally offered in 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
Institutional share classes, contact PFPC at (800) 441-7762.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December , 1996, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
46
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield" and "effective yield" for each class
of Investor Shares. Both yield figures are based on historical earnings and are
not intended to indicate future performance. "Yield" refers to the income gen-
erated by an investment in a particular class of a Portfolio's Investor Shares
over a seven-day period. This income is then "annualized." That is, the amount
of income generated by the investment during that week is assumed to be gener-
ated each week over a 52-week period and is shown as a percentage of the in-
vestment. "Effective yield" is calculated similarly but, when annualized, the
income earned by an investment in a particular class of a Portfolio's Investor
Shares is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed rein-
vestment. A Municipal Portfolio's "tax equivalent yield" may also be quoted,
which shows the level of taxable yield needed to produce an after-tax equiva-
lent to the Portfolio's tax-free yield for a particular class of Investor
Shares.
The performance of each class of Investor Shares of a Portfolio may be compared
to the performance of mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the yield of a particular class of Investor
Shares of a Portfolio may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Performance information may also include evaluations of the
Portfolios published in nationally recognized ranking services, and information
as reported by financial publications such as Business Week, Fortune, Institu-
tional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
47
<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 (888) 4COMPASS.
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.
48
<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
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(SERVICE SHARES OF THE LOW DURATION BOND
PORTFOLIO, INTERMEDIATE GOVERNMENT BOND PORTFOLIO, INTERMEDIATE
BOND PORTFOLIO, CORE BOND PORTFOLIO, MANAGED INCOME PORTFOLIO,
INTERNATIONAL BOND PORTFOLIO, TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA
TAX-FREE INCOME PORTFOLIO, NEW JERSEY TAX-FREE INCOME PORTFOLIO AND OHIO TAX-
FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund.................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance............................ What Are The Portfolios'
Financial Highlights?
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8 Redemption or Repurchase................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Bond Portfolios Service Shares
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Service Shares of ten of those portfolios (the
"Portfolios"):
Low Duration Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond Portfolio
Managed Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
Ohio Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Commis-
sion (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 Information, as supple-
mented from time to time, is incorporated by reference into
this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN
THE PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest in taxable bonds, and four of these
Portfolios invest in tax-exempt bonds. A detailed description of
each Portfolio begins on page 22.
COMPASS PERFORMANCE LIPPER PEER GROUP
CAPITAL BENCHMARK
PORTFOLIO
Short U.S. Government
Merrill 1-3
Low Duration Year
Bond Treasury
(previously Index
called the
Short
Government
Bond
Portfolio)
Intermediate U.S. Government
Intermediate Government/Corporate
Intermediate Investment Grade
Lehman Debt
Brothers Corporate Debt A-Rated
Intermediate General World Income
Government
Lehman
Intermediate Brothers
Government Intermediate
Bond Government/Corporate
General Municipal Debt
PA Municipal Debt
Intermediate Lehman
Bond Aggregate
NJ Municipal Debt
OH Municipal Debt
Lehman
Aggregate
Core Bond Salomon Non-
U.S. Hedged
World
Government
Bond Index
Managed
Income
International
Bond Lehman
Municipal
Bond Index
Tax-Free Lehman Local
Income GO Index
Lehman Local
PA Tax-Free GO Index
Income Lehman Local
NJ Tax-Free GO Index
Income
OH Tax Free
Income
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc.
("BlackRock") serves as sub-adviser to each Portfolio.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
BOND We intend this document to be an effective tool as you explore
PORTFOLIOS different directions in fixed income investing.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. Some or all of the Portfolios may
BOND INVESTING purchase mortgage-related, asset-backed, foreign and illiquid
securities; enter into repurchase and reverse repurchase
agreements and engage in leveraging techniques; lend portfo-
lio securities to third parties; and enter into futures con-
tracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Port-
folios, which are considered diversified. See "What Addi-
tional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "HOW ARE SHARES PURCHASED AND REDEEMED?" and
CAPITAL FUNDS "WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 11
What Are The Portfolios?..................................... 22
What Are The Differences Among The Portfolios?............... 23
What Types of Securities Are In The Portfolios?.............. 24
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 25
What Additional Investment Policies And Risks Apply?......... 26
Who Manages The Fund?........................................ 39
How Are Shares Purchased And Redeemed?....................... 44
What Special Purchase And Redemption Procedures May Apply?... 46
How Is Net Asset Value Calculated?........................... 48
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 49
How Are Fund Distributions Taxed?............................ 50
How Is The Fund Organized?................................... 54
How Is Performance Calculated?............................... 55
How Can I Get More Information?.............................. 57
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios after fee waivers for the fiscal period ended September 30,
1996 as a percentage of average daily net assets. The figures shown for the
International Bond Portfolio have been restated to reflect current expenses
and fee waivers. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE INTERMEDIATE
DURATION BOND GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .30% .30% .30%
Other operating expenses .55 .55 .55
------- -------- ------
Administration fees (after fee
waivers)(/1/) .15 .15 .13
Shareholder servicing fees .15 .15 .15
Other expenses .25 .25 .27
------ ------- -----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .85% .85% .85%
======= ======== ======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are
under no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .63%, .63% and .63%, re-
spectively, and "Total Portfolio operating expenses" would be 1.13%, 1.13%
and 1.13%, respectively. See "What are the Portfolios' Financial High-
lights?" for information about interest paid by the Portfolios in connec-
tion with their investment activity.
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED INCOME
CORE BOND 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/) .14 .15
Shareholder servicing fees .15 .15
Other expenses .26 .23
--------- ------
Total Portfolio operating expenses (after
fee waivers)(/1/) .85% .88%
========== =======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .64% and .61%, respective-
ly, and "Total Portfolio operating expenses" would be 1.14% and 1.11%, re-
spectively. See "What are the Portfolios' Financial Highlights?" for infor-
mation about interest paid by the Portfolios in connection with their in-
vestment activity.
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/) .50% .30% .30%
Other operating expenses .78 .55 .55
---------- -------- --------
Administration fees
(after fee
waivers)(/1/) .15 .11 .14
Shareholder servicing
fee .15 .15 .15
Other expenses .48 .29 .26
-------- ------- -------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) 1.04% .85% .85%
========== ======== ========
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50% and .50%, respectively,
and administration fees would be .23% for each Portfolio. In addition, the
Expense Summary reflects reimbursements made to the Tax-Free Income Port-
folio by the adviser. PAMG and the Portfolio's administrators are under no
obligation to waive fees or reimburse expenses, but have informed the Fund
that they expect to waive fees and reimburse expenses during the remainder
of the current fiscal year as necessary to maintain the Portfolios' total
operating expenses at the levels set forth in the table. Without waivers,
"Other operating expenses" would be .81%, .68% and .65%, respectively, and
"Total Portfolio operating expenses" would be 1.33%, 1.18% and 1.15%, re-
spectively.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE TAX-FREE
INCOME INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)(/1/) .30% .30%
Other operating expenses .55 .55
----- -----
Administration fees (after fee waivers)(/1/) .11 .10
Shareholder servicing fees .15 .15
Other expenses .29 .30
---- ----
Total Portfolio operating expenses (after fee
waivers)(/1/) .85% .85%
===== =====
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .67% and .88%, respective-
ly, and "Total Portfolio operating expenses" would be 1.17% and 1.38%, re-
spectively.
9
<PAGE>
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 9 $27 $47 $105
Intermediate Government Bond
Portfolio 9 27 47 105
Intermediate Bond Portfolio 9 27 47 105
Core Bond Portfolio 9 27 47 105
Managed Income Portfolio 9 28 49 108
International Bond Portfolio 11 35 60 133
Tax-Free Income Portfolio 9 27 47 105
Pennsylvania Tax-Free Income
Portfolio 9 27 47 105
New Jersey Tax-Free Income Portfolio 9 27 47 105
Ohio Tax-Free Income Portfolio 9 27 47 105
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' independent accountants. The financial statements of the
Core Bond Portfolio and the Low Duration Bond Portfolio (former-
ly, the Short Government Bond Portfolio) for the year ended June
30, 1995 were audited by other auditors. Please refer to a re-
vised auditor's report under "Other Information" which makes
reference to the audits performed by those other auditors. This
financial information should be read together with those finan-
cial statements. 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.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
APRIL 1, 1996 JANUARY 13, 1996(*)
THROUGH THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.79 $ 9.91
------- --------
Net investment income (net of $.014,
$.011 and $.005 respectively, of
interest expense) 0.26 0.11
Net realized and unrealized loss on
investments (0.01) (0.12)
------- --------
Net increase from investment operations 0.25 (0.01)
------- --------
Dividends from net investment income (0.25) (0.11)
Distributions from net realized capital
gains - - - -
------- --------
Total dividends and distributions (0.25) (0.11)
------- --------
NET ASSET VALUE, END OF PERIOD $ 9.79 $ 9.79
======= ========
Total investment return 2.54% (0.11)%
RATIOS TO AVERAGE NET ASSETS:
Expenses(**) 0.85%/1/ 0.85%/1/
Excluding waivers(**) 1.13% 1.05%
Net investment income(**) 5.40% 5.25%
Excluding waivers(**) 5.13% 5.05%
SUPPLEMENTAL DATA:
Portfolio turnover 228% 185%
Net assets, end of period (in
thousands) $91,870 $181,670
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Low Duration Bond Portfolio were transferred to
this Portfolio, and were combined with the assets of a pre-existing portfo-
lio of investments maintained by the Fund.
(*) Commencement of investment operations of share class.
(**) Annualized.
/1/Including interest expense, ratios would have been 0.97% for the period
ended September 30, 1996 and 1.18% for the period ended March 31, 1996. For
the periods prior to March 31, 1996, interest income was presented net of
interest expense.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29//93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.02 $ 9.64 $ 10.60 $ 10.45
------- ------- ------- -------
Income from investment
operations
Net investment income 0.56 0.56 0.53 0.09
Net gain (loss) on investments
(both realized and
unrealized) (0.12) 0.37 (0.86) 0.15
------- ------- ------- -------
Total from investment
operations 0.44 0.93 (0.33) 0.24
------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.55) (0.53) (0.09)
Distributions from net
realized capital gains - - - - (0.10) - -
------- ------- ------- -------
Total distributions (0.54) (0.55) (0.63) (0.09)
------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 9.92 $ 10.02 $ 9.64 $ 10.60
======= ======= ======= =======
Total return 4.51% 9.99% (3.31)% 2.30%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $47,494 $49,762 $60,812 $15,035
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.83%/3/ 0.69%/3/ 0.65% 0.67%/2/
Before advisory/administration
fee waivers 1.13% 1.06% 1.05% 0.75%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.73% 5.67% 5.30% 5.14%/2/
Before advisory/administration
fee waivers 5.43% 5.30% 4.90% 5.06%/2/
PORTFOLIO TURNOVER RATE 580% 247% 9% 80%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 1.00% for the period
ended September 30, 1996, and 0.69% for the period ended September 30, 1995.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/29//93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 9.43 $ 9.05 $ 10.01 $ 9.99
------- ------- ------- ------
Income from investment
operations
Net investment income 0.53 0.54 0.54 - -
Net gain (loss) on investments
(both realized and
unrealized) (0.09) 0.38 (0.91) 0.02
------- ------- ------- ------
Total from investment
operations 0.44 0.92 (0.37) 0.02
------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.52) (0.54) (0.53) - -
Distributions from net
realized capital gains (0.03) - - (0.06) - -
------- ------- ------- ------
Total distributions (0.55) (0.54) (0.59) - -
------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 9.32 $ 9.43 $ 9.05 $10.01
======= ======= ======= ======
Total return 4.79% 10.46% (3.80)% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $45,362 $36,718 $35,764 $ 91
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.83%/3/ 0.74%/3/ 0.70% 0.70%/2/
Before advisory/administration
fee waivers 1.13% 1.09% 1.13% 1.09%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.98% 5.90% 5.33% 4.35%/2/
Before advisory/administration
fee waivers 5.67% 5.55% 4.90% 3.96%/2/
PORTFOLIO TURNOVER RATE 670% 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 1.14% for the period
ended September 30, 1996, and 0.82% for the period ended September 30, 1995.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
4/1/96 1/13/96(*)
THROUGH THROUGH
9/30/96 3/31/96
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.61 $ 9.91
-------- --------
Net investment income
(net of $.004, $.003
and $.001,
respectively, of
interest expense)(**) 0.30 0.11
Net realized and
unrealized gains on
investments (0.07) (0.30)
-------- --------
Net (decrease) increase
from investment
operations 0.23 (0.19)
-------- --------
Dividends from net
investment income (0.29) (0.11)
Distributions from net
realized capital gains - - - -
Total dividends and
distributions (0.29) (0.11)
-------- --------
NET ASSET VALUE, END OF
PERIOD $ 9.55 $ 9.61
======== ========
Total investment return 2.40% (1.90)%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.85%(**),/1/ 0.85%(**),/1/
Excluding waivers 1.14%(**) 1.10%(**)
Net investment
income(**) 6.33%(**) 5.46%(**)
Excluding waivers 6.04%(**) 5.21%(**)
SUPPLEMENTAL DATA:
Portfolio turnover 308% 723%
Net assets, end of
period (in thousands) $117,207 $232,040
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations of share class.
(**) Annualized.
/1/Including interest expense, ratios would have been 1.08% for the period
ended September 30, 1996, and 0.94% for the period ended March 31, 1996. For
the periods prior to March 31, 1996, interest income was presented net of
interest expense.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.38 $ 9.79 $ 11.17 $ 10.96
-------- -------- ------- -------
Income from investment operations
Net investment income 0.61 0.63 0.59 0.11
Net gain (loss) on investments
(both realized and unrealized) (0.20) 0.60 (1.18) 0.21
-------- -------- ------- -------
Total from investment operations 0.41 1.23 (0.59) 0.32
-------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.60) (0.63) (0.62) (0.11)
Distribution in excess of net
investment income - - (0.01) (0.02) - -
Distributions from net realized
capital gains (0.10) - - (0.14) - -
Distributions in excess of net
realized gains - - (0.01) - -
-------- -------- ------- -------
Total distributions (0.70) (0.64) (0.79) (0.11)
-------- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.09 $ 10.38 $ 9.79 $ 11.17
======== ======== ======= =======
Total return 4.05% 12.97% (5.49)% 2.93%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $165,073 $116,846 $67,655 $15,322
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.88% 0.85% 0.80% 0.80%/2/
Before advisory/administration fee
waivers 1.11% 1.05% 1.02% 0.84%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.87% 6.14% 5.95% 5.83%/2/
Before advisory/administration fee
waivers 5.65% 5.94% 5.73% 5.79%/2/
PORTFOLIO TURNOVER RATE 638% 203% 61% 72%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
2/1/96 3/1/95 YEAR YEAR YEAR 7/1/91
THROUGH THROUGH ENDED ENDED ENDED THROUGH
9/30/96 1/31/96 2/28/95 2/28/94 2/28/93 2/29/92**
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
------ ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.89 0.62 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both
realized and
unrealized) (0.29) 1.13 (0.48) 0.46 0.47 0.26
------ ------- ------- ------- ------- -------
Total from investment
operations 0.60 1.75 (0.14) 1.11 0.99 0.57
------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28) (0.88) (0.13) (0.90) (0.30) - -
Distributions from net
realized capital gains - - - - (0.24) (0.22) (0.14) (0.36)
------ ------- ------- ------- ------- -------
In Excess of Net
Realized Gains - - - - - - - - - - - -
Total distributions (0.28) (0.88) (0.37) 1.12 (0.44) (0.36)
------ ------- ------- ------- ------- -------
NET ASSET VALUE AT END
OF PERIOD $11.71 $ 11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21
====== ======= ======= ======= ======= =======
Total return 5.39% 16.79% 1.50% 10.24% 9.55% 5.84%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $7,836 $37,627 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.09%* 1.23%* 1.24% 1.38% 1.30% 1.33%*
Excluding waivers 1.20%* 1.23%* 1.24% 1.38% 1.30% 1.37%*
Ratios of net
investment income to
average net assets 3.82%* 5.62%* 5.96% 6.00% 6.31% 6.79%*
Excluding waivers 3.72%* 5.62%* 5.96% 6.00% 6.31% 6.75%*
PORTFOLIO TURNOVER RATE 108% 159% 131% 128% 115% 110%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996. For the periods pre-
sented, this Portfolio received Sub-advisory services from another company
that was unaffiliated with PAMG and BlackRock.
* Annualized.
** Share class commenced operations on July 1, 1991.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.61 $10.04 $11.31 $10.97
------- ------ ------ ------
Income from investment operations
Net investment income 0.51 0.50 0.51 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.23 0.59 (0.93) 0.34
------- ------ ------ ------
Total from investment operations 0.74 1.09 (0.42) 0.43
------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.51) (0.50) (0.51) (0.09)
Distributions from net realized
capital gains - - (0.02) (0.34) - -
------- ------ ------ ------
Total distributions (0.51) (0.52) (0.85) (0.09)
------- ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 10.84 $10.61 $10.04 $11.31
======= ====== ====== ======
Total return 7.14% 11.24% (4.02)% 3.92%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $36,161 $4,713 $2,109 $ 634
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.85% 0.80% 0.75% 0.71%/2/
Before advisory/administration fee
waivers 1.18% 1.57% 1.98% 1.49%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 4.88% 4.92% 4.75% 4.99%/2/
Before advisory/administration fee
waivers 4.56% 4.15% 3.52% 4.21%/2/
PORTFOLIO TURNOVER RATE 268% 92% 40% 71%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.33 $ 9.82 $ 10.70 $ 10.43
------- ------- ------- -------
Income from investment operations
Net investment income 0.50 0.50 0.51 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.11 0.51 (0.85) 0.28
------- ------- ------- -------
Total from investment operations 0.61 1.01 (0.34) 0.37
------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.50) (0.50) (0.51) (0.09)
Distributions from net realized
capital gains - - - - (0.03) (0.01)
------- ------- ------- -------
Total distributions (0.50) (0.50) (0.54) (0.10)
------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.44 $ 10.33 $ 9.82 $ 10.70
======= ======= ======= =======
Total return 5.97% 10.51% (3.20)% 3.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $34,297 $13,815 $11,518 $ 3,894
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.85% 0.79% 0.55% 0.34%/2/
Before advisory/administration fee
waivers 1.15% 1.11% 1.15% 1.22%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 4.74% 5.04% 4.97% 4.90%/2/
Before advisory/administration fee
waivers 4.44% 4.72% 4.37% 4.02%/2/
PORTFOLIO TURNOVER RATE 119% 66% 30% 40%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
2/1/96 3/1/95 YEAR YEAR YEAR PERIOD
THROUGH THROUGH ENDED ENDED ENDED ENDED
9/30/96 1/31/96 2/28/95 2/28/94 2/28/93 2/28/92**
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46 $ 10.00
------- ------- ------- -------- ------- -------
Income from investment
operations
Net investment income 0.73 0.46 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and
unrealized) (0.32) 0.65 (0.36) 0.04 0.85 0.45
------- ------- ------- -------- ------- -------
Total from investment
operations 0.41 1.11 0.15 0.58 1.37 0.79
------- ------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.75) (0.44) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - - - (0.01) (0.03) - - - -
------- ------- ------- -------- ------- -------
Total distributions (0.75) (0.44) (0.52) (0.57) (0.53) (0.33)
------- ------- ------- -------- ------- -------
NET ASSET VALUE AT END
OF PERIOD $ 11.27 $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46
======= ======= ======= ======== ======= =======
Total return 0.15% 10.35% 1.49% 5.18% 13.48% 12.33%*
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $88,077 $97,976 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.85%* 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 1.17%* 0.90%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net
investment income to
average net assets 4.44%* 4.43%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.13%* 4.41%* 4.63% 4.27% 4.48% 4.58%*
PORTFOLIO TURNOVER RATE 109% 26% 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 13, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
* Annualized.
** Share class commenced operations on July 1, 1991.
20
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $10.05 $ 9.60 $10.53 $10.24
------ ------ ------ ------
Income from investment operations
Net investment income 0.48 0.52 0.49 0.09
Net gain (loss) on investments (both
realized and unrealized) 0.10 0.45 (0.91) 0.29
------ ------ ------ ------
Total from investment operations 0.58 0.97 (0.42) 0.38
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.48) (0.52) (0.49) (0.09)
Distributions from net realized
capital gains - - - - (0.02) - -
------ ------ ------ ------
Total distributions (0.48) (0.52) (0.51) (0.09)
------ ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.15 $10.05 $ 9.60 $10.53
====== ====== ====== ======
Total return 5.80% 10.45% (4.00)% 3.68%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $6,377 $5,150 $4,428 $ 907
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.79% 0.39% 0.35% 0.32%/2/
Before advisory/administration fee
waivers 1.38% 1.46% 1.74% 2.83%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 4.69% 5.39% 5.06% 4.71%/2/
Before advisory/administration fee
waivers 4.10% 4.31% 3.67% 2.20%/2/
PORTFOLIO TURNOVER RATE 136% 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
21
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment
styles across the spectrum of fixed income investments so that
investors may participate across multiple disciplines in order
to seek their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Six of these Portfolios invest solely in taxable bonds
and four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods,
a fund that invests in any one of these styles may perform
above or below the market. An investment program that combines
these multiple disciplines allows investors to select from
among these various product options in the way that most
closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
22
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Managed Lehman Aggregate 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' sub-adviser will normally attempt to structure the Portfo-
lios to have comparable durations to the benchmarks. Duration, which mea-
sures price sensitivity to interest rate changes, is not necessarily equal
to average maturity.
23
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes:The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
24
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio (as defined below), invest less than
80% of its net assets in Municipal Obligations (as defined below), except
during defensive periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), more than 5% of its total assets to be invested in securities of
any one issuer, except that up to 50% of a Portfolio's total assets may be in-
vested without regard to this limitation so long as no more than 25% of the
Portfolio's total assets are invested in any one issuer (except U.S. Government
securities).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
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What Additional Investment Policies And Risks Apply?
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INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio and
Intermediate Government Bond Portfolio will be rated in the highest rating cat-
egory at the time of purchase or, if unrated, of comparable quality as deter-
mined by the Portfolios' sub-adviser. Securities acquired by the other Portfo-
lios will be rated investment grade at the time of purchase (within the four
highest rating categories by Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor
Services, Inc.) or, if unrated, of comparable quality as determined by the
Portfolios' sub-adviser. Securities rated "Baa" on "BBB" are generally consid-
ered to be investment grade although they have speculative characteristics. If
a security's rating is reduced below the minimum rating that is permitted for a
Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio
should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Intermediate Government
Bond Portfolio will invest at least 65% of its total assets in obligations is-
sued or guaranteed by the U.S. Government, its agencies or instrumentalities
and related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its total assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific Tax-Free Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name. The Tax-Free Income Portfolio intends to invest no more than 25% of
its net assets in Municipal Obligations of issuers located in the same state.
During temporary defensive periods each Tax-Free Portfolio may invest without
limitation in securities that are not Municipal Obligations and may hold with-
out limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. The Managed Income Portfolio may invest up
to 10% of its total assets in debt securities of foreign issuers and may hold
from time to time various foreign currencies pending investment or conversion
into U.S. dollars. Investing in securities of foreign issuers involves consid-
erations not typically associated with investing in securities of companies or-
ganized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a Portfolio that invests in foreign securities will be affected favorably or
unfavorably by changes in currency exchange rates.
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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.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
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MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
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Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. The Tax-Free Portfolios may invest in tax-exempt derivative secu-
rities relating to Municipal Obligations, including tender option bonds, par-
ticipations, beneficial interests in trusts and partnership interests.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no principal payments will be made on a CMO class until all other classes hav-
ing an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include
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<PAGE>
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws many of which give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the pur-
chaser would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have an effective
security interest in all of the obligations backing such receivables. There-
fore, there is a possibility that recoveries on repossessed collateral may not,
in some cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at
any time. In calculating the average weighted maturity of a Portfolio, the ma-
turity of mortgage-related and other asset-backed securities held by the Port-
folio will be based on estimates of average life which take prepayments into
account. The average life of a mortgage-related instrument, in particular, is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of scheduled principal payments
and mortgage prepayments. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage passthrough securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears
Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of
Sears Mortgage) or mortgage-related securities containing loans or mortgages
originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It
is possible that under some circumstances, PNC
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<PAGE>
Mortgage Securities Corp. or its affiliates could have interests that are in
conflict with the holders of these mortgage-backed securities, and such holders
could have rights against PNC Mortgage Securities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
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U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the Government National Mort-
gage Association are supported by the United States' full faith and credit;
others such as those of the Federal National Mortgage Association and the Stu-
dent Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the Federal Home Loan Mortgage Corporation are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored agencies or instrumen-
talities 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 may to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their holdings, as a duration
management technique or to protect against an increase in the price of securi-
ties a Portfolio anticipates purchasing at a later date. The Portfolios intend
to use these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative, or, with respect to the
International Bond Portfolio, cross-hedging. These
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options may relate to particular securities, securities indices, or the yield
differential between two securities or, in the case of the International Bond
Portfolio, foreign currencies, and may or may not be listed on a securities ex-
change and may or may not be issued by the Options Clearing Corporation. A
Portfolio will not purchase put and call options when the aggregate premiums on
outstanding options exceed 5% of its net assets at the time of purchase, and
will not write options on more than 25% of the value of its net assets (mea-
sured at the time an option is written). Options trading is a highly special-
ized activity that entails greater than ordinary investment risks. In addition,
unlisted options are not subject to the protections afforded purchasers of
listed options issued by the Options Clearing Corporation, which performs the
obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities in
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; (d) the
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors; and (e)
the possibility that the counterparty will default in the performance of its
obligations. For further discussion of risks involved with domestic and foreign
futures and options, see the Statement of Additional Information.
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The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for a Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities.
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Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios may use the proceeds of reverse repurchase agreements to
purchase other securities either maturing, or under an agreement to resell, on
a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse re-
purchase agreements when it is anticipated that the interest income to be
earned from the investment of the proceeds of the transaction is greater than
the interest expense of the transaction. This use of reverse repurchase agree-
ments may be regarded as leveraging and, therefore, speculative. Reverse repur-
chase agreements involve the risks that the interest income earned in the in-
vestment of the proceeds will be less than the interest expense, that the mar-
ket value of the securities sold by a Portfolio may decline below the price of
the securities the Portfolio is obligated to repurchase and that the securities
may not be returned to the Portfolio. During the time a reverse repurchase
agreement is outstanding, a Portfolio will maintain a segregated account with
the Fund's custodian containing cash, U.S. Government or other appropriate liq-
uid debt securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In
addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an ad-
ditional 5% of its total assets for temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and re-
purchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual-
ified institutional buyers" in accordance with Rule 144A under the 1933 Act.
These securities will not be considered illiquid so long as it is determined by
the Portfolios' sub-adviser that an adequate trading market exists for the se-
curities. 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.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and for-
35
<PAGE>
ward commitment transactions involve the risk, however, that the price or yield
obtained in a transaction may be less favorable than the price or yield avail-
able in the market when the securities delivery takes place. Each Portfolio's
when-issued purchases and forward commitments are not expected to exceed 25% of
the value of its total assets absent unusual market conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Port-
folio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the sub-adviser believes
36
<PAGE>
investment considerations warrant such sale or purchase. Portfolio turnover may
vary greatly from year to year as well as within a particular year. High port-
folio turnover rates will generally result in higher transaction costs to a
Portfolio and may result in the realization of short-term capital gains that
are taxable to shareholders as ordinary income.
INTEREST RATE AND EXTENSION RISKS. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce higher yields, are subject to potentially greater capital appreciation and
depreciation than securities with shorter maturities. The Portfolios are not
restricted to any maximum or minimum time to maturity in purchasing individual
portfolio securities, and the average maturity of a Portfolio's assets will
vary 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. Although the Portfolios' sub-adviser will normally attempt to
structure each Portfolio to have a comparable duration to its benchmark as
stated in that section, there can be no assurance that it will be able to do so
at all times.
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 four
years; as of June 30, 1995, the General Fund had a surplus of $688.3 million.
The deficit in the Commonwealth's unreserved/undesignated funds also have been
eliminated. 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. Employment
growth has shifted to the trade and service sectors, with losses in more high-
paid manufacturing positions. A new governor took office in January 1995, but
the Commonwealth has continued 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
37
<PAGE>
could adversely affect New Jersey's overall economy and the ability of New Jer-
sey and its political subdivisions and instrumentalities to meet their finan-
cial obligations. In addition, New Jersey maintains a balanced budget which re-
stricts total appropriation increases to only 5% annually with respect to any
municipality or county, the balanced budget plan may actually adversely affect
a particular municipality's or county's ability to repay its obligations.
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 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. 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 pay-
ments relating to) those obligations.
38
<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 persons cur-
rently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND
SUB- The Adviser to the Compass Capital Funds is PNC Asset Management
ADVISERS Group ("PAMG"). Each of the Portfolios within the Compass Capi-
tal Fund family is managed by a specialized portfolio manager
who is a member of PAMG's fixed income portfolio management sub-
sidiary, BlackRock Financial Management, Inc. ("BlackRock").
BlackRock has its primary offices at 345 Park Avenue, New York,
New York 10154.
The ten Portfolios and their portfolio managers are as follows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- ----------------------------------------------------
<S> <C>
Low Duration Bond 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.
Intermediate Government Robert S. Kapito, Michael P. Lustig and Scott Amero
Bond (see above); Messrs. Kapito, Lustig and Amero have
been Portfolio co-managers since 1995.
Intermediate Bond Robert S. Kapito, Michael P. Lustig and Scott Amero
(see above); Messrs. Kapito, Lustig and Amero have
been Portfolio co-managers since 1995.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- ----------------------------------------------------
<S> <C>
Core Bond Scott Amero (see above); Mr. Amero has been
Portfolio manager since its inception.
Managed Income 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 Andrew Gordon [add Gordon bio]
Tax-Free Income 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 Kevin Klingert (see above); Portfolio manager since
Income 1995.
New Jersey Tax-Free In- Kevin Klingert (see above); Portfolio manager since
come 1995.
Ohio Tax-Free Income Kevin Klingert (see above); Portfolio manager since
1995.
</TABLE>
40
<PAGE>
PAMG was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103. PAMG is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank
holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-adviser 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-adviser
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfolios
paid investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after vol-
untary fee waivers: Intermediate Government Bond Portfolio,
.28%; Intermediate Bond Portfolio, .30%; Managed Income Portfo-
lio, .35%; Tax-Free Income Portfolio, .28%; Pennsylvania Tax-
Free Income Portfolio, .29%; and Ohio Tax-Free Income Portfolio,
.06%. For the period from April 1, 1996 through September 30,
1996, the Low Duration Bond and Core Bond Portfolios paid in-
vestment advisory fees, after voluntary fee waivers, at the an-
nual rates of .30% and .30% of their respective average daily
net assets. For the periods from February 1, 1996 and February
13, 1996, respectively, through September 30, 1996, the New Jer-
sey Tax-Free Income and International Bond Portfolios paid in-
vestment advisory fees, after voluntary fee waivers, at the an-
nual rates of .30% and .55% of their respective average daily
net assets.
The Portfolios' sub-adviser strives to achieve best execution 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 dis-
tributor, subject to the requirements of best execution.
41
<PAGE>
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). A majority of the outstanding stock of PDI is owned
by its officers and the remaining outstanding stock is owned
by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating
to the maintenance of financial records and fund accounting.
As compensation for these services, CCG is entitled to receive
a fee, computed daily and payable monthly, at an annual rate
of .03% of each Portfolio's average daily net assets, and PFPC
and CDI are entitled to receive a combined fee, computed daily
and payable monthly, at an annual rate of .20% of the first
$500 million of each Portfolio's average daily net assets,
.18% of the next $500 million of each Portfolio's average
daily net assets, .16% of the next $1 billion of each Portfo-
lio's average daily net assets and .15% of each Portfolio's
average daily net assets in excess of $2 billion. From time to
time the Administrators may waive some or all of their admin-
istration fees from a Portfolio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal period, see "What Are the Ex-
penses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service arrangements with in-
SERVICING stitutional investors ("Institutions") (including PNC Bank,
National Association and its affiliates) which provide that
the Institutions will render support services to their custom-
ers who are the beneficial owners of Service Shares. These
services are intended to supplement the services provided by
the Fund's Administrators and transfer agent to the Fund's
shareholders of record. In consideration for payment of a
shareholder processing fee of up to .15% (on an annualized ba-
sis) of the average daily net asset value of Service Shares
owned beneficially by their customers, Institutions may pro-
vide one or more of the following services: processing pur-
chase and redemption requests from customers and placing or-
ders with the Fund's transfer agent or the distributor;
processing dividend payments from the Fund on behalf of cus-
tomers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information nec-
essary for sub-accounting; and provid-
42
<PAGE>
ing other similar services. In consideration for payment of a
separate shareholder servicing fee of up to .15% (on an
annualized basis) of the average daily net asset value of Serv-
ice Shares owned beneficially by their customers, Institutions
may provide one or more of these additional services to such
customers: responding to customer inquiries relating to the
services performed by the Institution and to customer inquiries
concerning their investments in Service Shares; assisting cus-
tomers in designating and changing dividend options, account
designations and addresses; and providing other similar share-
holder liaison services. Customers who are beneficial owners of
Service Shares should read this Prospectus in light of the terms
and fees governing their accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment
of fiduciary funds in Portfolio shares. Institutions, including
banks regulated by the Comptroller of the Currency, Federal Re-
serve Board and state banking commissions, and investment advis-
ers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor or state securities commissions,
are urged to consult their legal counsel before entering into
agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Institutions under their service agreements will not be prohib-
ited under these laws. Under state securities laws, banks and
financial institutions that receive payments from the Fund may
be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and other
expenses which are not expressly assumed by PAMG or the Fund's
service providers under their agreements with the Fund. Any gen-
eral expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment port-
folios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
43
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu-
tions acting on behalf of their customers, as well as certain persons who were
shareholders of Compass Capital Group of Funds at the time of its combination
with the PNC(R) Fund during the first quarter of 1996. Service Shares will nor-
mally be held of record by Institutions or in the names of nominees of Institu-
tions. Share purchases are normally effected through a customer's account at an
Institution through procedures established in connection with the requirements
of the account. In these cases, confirmations of share purchases and redemp-
tions will be sent to the Institutions. Beneficial ownership of shares will be
recorded by the Institutions and reflected in the account statements provided
by such Institutions to their customers. Investors wishing to purchase shares
should contact their Institutions.
Service Shares are sold at their net asset value per share next computed after
an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern
Time) on a Business Day are priced the same day. A "Business Day" is any week-
day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of Philadelphia (the "FRB") are open for business. Purchase orders may be
placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after
4:00 p.m. (Eastern Time) are priced on the following Business Day.
Payment for Service Shares must normally be made in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information. The minimum initial investment is $5,000;
however, Institutions may set a higher minimum for their customers. There is no
minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may in its discretion reject any order for Service Shares.
REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in
accordance with the procedures applicable to their accounts with the Institu-
tions. These procedures will vary according to the type of account and the In-
stitution involved, and customers should consult their account managers in this
regard. It is the responsibility of Institutions to transmit redemption orders
to PFPC and credit their customers' accounts with redemption proceeds on
44
<PAGE>
a timely basis. In the case of shareholders holding share certificates, the
certificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the Administrators and the
Distributor will employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. The Fund and its service providers will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed by the Fund, although Institutions may charge their customer accounts for
redemption services. Information relating to such redemption services and
charges, if any, should be obtained by customers from their Institutions.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may redeem Service Shares in any Portfolio account if the account bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count falls below that minimum, the customer may be obligated to redeem all or
part of his or her shares in the Portfolios to the extent necessary to maintain
the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
45
<PAGE>
What Special Purchase and Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC(R) Fund
may also purchase and redeem Service Shares of the same Portfolio and for the
same account in which they held shares on that date through the procedures de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. The minimum investment
is $100. Purchases through the Automatic Investment Plan described below are
subject to a lower purchase minimum. The name of the Portfolio with respect to
which shares are purchased must appear on the check or Federal Reserve Draft.
Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders which
are received by PFPC, together with payment, before the close of regular trad-
ing hours on the NYSE (currently 4:00 p.m. Eastern Time) on any Business Day
(as defined above) are priced according to the net asset value next determined
on that day.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an investor
in shares of a Portfolio may arrange for periodic investments in that Portfolio
through automatic deductions from a checking or savings account by completing
the AIP Application Form which may be obtained from PFPC. The minimum pre-au-
thorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to Compass Capital Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Dela-
ware 19899-8907.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding share certificates must send
their certificates with the redemption request. Additional documentary evidence
of authority is required by PFPC in the event redemption is requested by a cor-
poration, partnership, trust, fiduciary, executor or administrator.
If a shareholder has given authorization for expedited redemption, shares can
be redeemed by telephone and the proceeds sent by check to the shareholder or
by Federal wire transfer to a
46
<PAGE>
single previously designated bank account. Once authorization is on file, PFPC
will honor requests by any person by telephone at (800) 441-7762 (in Delaware
call collect (302) 791-1194) or other means. The minimum amount that may be
sent by check is $500, while the minimum amount that may be wired is $10,000.
Compass Capital reserves the right to change these minimums or to terminate
these redemption privileges. If the proceeds of a redemption would exceed
$25,000, the redemption request must be in writing and will be subject to the
signature guarantee requirement described above. This privilege may not be used
to redeem shares in certificated form.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed by the shareholder's bank. To change the name of the single designated
bank account to receive wire redemption proceeds, it is necessary to send a
written request (with a guaranteed signature as described above, to Compass
Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, the Administrators and the Distributor
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions reasonably believed to be genuine in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") which may be used
by investors who wish to receive regular distributions from their accounts.
Upon commencement of the SWP, the account must have a current value of $10,000
or more in a Portfolio. Shareholders may elect to receive automatic cash pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed on the 25th day of the applicable month or, if such day is not a Business
Day, on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form which may be obtained
from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
47
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its Service Shares,
less the liabilities charged to its Service Shares, by the number of its Serv-
ice Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
48
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
Service Shares of the relevant Portfolio unless a shareholder elects otherwise.
Such election, or any revocation thereof, must be made in writing to PFPC, and
will become effective with respect to dividends paid after its receipt by PFPC.
Each Portfolio declares a dividend each day on "settled" shares (i.e. shares
for which the particular Portfolio has received payment in Federal funds) on
the first Business Day after a purchase order is placed with the Fund. Payments
by check are normally converted to Federal funds within two Business Days of
receipt. Over the course of a year, substantially all of the Portfolios' net
investment income will be declared as dividends. The amount of the daily divi-
dend for each Portfolio will be based on periodic projections of its net in-
vestment income. All dividends are paid within ten days after the end of each
month. Net realized capital gains (including net short-term capital gains), if
any, will be distributed by each Portfolio at least annually.
49
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), whether the
distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. 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 Re-
tirement Act benefits should note that "exempt interest dividends" will be
taken into account in determining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net 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.
50
<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Any loss upon the sale or ex-
change of shares held for six months or less will be disallowed for Federal in-
come tax purposes to the extent of any exempt interest dividends received by
the shareholder. For the Ohio Tax-Free Income Portfolio, the loss will be dis-
allowed for Ohio income tax purposes to the same extent, even though, for Ohio
income tax purposes, some portion of such dividends actually may have been sub-
ject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of a taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including gen-
erally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio intends to make this election. As a result, the
amount of such foreign taxes paid by the Portfolio will be included in its
shareholders' income pro rata (in addition to taxable distributions actually
received by them), and each shareholder generally will be entitled either (a)
to credit a proportionate amount of such taxes against U.S. Federal income tax
liabilities, or (b) if a shareholder itemizes deductions, to deduct such pro-
portionate amounts from U.S. income, should the shareholder so choose.
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, 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 a
Portfolio. For additional information concerning the tax treatment of dividends
and distributions by the states listed below including certain restrictions ap-
plicable to such treatment, see "Taxes" in the Statement of Additional Informa-
tion.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania Municipal Obligations or attributable to insurance proceeds on account
of such interest, is not taxable to individuals, estates or trusts under the
Personal Income Tax (in the case of insurance proceeds, to the extent they are
exempt for Federal income tax purposes); to corporations under the Corporate
Net Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal income tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were
51
<PAGE>
held by the Pennsylvania Tax-Free Income Portfolio for more than six months,
the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free Income
Portfolio, such gain may be subject to the Personal Income Tax and Corporate
Net Income Tax. Such gain may also be subject to the School District Tax, 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, are subject to, or included in the measure of, the spe-
cial taxes imposed by the Commonwealth of Pennsylvania on banks and other fi-
nancial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed above (including the Cor-
porate Capital 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 Municipal Obligations, or as interest or gain from direct U.S. Gov-
ernment obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States). Cor-
porations that are subject to the Ohio corporation franchise tax will not have
to include distributions from the Ohio Tax-Free Income Portfolio in their net
income base for purposes of calculating their Ohio corporation franchise tax
liability to the extent that such distributions either consti
52
<PAGE>
tute exempt-interest dividends for Federal income tax purposes or are properly
attributable to interest on Ohio Municipal Obligations or the U.S. obligations
describved above. However, Shares of the Ohio Tax-Free Income Portfolio will be
included in a corporation's net worth base for purposes of calculating the Ohio
corporation franchise tax. Distributions 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 cor-
poration franchise tax. Distributions attributable to other sources will be
subject to the Ohio personal income tax and the Ohio corporation franchise tax.
53
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, except the Intermediate Bond, Managed Income and Ohio Tax-Free In-
come Portfolios, offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. The
Intermediate Bond, Managed Income and Ohio Tax-Free Income Portfolios each of-
fer Institutional Shares, Service Shares and Investor A Shares and, in addi-
tion, the Ohio Tax-Free Income Portfolio offers Investor B Shares. This pro-
spectus relates only to Service Shares of the 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 performance of each class of Investor Shares may be
different. The Fund offers various services and privileges in connection with
its Investor Shares that are not generally offered in connection with its In-
stitutional and Service Shares, including an automatic investment plan and an
automatic withdrawal plan. For further information regarding the Fund's Insti-
tutional or Investor Share classes, contact PFPC at (800) 441-7764 (Institu-
tional Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, and may be deemed a controlling person of the Fund under the 1940 Act. PNC
Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
54
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Service Shares of the Portfolios may be quoted in
advertisements and communications to shareholders. Total return will be calcu-
lated on an average annual total return basis for various periods. Average an-
nual total return reflects the average annual percentage change in value of an
investment in Service Shares of a Portfolio over the measuring period. Total
return may also be calculated on an aggregate total return basis. Aggregate to-
tal return reflects the total percentage change in value over the measuring pe-
riod. Both methods of calculating total return assume that dividend and capital
gain distributions made by a Portfolio with respect to its Service Shares are
reinvested in Service Shares.
The yield of Service Shares is computed by dividing the Portfolio's net income
per share allocated to its Service Shares during a 30-day (or one month) period
by the net asset value per share on the last day of the period and annualizing
the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to a Portfolio's tax-free yield. This is done
by increasing the Portfolio's yield (calculated above) by the amount necessary
to reflect the payment of Federal and/or state income tax at a stated tax rate.
The performance of a Portfolio's Service Shares may be compared to the perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Portfolio's Service Shares may be com-
pared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Lehman GMNA Index, the T-Bill Index, the "stocks, bonds and
inflation index" published annually by Ibbotson Associates and the Lehman Gov-
ernment Corporate Bond Index, as well as the benchmarks attached to this Pro-
spectus. Performance information may also include evaluations of the Portfolios
and their Service Shares published by nationally recognized ranking services,
and information as reported in financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or re-
gional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Service Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for
Service Shares of a Portfolio cannot necessarily be used to compare an invest-
ment in
55
<PAGE>
such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in
Service Shares will not be included in the Portfolio performance calculations.
Other Information
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, of the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed In-
come, International Bond, Tax-Free Income and New Jersey Tax-Free Income Port-
folios of the Compass Capital Fund, and the statements of net assets of the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios of the Compass
Capital Funds as of September 30, 1996, and the related statements of opera-
tions for the periods then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented (except for those statements which
have been audited by other auditors as discussed below). These financial state-
ments and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net as-
sets for the year ended June 30, 1995, and the financial highlights for the
year ended June 30, 1995 and each of the prior periods presented of the Short
Government Bond and Core Bond Portfolios, formerly the BFM Institutional Trust
Short Duration and Core Fixed Income Portfolios (the "BFM Funds"), respectively
were audited by other auditors, whose report dated August 7, 1995 expressed an
unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of materials misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian and brokers as of September 30, 1996. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Compass Capital Funds (Short Government Bond, Intermediate Government Bond, In-
termediate Bond, Core Bond, Government Income, Managed Income, International
Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free and
Ohio Tax-Free Income Portfolios), as of September 30, 1996, and the results of
their operations for the periods then ended, the changes in their net assets
for each of the two years (or periods) in the period then ended (except for the
year ended June 30, 1995 for the BFM Funds which have been audited by other au-
ditors), and the financial highlights for each of the periods presented (except
for the year ended June 30, 1995 and prior periods for the BFM Funds which have
been audited by other auditors), in conformity with generally accepted account-
ing principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
56
<PAGE>
How Can I Get More Information?
- --------------------------------------------------------------------------------
We believe that it is essential for shareholders to have access to information
regarding their investment 24 hours a day, 7 days a week. The COMPASS CAPITAL
FUNDS have an investor information line that can provide such access.
In addition to account information, other sources of information regarding each
COMPASS CAPITAL Portfolio and its portfolio holdings, strategy and current div-
idend and performance levels are available.
By selecting the appropriate source of information as listed below, investors
can receive additional information on the COMPASS CAPITAL Portfolios by either
using a toll-free number or through electronic access:
For Performance and Portfolio Management Questions dial (888) 4COMPASS.
For Information Related to Share Purchases and Redemptions call COMPASS CAPITAL
FUNDS at (800) 441-7450.
For Questions about Shareholder Accounts and Balances held directly at the
Fund, call (800) 441-7764.
Information is also available on the Internet through the World Wide Web.
Shareholders and investment professionals may access portfolio information,
portfolio manager updates and market data by accessing
http://www.compassfunds.com.
57
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of 1996, the composition of the
Lehman Brothers Aggregate Index is:
% allocation to Treasury and government
securities
% allocation to mortgage-backed securities
% allocation to corporate and asset-backed
securities
Managed Income 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 1996, the composition of the
Lehman Brothers Aggregate Index is:
% allocation to Treasury and government
securities
% allocation to mortgage-backed securities
% allocation to corporate and asset-backed
securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
58
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND PORTFOLIO
MANAGED INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
THE BOND
PORTFOLIOS
SERVICE SHARES
Prospectus
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF THE LOW DURATION BOND
PORTFOLIO, INTERMEDIATE GOVERNMENT BOND PORTFOLIO, INTERMEDIATE
BOND PORTFOLIO, CORE BOND PORTFOLIO, MANAGED INCOME PORTFOLIO,
INTERNATIONAL BOND PORTFOLIO, TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA
TAX-FREE INCOME PORTFOLIO, NEW JERSEY TAX-FREE INCOME PORTFOLIO AND OHIO TAX-
FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund.................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance............................. What Are The Portfolios'
Financial Highlights?
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Bond Portfolios Institutional Shares
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Institutional Shares of ten of those portfolios
(the "Portfolios"):
Low Duration Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond Portfolio
Managed Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
Ohio Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Com-
mission (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 Information, as supple-
mented from time to time, is incorporated by reference into
this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OB-
LIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN
THE PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
<PAGE>
The Bond Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest in taxable bonds, and four of these
Portfolios invest in tax-exempt bonds. A detailed description of
each Portfolio begins on page 20.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasury Short U.S. Government
(previously called the Short Index
Government Bond
Portfolio)
Intermediate Government Lehman Brothers Intermediate U.S.
Bond Intermediate Government Government
Intermediate Bond Lehman Brothers Intermediate
Intermediate Government/Corporate
Government/Corporate
Core Bond Lehman Aggregate Intermediate Investment
Grade Debt
Managed Income Lehman Aggregate 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.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
BOND We intend this document to be an effective tool as you explore
PORTFOLIOS different directions in fixed income investing.
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?..................................... 19
What Are The Differences Among The Portfolios?............... 20
What Types Of Securities Are In The Portfolios?.............. 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 22
What Additional Investment Policies and Risks Apply?......... 23
Who Manages The Fund?........................................ 36
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 incurred by Institutional
Shares of the Portfolios for the fiscal period ended September 30, 1996 as a
percentage of average daily net assets. The figures shown for the Interna-
tional Bond Portfolio have been restated to reflect current expenses and fee
waivers. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION GOVERNMENT INTERMEDIATE
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .30% .30%
Other operating expenses .25 .25 .25
----- ------ ------
Administration fees
(after fee waivers)(/1/) .15 .15 .13
Other expenses .10 .10 .12
---- ----- -----
Total Portfolio operating expenses (after
fee waivers)(/1/) .55% .55% .55%
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CORE BOND MANAGED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees
(after fee waivers)(/1/) .30% .35%
Other operating expenses .25 .23
----- -------
Administration fees (after fee waivers)(/1/) .14 .15
Other expenses .11 .08
---- ------
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .58%
===== =======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are
under no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .32%, .33%, .33%, .34%
and .31%, respectively, and "Total Portfolio operating expenses" would be
.83%, .83%, .83%, .84% and .81%, respectively. See "What are the Portfo-
lios' Financial Highlights?" for information about interest paid by the
Portfolios in connection with their investment activity.
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/) .50% .30% .30%
Other operating expenses .48 .25 .25
--------- -------- ---------
Administration fees
(after fee
waivers)(/1/) .15 .11 .14
Other expenses .33 .14 .11
-------- ------- --------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .92% .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/) .11 .10
Other expenses .14 .15
----- -----
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .55%
====== ======
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50%, .50%, .50% and .50%,
respectively, and administration fees would be .23% for each Portfolio. In
addition, the Expense Summary reflects reimbursements made to the Tax-Free
Income Portfolio by the adviser. PAMG and the Portfolios' administrators
are under no obligation to waive fees or reimburse expenses, but have in-
formed the Fund that they expect to waive fees and reimburse expenses dur-
ing the remainder of the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .48%, .39%, .35%, .37%
and .60% respectively, and "Total Portfolio operating expenses" would be
1.03%, .89%, .85%, .87% and 1.10%, respectively.
7
<PAGE>
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 6 $18 $31 $ 69
Intermediate Government Bond
Portfolio 6 18 31 69
Intermediate Bond Portfolio 5 17 30 66
Core Bond Portfolio 6 18 31 69
Managed Income Portfolio 6 19 32 73
International Bond Portfolio 10 31 51 120
Tax-Free Income Portfolio 6 18 31 69
Pennsylvania Tax-Free Income
Portfolio 6 18 31 69
New Jersey Tax-Free Income Portfolio 6 18 31 69
Ohio Tax-Free Income Portfolio 6 18 31 69
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERAT-
ING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
8
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' independent accountants. The financial highlights of the
Core Bond Portfolio and the Low Duration Bond Portfolio (former-
ly, the Short Government Bond Portfolio) for the periods ended
June 30, 1995, 1994 and 1993 were audited by other auditors.
Please refer to a revised auditor's report under "Other Informa-
tion" which makes reference to the audits performed by those
other auditors. This financial information should be read to-
gether 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 Addi-
tional Information and the annual shareholder reports may be ob-
tained from the Fund free of charge by calling (800) 441-7764.
During the periods shown, no Institutional Shares of the New
Jersey Tax-Free Income Portfolio were outstanding.
9
<PAGE>
Financial Highlights
- -------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
APRIL 1, 1996 JULY 1, 1995 YEAR YEAR JULY 17, 1992(/1/)
THROUGH THROUGH ENDED ENDED THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.79 $ 9.83 $ 9.71 $ 9.96 $ 10.00
-------- ------- ------- ------- -------
Net investment income 0.28 0.42 0.58 0.48 0.51
Net realized and
unrealized loss on
investments (0.01) - - 0.13 (0.25) (0.06)
-------- ------- ------- ------- -------
Net increase from
investment operations 0.27 0.42 0.71 0.23 0.45
-------- ------- ------- ------- -------
Dividends from net
investment income (0.27) (0.41) (0.58) (0.48) (0.49)
Distributions from net
realized capital gains - - (0.01) (0.01) - - - -
-------- ------- ------- ------- -------
Total dividends and
distributions (0.27) (0.46) (0.59) (0.48) (0.49)
-------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ 9.79 $ 9.79 $ 9.83 $ 9.71 $ 9.96
======== ======= ======= ======= =======
Total investment return 2.70% 4.25% 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.55%/2/,/3/ 0.63%/2/,/3/ 0.57% 0.57% 0.56%/2/
Excluding Waivers 0.83%/2/ 0.83%/2/ 1.05% 1.02% 0.66%/2/
Net investment income 5.72%/2/ 5.25%/2/ 6.08% 4.70% 5.32%/2/
Excluding Waivers 5.45%/2/ 5.05%/2/ 5.60% 4.25% 5.22%/2/
SUPPLEMENTAL DATA:
Portfolio turnover 228% 185% 586% 455% 513%
Net assets, end of
period (in thousands) $135,686 $52,843 $44,486 $31,265 $51,611
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Low Duration Bond Portfolio were transferred to
this Portfolio, and were combined with the assets of a pre-existing portfo-
lio investment maintained by the Fund.
/1Commencement/of investment operations of share class.
/2Annualized./
/3Including/interest expense, ratios would have been 0.64% for the period
ended September 30, 1996 and 0.96% for the period ended March 31, 1996. For
the periods prior to March 31, 1996, interest income was presented net of
interest expense.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.02 $ 9.64 $ 10.60 $ 10.46 $ 10.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.58 0.58 0.55 0.54 0.24
Net gain (loss) on
investments (both
realized and
unrealized) (0.11) 0.38 (0.86) 0.16 0.46
-------- -------- -------- -------- --------
Total from investment
operations 0.47 0.96 (0.31) 0.70 0.70
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.57) (0.58) (0.55) (0.54) (0.24)
Distributions from net
realized capital gains - - - - (0.10) (0.02) - -
-------- -------- -------- -------- --------
Total distributions (0.57) (0.58) (0.65) (0.56) (0.24)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 9.92 $ 10.02 $ 9.64 $ 10.60 $ 10.46
======== ======== ======== ======== ========
Total return 4.82% 10.28% (3.08)% 6.88% 7.14%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $126,312 $134,835 $128,974 $137,065 $105,620
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.53%/3/ 0.42%/3/ 0.40% 0.73% 0.80%/2/
Before
advisory/administration
fee waivers 0.83% 0.79% 0.80% 0.81% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.03% 5.94% 5.48% 5.23% 5.28%/2/
Before
advisory/administration
fee waivers 5.73% 5.57% 5.08% 5.15% 5.28%/2/
PORTFOLIO TURNOVER RATE 580% 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.83% for the period
ended September 30, 1996, and 0.55% for the period ended September 30, 1995.
11
<PAGE>
Financial Highlights (continued)
- -------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/17/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 9.43 $ 9.05 $ 10.01 $ 10.00
-------- -------- ------- -------
Income from investment
operations
Net investment income 0.56 0.56 0.54 0.02
Net gain (loss) on
investments (both realized
and unrealized) (0.09) 0.38 (0.88) (0.01)
-------- -------- ------- -------
Total from investment
operations 0.47 0.94 (0.34) 0.01
-------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.56) (0.56) - -
Distributions from net
realized capital gains (0.03) - - (0.06) - -
-------- -------- ------- -------
Total distributions (0.58) (0.56) (0.62) - -
-------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 9.32 $ 9.43 $ 9.05 $ 10.01
======== ======== ======= =======
Total return 5.10% 10.76% (3.52)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $207,909 $124,979 $71,896 $56,713
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.53%/3/ 0.47%/3/ 0.45% 0.45%/2/
Before
advisory/administration fee
waivers 0.83% 0.89% 0.88% 0.84%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 6.27% 6.18% 5.54% 4.72%/2/
Before
advisory/administration fee
waivers 5.97% 5.84% 5.11% 4.33%/2/
PORTFOLIO TURNOVER RATE 670% 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.83% for the period
ended September 30, 1996, and 0.55% for the period ended September 30, 1995.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
APRIL 1, 1996 JULY 1, 1995 YEAR YEAR DECEMBER 9, 1992/1/
THROUGH THROUGH ENDED ENDED THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.61 $ 9.85 $ 9.36 $ 10.37 $10.00
-------- ------- ------- ------- ------
Net investment income
(net of $.004, $.003 and
$.001, respectively, of
interest expense)(**) 0.30 0.47 0.62 0.55 0.32
Net realized and
unrealized gains on
investments (0.06) (0.07) 0.50 (0.60) 0.37
-------- ------- ------- ------- ------
Net (decrease) increase
from investment
operations 0.24 0.40 1.12 (0.05) 0.69
-------- ------- ------- ------- ------
Dividends from net
investment income (0.30) (0.47) (0.62) (0.55) (0.32)
Distributions from net
realized capital gains - - (0.17) (0.01) (0.41)
-------- ------- ------- -------
Total dividends and
distributions (0.30) (0.64) (0.63) (0.96) (0.32)
-------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD $ 9.55 $ 9.61 $ 9.85 $ 9.36 $10.37
======== ======= ======= ======= ======
Total investment
return(***) 2.55% 3.93% 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET
ASSETS:
Expenses(*) 0.55%/2/,/3/ 0.66%/2/,/3/ 0.55% 0.55% 0.55%/2/
Excluding Waivers 0.84%/2/ 0.91%/2/ 1.75% 2.65% 2.44%/2/
Net investment
income(**) 6.75%/2/ 5.89%/2/ 6.62% 5.61% 5.57%/2/
Excluding Waivers 6.45%/2/ 5.64%/2/ 5.43% 3.51% 3.68%/2/
SUPPLEMENTAL DATA:
Portfolio turnover 308% 723% 435% 722% 354%
Net assets, end of
period (in thousands) $162,626 $64,707 $32,191 $12,507 $7,803
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
/1/Commencement of investment operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.80% for the period
ended September 30, 1996, and 0.75% for the period ended March 31, 1996. For
the periods prior to March 31, 1996 interest income was presented net of in-
terest expense.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
-------- -------- -------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.64 0.65 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on
investments (both
realized and
unrealized) (0.21) 0.60 (1.21) 0.56 0.48 0.63 (0.29)
-------- -------- -------- -------- -------- ------- -------
Total from investment
operations 0.43 1.25 (0.57) 1.23 1.17 1.37 0.37
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.62) (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 (0.10) - - (0.14) (0.13) - - - - - -
Distributions in excess
of net realized gains - - - - (0.01) - - - - - - - -
-------- -------- -------- -------- -------- ------- -------
Total distributions (0.72) (0.66) (0.81) (0.80) (0.69) (0.81) (0.67)
-------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.09 $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
======== ======== ======== ======== ======== ======= =======
Total return 4.33% 13.27% (5.27)% 12.13% 11.80% 14.74% 3.80%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $564,744 $443,148 $395,060 $341,791 $314,075 $52,802 $38,328
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.58% 0.57% 0.55% 0.74% 0.80% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers 0.81% 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 6.17% 6.44% 6.11% 6.25% 6.28% 7.36% 7.31%/2/
Before
advisory/administration
fee waivers 5.95% 6.24% 5.89% 6.21% 6.28% 7.32% 7.29%/2/
PORTFOLIO TURNOVER RATE 638% 203% 61% 72% 56% 38% 18%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD
6/10/96*
THROUGH
9/30/96
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.37
-------
Income from investment operations
Net investment income 0.21
Net (loss) gain on investments (both realized and unrealized) 0.30
-------
Total from investment operations 0.51
-------
LESS DISTRIBUTIONS
Distributions from net investment income (0.17)
Distributions from net realized capital gains - -
-------
In Excess of Net Realized Gains
Total distributions (0.17)
-------
NET ASSET VALUE AT END OF PERIOD $ 11.71
=======
Total return 4.48%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $30,882
Ratios of expenses to average net assets 0.92%**
Excluding waivers 1.32%**
Ratios of net investment income to average net assets 6.28%**
Excluding waivers 5.88%**
PORTFOLIO TURNOVER RATE 108%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996. For the periods pre-
sented, this Portfolio received Sub-advisory services from another company
that was unaffiliated with PAMG and BlackRock.
* Commencement of operations of share class.
** Annualized.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 1/21/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $10.61 $10.04 $11.31 $10.61
------ ------ ------ ------
Income from investment operations
Net investment income 0.49 0.53 0.53 0.42
Net gain (loss) on investments (both
realized and unrealized) 0.28 0.59 (0.93) 0.70
------ ------ ------ ------
Total from investment operations 0.77 1.12 (0.40) 1.12
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.54) (0.53) (0.53) (0.42)
Distributions from net realized
capital gains - - (0.02) (0.34) - -
------ ------ ------ ------
Total distributions (0.54) (0.55) (0.87) (0.42)
------ ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.84 $10.61 $10.04 $11.31
====== ====== ====== ======
Total return 7.45% 11.54% (3.77)% 10.72%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $8,350 $ 271 $ 132 $ 675
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.55% 0.52% 0.50% 0.50%/2/
Before advisory/administration fee
waivers 0.89% 1.30% 1.73% 1.28%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.10% 5.19% 4.97% 5.14%/2/
Before advisory/administration fee
waivers 4.78% 4.41% 3.74% 4.36%/2/
PORTFOLIO TURNOVER RATE 268% 92% 40% 71%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 12/1/92/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $10 .33 $ 9.82 $10.70 $10.00
------- ------ ------ ------
Income from investment operations
Net investment income 0.52 0.52 0.53 0.39
Net gain (loss) on investments (both
realized and unrealized) 0.12 0.51 (0.85) 0.73
------- ------ ------ ------
Total from investment operations 0.64 1.03 (0.32) 1.12
------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.53) (0.52) (0.53) (0.39)
Distributions from net realized
capital gains - - - - (0.03) (0.03)
------- ------ ------ ------
Total distributions (0.53) (0.52) (0.56) (0.42)
------- ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 10.44 $10.33 $ 9.82 $10.70
======= ====== ====== ======
Total return 6.29% 10.81% (2.96)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 3,609 $2,092 $ 639 $ 256
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.55% 0.52% 0.39% 0.09%/2/
Before advisory/administration fee
waivers 0.85% 0.84% 0.99% 0.97%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 5.01% 5.23% 5.27% 5.19%/2/
Before advisory/administration fee
waivers 4.72% 4.91% 4.67% 4.31%/2/
PORTFOLIO TURNOVER RATE 119% 66% 30% 40%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 12/1/92/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $10.05 $ 9.60 $10.53 $10.00
------ ------ ------ ------
Income from investment operations
Net investment income 0.50 0.55 0.53 0.36
Net gain (loss) on investments (both
realized and unrealized) 0.10 0.45 (0.91) 0.53
------ ------ ------ ------
Total from investment operations 0.60 1.00 (0.38) 0.89
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.50) (0.55) (0.53) (0.36)
Distributions from net realized
capital gains - - - - (0.02) - -
------ ------ ------ ------
Total distributions (0.50) (0.55) (0.55) (0.36)
------ ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $10.15 $10.05 $ 9.60 $10.53
====== ====== ====== ======
Total return 6.12% 10.75% (3.75)% 9.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 409 $ 200 $ 127 $1,676
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.51% 0.12% 0.10% 0.08%/2/
Before advisory/administration fee
waivers 1.10% 1.19% 1.49% 2.59%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 4.96% 5.61% 5.16% 4.99%/2/
Before advisory/administration fee
waivers 4.37% 4.54% 3.77% 2.48%/2/
PORTFOLIO TURNOVER RATE 136% 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
18
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 30 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of ten in-
vestment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector. Six
of these Portfolios invest solely in taxable bonds and four of
these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods, a
fund that invests in any one of these styles may perform above
or below the market. An investment program that combines these
multiple disciplines allows investors to select from among these
various product options in the way that most closely fits the
investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
19
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Managed Lehman Aggregate 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' sub-adviser will normally attempt to structure the Portfo-
lios to have comparable durations to the benchmarks. Duration, which mea-
sures price sensitivity to interest rate changes, is not necessarily equal
to average maturity.
20
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio,
according to the following designations:
Yes:The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No:The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
21
<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
provided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations
that may be changed only with the approval of a "majority of the outstanding
shares of a Portfolio" (as defined in the Statement of Additional Informa-
tion). Several of the Portfolios' fundamental investment policies, which are
set forth in full in the Statement of Additional Information, are summarized
below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) 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 (as defined below), invest less
than 80% of its net assets in Municipal Obligations (as defined below),
except during defensive periods or during periods of unusual market condi-
tions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), more than 5% of its total assets to be invested in securities
of any one issuer, except that up to 50% of a Portfolio's total assets may be
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. Govern-
ment securities).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
22
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio and
Intermediate Government Bond Portfolio will be rated in the highest rating cat-
egory at the time of purchase or, if unrated, of comparable quality as deter-
mined by the Portfolios' sub-adviser. Securities acquired by the other Portfo-
lios will be rated investment grade at the time of purchase (within the four
highest rating categories by Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor
Services, Inc.) or, if unrated, of comparable quality as determined by the
Portfolios' sub-adviser. Securities rated "Baa" on "BBB" are generally consid-
ered to be investment grade although they have speculative characteristics. If
a security's rating is reduced below the minimum rating that is permitted for a
Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio
should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Intermediate Government
Bond Portfolio will invest at least 65% of its total assets in obligations is-
sued or guaranteed by the U.S. Government, its agencies or instrumentalities
and related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its total assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific Tax-Free Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name. The Tax-Free Income Portfolio intends to invest no more than 25% of
its net assets in Municipal Obligations of issuers located in the same state.
During temporary defensive periods each Tax-Free Portfolio may invest without
limitation in securities that are not Municipal Obligations and may hold with-
out limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. The Managed Income Portfolio may invest up
to 10% of its total assets in debt securities of foreign issuers and may hold
from time to time various foreign currencies pending investment or conversion
into U.S. dollars. Investing in securities of foreign issuers involves consid-
erations not typically associated with investing in securities of companies or-
ganized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a Portfolio that invests in foreign securities will be affected favorably or
unfavorably by changes in currency exchange rates.
23
<PAGE>
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions
effected on foreign stock exchanges has increased in recent years, it remains
appreciably below that of the New York Stock Exchange. Accordingly, a Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more that 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
24
<PAGE>
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
25
<PAGE>
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. The Tax-Free Portfolios may also invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no principal payments will be made on a CMO class until all other classes hav-
ing an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include planned
amortization classes ("PACs") which generally require, within certain limits,
that speci-
26
<PAGE>
fied amounts of principal be applied on each payment date, and generally ex-
hibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws many of which give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the pur-
chaser would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have an effective
security interest in all of the obligations backing such receivables. There-
fore, there is a possibility that recoveries on repossessed collateral may not,
in some cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at
any time. In calculating the average weighted maturity of a Portfolio, the ma-
turity of mortgage-related and other asset-backed securities held by the Port-
folio will be based on estimates of average life which take prepayments into
account. The average life of a mortgage-related instrument, in particular, is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of scheduled principal payments
and mortgage prepayments. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities contain-
ing loans or mortgages originated by PNC Bank, National Association ("PNC
Bank") or its affiliates. It is possible that under some circumstances, PNC
Mortgage Securities Corp. or its affiliates could have interests that are in
conflict with the hold
27
<PAGE>
ers of these mortgage-backed securities, and such holders could have rights
against PNC Mortgage Securities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
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.
28
<PAGE>
Government such as the Government National Mortgage Association are supported
by the United States' full faith and credit; others such as those of the Fed-
eral National Mortgage Association and the Student Loan Marketing Association
are supported by the right of the issuer to borrow from the Treasury; others
such as those of the Federal Farm Credit Banks or the Federal Home Loan Mort-
gage Corporation are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not obli-
gated 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 may enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their holdings, as a duration manage-
ment technique or to protect against an increase in the price of securities a
Portfolio anticipates purchasing at a later date. The Portfolios intend to use
these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative, or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, securities indices or the yield differential between two
securities, or, in the case of the International Bond Portfolio, foreign cur-
rencies, and may
29
<PAGE>
or may not be listed on a securities exchange and may or may not be issued by
the Options Clearing Corporation. A Portfolio will not purchase put and call
options when the aggregate premiums on outstanding options exceed 5% of its
net assets at the time of purchase, and will not write options on more than
25% of the value of its net assets (measured at the time an option is writ-
ten). Options trading is a highly specialized activity that entails greater
than ordinary investment risks. In addition, unlisted options are not subject
to the protections afforded purchasers of listed options issued by the Options
Clearing Corporation, which performs the obligations of its members if they
default.
To the extent consistent with its investment objective, each Portfolio may
also invest in futures contracts and options on futures contracts for hedging
purposes or to maintain liquidity. The value of a Portfolio's contracts may
equal or exceed 100% of its 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 entered in to for other than bona
fide hedging purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order
to offset an expected decrease in the value of its portfolio positions that
might otherwise result from a market decline or currency exchange fluctuation.
A Portfolio may do so either to hedge the value of its securities portfolio as
a whole, or to protect against declines occurring prior to sales of securities
in the value of the securities to be sold. In addition, a Portfolio may uti-
lize futures contracts in anticipation of changes in the composition of its
holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in-
struments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d)
the sub-adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default to the performance
of its obligations. For further discussion of risks involved with domestic and
foreign futures and options, see the Statement of Additional Information.
30
<PAGE>
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for a Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value
31
<PAGE>
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 agree-
ments to purchase other securities either maturing, or under an agreement to
resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use
reverse repurchase agreements when it is anticipated that the interest income
to be earned from the investment of the proceeds of the transaction is greater
than the interest expense of the transaction. This use of reverse repurchase
agreements may be regarded as leveraging and, therefore, speculative. Reverse
repurchase agreements involve the risks that the interest income earned in the
investment of the proceeds will be less than the interest expense, that the
market value of the securities sold by a Portfolio may decline below the price
of the securities the Portfolio is obligated to repurchase and that the secu-
rities may not be returned to the Portfolio. During the time a reverse repur-
chase agreement is outstanding, a Portfolio will maintain a segregated account
with the Fund's custodian containing cash, U.S. Government or other appropri-
ate liquid securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
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. These securities will not be considered illiquid so long as it is deter-
mined by the Portfolios' sub-adviser that an adequate trading market exists
for the securities. This investment practice could have the effect of increas-
ing the level of illiquidity in a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase 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
32
<PAGE>
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Portfo-
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
33
<PAGE>
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not 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 and may result in
the realization of short-term capital gains that are taxable to shareholders
as ordinary income.
INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce 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 indi-
vidual portfolio securities, 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 mar-
ket conditions. Although the Portfolios' sub-adviser will normally attempt to
structure each Portfolio to have a comparable duration to its benchmark as
stated in that section, there can be no assurance that it will be able to do
so at all times.
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 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 informa-
tion, see "Special Considerations Regarding State-Specific Municipal Obliga-
tions" 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
four years; as of June 30, 1995, the General Fund had a surplus of $688.3 mil-
lion. The deficit in the Commonwealth's unreserved/ undesignated funds also
have been eliminated. Rising unemployment, a relatively high proportion of
persons 65 and older in the Commonwealth and court ordered increases in
healthcare reimbursement rates place increased pressures on the tax resources
of the Commonwealth and its municipalities. The Commonwealth has sold a sub-
stantial amount of bonds over the past several years, but the debt burden re-
mains moderate. 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 has continued 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 com-
mercial agriculture, insurance, tourism, petroleum refining and manufacturing,
although New Jersey's manufacturing industry has experienced a downward trend
in the last few years. New Jersey is a major recipient of Federal assistance
and, of all the states, is among the highest in the amount of Federal aid
34
<PAGE>
received. Therefore, a decrease in Federal financial assistance may adversely
affect the financial condition of New Jersey and its political subdivisions and
instrumentalities. While New Jersey's economic base has become more diversified
over time and thus its economy appears to be less vulnerable during recession-
ary periods, a recurrence of high levels of unemployment could adversely affect
New Jersey's overall economy and the ability of New Jersey and its political
subdivisions and instrumentalities to meet their financial obligations. In ad-
dition, New Jersey maintains a balanced budget which restricts total appropria-
tion increases to only 5% annually with respect to any municipality or county,
the balanced budget plan may actually adversely affect a particular
municipality's or county's ability to repay its obligations.
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 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. 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 pay-
ments relating to) those obligations.
35
<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 persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief
Financial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Of-
ficer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND
SUB-ADVISERS The Adviser to the Compass Capital Funds is PNC Asset Manage-
ment Group ("PAMG"). Each of the Portfolios within the Com-
pass Capital Fund family is managed by a specialized portfo-
lio manager who is a member of PAMG's fixed income portfolio
management subsidiary, BlackRock Financial Management, Inc.
("BlackRock"). BlackRock has its primary offices at 345 Park
Avenue, New York, New York 10154.
The ten Portfolios and their portfolio managers are as fol-
lows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
- ------------------------- -------------------------------------------
<S> <C>
Low Duration Bond 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>
36
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -------------------------------------------
<S> <C>
Intermediate Government Bond Robert S. Kapito, Michael P. Lustig and
Scott Amero (see above); Messrs. Kapito,
Lustig and Amero have been Portfolio co-
managers since 1995.
Intermediate Bond 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 Scott Amero (see above); Mr. Amero has been
Portfolio manager since its inception.
Managed Income 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 Andrew Gordon [add Gordon bio]
Tax-Free Income 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 Income Kevin Klingert (see above); Portfolio
manager since 1995.
New Jersey Tax-Free Income Kevin Klingert (see above); Portfolio
manager since 1995.
Ohio Tax-Free Income Kevin Klingert (see above); Portfolio
manager since 1995.
</TABLE>
37
<PAGE>
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-adviser 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-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfo-
lios 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, .28%; Intermediate Bond Portfolio, .30%; Managed
Income Portfolio, .35%; Tax-Free Income Portfolio, .28%;
Pennsylvania Tax-Free Income Portfolio, .29%; and Ohio Tax-
Free Income Portfolio, .06%. For the period from April 1,
1996 through September 30, 1996, the Low Duration Bond and
Core Bond Portfolios paid investment advisory fees, after
voluntary fee waivers, at the annual rates of .30% and .30%
of their respective average daily net assets. For the periods
from February 1, 1996 and February 13, 1996, respectively,
through September 30, 1996, the New Jersey Tax-Free Income
and International Bond Portfolios paid investment advisory
fees, after voluntary fee waivers, at the annual rates of
.30% and .55% of their respective average daily net assets.
The Portfolios' sub-adviser strives to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed through registered
broker/dealers who have entered into dealer
38
<PAGE>
agreements with Compass Capital's distributor, subject to the
requirements of best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .20% of the first $500
million of each Portfolio's average daily net assets, .18% of
the next $500 million of each Portfolio's average daily net as-
sets, .16% of the next $1 billion of each Portfolio's average
daily net assets and .15% of each Portfolio's average daily net
assets in excess of $2 billion. From time to time the Adminis-
trators may waive some or all of their administration fees from
a Portfolio.
For information about the operating expenses the Portfolios paid
for the most recent fiscal period, see "What Are The Expenses Of
The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
EXPENSES
Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, fees and expenses in registering
and qualifying the Portfolios and their shares for distribution
under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of
printing and distributing prospectuses and statements of addi-
tional information to existing shareholders, expenses relating
to shareholder re
39
<PAGE>
ports, shareholder meetings and proxy solicitations, insur-
ance premiums, the expense of independent pricing services,
and other expenses which are not expressly assumed by PAMG or
the Fund's service providers under their agreements with the
Fund. Any general expenses of the Fund that do not belong to
a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board
of Trustees in a manner the Board determines to be fair and
equitable.
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?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio as of the close of regular trading hours on the NYSE (currently 4:00 p.m.
Eastern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its Institutional
Shares, less the liabilities charged to its Institutional Shares, by the number
of its Institutional Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not 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. Each Portfolio declares a dividend each day on "settled"
shares (i.e. shares for which the particular Portfolio has received payment in
Federal funds) on the first Business day after a purchase order is placed with
the Fund. Payments by check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year, substantially all of the
Portfolios' net investment income will be declared as dividends. the amount of
the daily dividend for each Portfolio will be based on periodic projections of
its net investment income. All dividends are paid within ten days after the end
of each month. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by each Portfolio at least annually.
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), whether the
distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. 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 Re-
tirement Act benefits should note that "exempt interest dividends" will be
taken into account in determining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net 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. Any loss upon the sale or exchange of shares held
for six months or less will be disallowed for Federal income tax purposes to
the extent of any exempt interest dividends received by the shareholder. For
the Ohio Tax-Free Income Portfolio, the loss will be disallowed for Ohio income
tax purposes to the same extent, even though, for Ohio income tax purposes,
some portion of such dividends actually may have been subject to Ohio income
tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of a taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including gen-
erally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio intends to make this election. As a result, the
amount of such foreign taxes paid by the Portfolio will be included in its
shareholders' income pro rata (in addition to taxable distributions actually
received by them), and each shareholder generally will be entitled either (a)
to credit a proportionate amount of such taxes against U.S. Federal income tax
liabilities, or (b) if a shareholder itemizes deductions, to deduct such pro-
portionate amounts from U.S. income, should the shareholder so choose.
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
addition,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 a
Portfolio. For additional information concerning the tax treatment of dividends
and distributions by the states listed below, including certain restrictions
applicable to such treatment, see "Taxes" in the Statement of Additional Infor-
mation.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania Municipal Obligations or attributable to insurance proceeds on account
of such interest, is not taxable to individuals, estates or trusts under the
Personal Income Tax (in the case of insurance proceeds, to the extent they are
exempt for Federal income tax purposes); to corporations under the Corporate
Net Income Tax (in the case of insurance proceeds, to the extent they are ex-
empt for Federal income tax purposes); nor to individuals under the Philadel-
phia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania Munici-
pal Obligations is taxable under the Personal Income Tax, the Corporate Net In-
come Tax, and, unless these assets were
46
<PAGE>
held by the Pennsylvania Tax-Free Income Portfolio for more than six months,
the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free Income
Portfolio, such gain may be subject to the Personal Income Tax and Corporate
Net Income Tax. Such gain may also be subject to the School District Tax, 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 Municipal Obligations, or as interest or gain from direct U.S. Gov-
ernment obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States) Cor-
porations that are subject to the Ohio corporation franchise tax will not have
to include distributions from the Ohio Tax-Free Income Portfolio in their net
income base for purposes of calculating their Ohio corporation franchise tax
liability to the extent that such distributions either consti
47
<PAGE>
tute exempt-interest dividends for Federal income tax purposes or are properly
attributable to interest on Ohio Municipal Obligations or the U.S. obligations
described above. However, Shares of the Ohio Tax-Free Income Portfolio will be
included in a corporation's net worth base for purposes of calculating the Ohio
corporation franchise tax. Distributions 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 cor-
poration 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 SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, except the Intermediate Bond, Managed Income and Ohio Tax-Free In-
come Portfolios, offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. The
Intermediate Bond, Managed Income and Ohio Tax-Free Income Portfolios offer In-
stitutional Shares, Service Shares and Investor A Shares and, in addition, the
Ohio Tax-Free Income Portfolio offers Investor B Shares. This prospectus re-
lates only to Investor Shares of the 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 performance of each class of Investor Shares may be
different. The Fund offers various services and privileges in connection with
its Investor Shares that are not generally offered in connection with its In-
stitutional and Service Shares, including an automatic investment plan and an
automatic withdrawal plan. For further information regarding the Fund's Service
and Investor Share classes, contact PFPC at (800) 441-7764 (Service Shares) or
(800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On , 1996, PNC Bank held of record approximately % of the Fund's outstand-
ing shares, as trustee on behalf of individual and institutional investors, and
may be deemed a controlling person of the Fund under the 1940 Act. PNC Bank is
a subsidiary of PNC Bank Corp., a multi-bank holding company.
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,
the "stocks, bonds and inflation index" published annually by Ibbotson Associ-
ates and the Lehman Government Corporate Bond Index, as well as the benchmarks
attached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their Institutional Shares published by nationally
recognized ranking services, and information as reported in financial publica-
tions such as Business Week, Fortune, Institutional Investor, Money Magazine,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in publi-
cations of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional Shares of a particular Portfolio, a Portfolio
may provide other information demonstrating hypothetical investment returns.
This information may include, but is not limited to, illustrating the com-
pounding effects of dividends in a dividend reinvestment plan or the impact of
tax-deferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Institutional Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Institutional Shares of a Portfolio cannot necessarily be used to compare
an
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.
Other Information
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, of the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed In-
come, International Bond, Tax-Free Income and New Jersey Tax-Free Income Port-
folios of the Compass Capital Fund, and the statements of net assets of the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios of the Compass
Capital Funds as of September 30, 1996, and the related statements of opera-
tions for the periods then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented (except for those statements which
have been audited by other auditors as discussed below). These financial state-
ments and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net as-
sets for the year ended June 30, 1995, and the financial highlights for the
year ended June 30, 1995 and each of the prior periods presented of the Short
Government Bond and Core Bond Portfolios, formerly the BFM Institutional Trust
Short Duration and Core Fixed Income Portfolios (the "BFM Funds"), respectively
were audited by other auditors, whose report dated August 7, 1995 expressed an
unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of materials misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian and brokers as of September 30, 1996. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Compass Capital Funds (Short Government Bond, Intermediate Government Bond, In-
termediate Bond, Core Bond, Government Income, Managed Income, International
Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free and
Ohio Tax-Free Income Portfolios), as of September 30, 1996, and the results of
their operations for the periods then ended, the changes in their net assets
for each of the two years (or periods) in the period then ended (except for the
year ended June 30, 1995 for the BFM Funds which have been audited by other au-
ditors), and the financial highlights for each of the periods presented (except
for the year ended June 30, 1995 and prior periods for the BFM Funds which have
been audited by other auditors), in conformity with generally accepted account-
ing principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
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 (888) 4COMPASS.
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>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of 1996, the composition of the
Lehman Brothers Aggregate Index is:
% allocation to Treasury and government
securities
% allocation to mortgage-backed securities
% allocation to corporate and asset-backed
securities
Managed Income 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 1996, the composition of the
Lehman Brothers Aggregate Index is:
% allocation to Treasury and government
securities
% allocation to mortgage-backed securities
% allocation to corporate and asset-backed
securities
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.
----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND PORTFOLIO
MANAGED INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
THE BOND
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR A, INVESTOR B AND INVESTOR C SHARES OF THE
LOW DURATION BOND PORTFOLIO, INTERMEDIATE GOVERNMENT BOND
PORTFOLIO, INTERMEDIATE BOND PORTFOLIO, GOVERNMENT INCOME PORTFOLIO,
MANAGED INCOME PORTFOLIO, CORE BOND PORTFOLIO, INTERNATIONAL BOND PORTFOLIO,
TAX-FREE INCOME PORTFOLIO, PENNSYLVANIA TAX-FREE INCOME PORTFOLIO,
OHIO TAX-FREE INCOME PORTFOLIO AND NEW JERSEY
TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance........................... What Are The Portfolios'
Financial Highlights?
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Bond Portfolios Investor Shares
- -------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus
describes the Investor Shares of eleven of those portfolios
(the "Portfolios"):
Low Duration Bond Portfolio
Intermediate Government Bond Portfolio
Intermediate Bond Portfolio
Core Bond Portfolio
Government Income Portfolio
Managed Income Portfolio
International Bond Portfolio
Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
New Jersey Tax-Free Income Portfolio
Ohio Tax-Free Income Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Commis-
sion (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 Information, as supple-
mented 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.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasury Short U.S. Government
(previously called the Short Index
Government Bond
Portfolio)
Intermediate Government Lehman Brothers Intermediate U.S.
Bond Intermediate Government Government
Intermediate Bond Lehman Brothers Intermediate
Intermediate Government/Corporate
Government/Corporate
Core Bond Lehman Aggregate Intermediate Investment
Grade Debt
Government Income Lehman Mortgage/10 Year General U.S. Government
Treasury
Managed Income Lehman Aggregate 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.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
BOND We intend this document to be an effective tool as you explore
PORTFOLIOS different directions in fixed income investing.
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?.................................... 50
How Are Shares Redeemed?..................................... 52
What Are The Shareholder Features Of The Fund?............... 54
What Is The Schedule Of Sales Charges And Exemptions?........ 57
How Is Net Asset Value Calculated?........................... 63
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 64
How Are Fund Distributions Taxed?............................ 65
How Is The Fund Organized?................................... 69
How Is Performance Calculated?............................... 70
How Can I Get More Information?.............................. 72
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a
percentage of average daily net assets. The figures shown for the Interna-
tional Bond Portfolio have been restated to reflect current expenses and fee
waivers. Because no Investor B or Investor C Shares of the Low Duration Bond,
Intermediate Government Bond, Intermediate Bond and Managed Income Portfolios
and no Investor C Shares of the Core Bond Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income and Ohio Tax-Free Portfolios were out-
standing during the fiscal year ended September 30, 1996, the figures shown
for those share classes under "Other expenses" are estimates for the current
fiscal year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE INTERMEDIATE
DURATION BOND GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR 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>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 3.0% None None 4.0% None None 4.0% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .30% .30% .30% .30% .30% .30% .30% .30% .30%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .72 .72 .72 .72 .72 .72 .72 .72 .72
------ ------ ------ ------ ------ ------ ------ ----- -----
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32 .32 .32 .32 .32
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.02% 1.77% 1.77% 1.02% 1.77% 1.77%
====== ====== ====== ====== ====== ====== ====== ===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. 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 for Investor B Shares decreases for redemptions made in sub-
sequent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse ex-
penses, but have informed the Fund that they expect to waive fees and re-
imburse expenses during the remainder of the current fiscal year as neces-
sary to maintain the Portfolios' total operating expenses at the levels
set forth in the table. Without waivers, "Other operating expenses" would
be: (i) .80%, .75% and .77%, respectively, for Investor A Shares; and (ii)
.80%, .75% and % respectively, for Investor B shares and Investor C
Shares; and "Total Portfolio operating expenses" would be: (iii) 1.30%,
1.25% and 1.27%, respectively, for Investor A Shares; and (iv) 2.05%,
2.00% and 1.77%, respectively, for Investor B Shares and Investor C
Shares. The Portfolios do not expect to incur any 12b-1 fees with respect
to Investor A Shares (otherwise payable at the maximum rate of .10%) dur-
ing the current fiscal year. See "What are the Portfolios' Financial High-
lights?" for information about interest paid by the Portfolios in connec-
tion with their investment activity.
(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 Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules
of the National Association of Securities Dealers, Inc. ("NASD").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED
CORE BOND GOVERNMENT INCOME INCOME
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>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.0% None None 4.5% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .30% .30% .30% .30% .30% .30% .35% .35% .35%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .72 .72 .72 .72 .72 .72 .70 .70 .70
------ ------ ------ ------ ------ ------ ------ ------ ------
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32 .32 .30 .30 .30
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.02% 1.77% 1.77% 1.05% 1.80% 1.80%
====== ====== ====== ====== ====== ====== ====== ====== ======
</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 for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.81%, 1.17% and .79%, respectively, for Investor A Shares; and (ii) .81%,
.80% and .81%, respectively, for Investor B Shares and Investor C Shares;
and "Total Portfolio operating expenses" would be: (iii) 1.17%, 1.67% and
1.29%, respectively, for Investor A Shares; (iv) 2.06%, 2.42% and 2.02%,
respectively, for Investor B Shares; and (v) 2.05%, 2.05% and 2.02%, re-
spectively, for Investor C Shares. The Investor A Shares (otherwise payable
at the maximum rate of .10%) during the current fiscal year. See "What are
the Portfolios' Financial Highlights?" for information about interest paid
by the Portfolios in connection with their investment activity.
(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 Shares may pay more than the economic equivalent
of the maximum front-end sales charges permitted by the rules of the NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
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>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 5.0% None None 4.0% None None 4.0% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES
(AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .50% .50% .50% .30% .30% .30% .30% .30% .30%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee waivers and
expense
reimbursements)(/3/) .95 .95 .95 .72 .72 .72 .67 .72 .72
------ ------ ------ ------ ------ ------ ----- ------ ------
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .55 .55 .55 .32 .32 .32 .27 .32 .32
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses
(after fee
waivers and
expense
reimbursements)(/3/) 1.45% 2.20% 2.20% 1.02% 1.77% 1.77% .97% 1.77% 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 for Investor B Shares decreases for redemptions made in sub-
sequent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "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' adminis-
trators are under no obligation to waive fees or reimburse expenses, but
have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.88%, .87% and .80%, respectively, for Investor A Shares; (ii) .88%, .87%
and .85%, respectively, for Investor B Shares and Investor C Shares; and
"Total Portfolio operating expenses" would be: (iv) 1.43%, 1.37% and 1.30%,
respectively, for Investor A Shares; and (v) 2.18%, 2.12% and 2.10%, re-
spectively, for Investor B Shares and Investor C Shares. The Portfolios do
not expect to incur any 12b-1 fees with respect to Investor A Shares (oth-
erwise 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 Shares may pay more than the economic equivalent
of the maximum front-end sales charges permitted by the rules of the NASD.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE INCOME TAX-FREE INCOME
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>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 4.0% None None 4.0% None None
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested Dividends None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)(/3/) .30% .30% .30% .30% .30% .30%
12b-1 fees(/3/)(/4/) .00 .75 .75 .00 .75 .75
Other operating expenses
(after fee
waivers)(/3/) .72 .72 .72 .72 .72 .72
------ ------ ------ ------ ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32 .32
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.02% 1.77% 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 for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.83% and 1.00%, respectively, for Investor A Shares and Investor B Shares;
and (ii) 1.00% and 1.00% for Investor C Shares and "Total Portfolio operat-
ing expenses" would be: (iii) 1.33% and 1.50% for Investor A Shares; (iv)
2.08% and 2.25% for Investor B Shares; and (v) 2.08% and 2.08% for Investor
C Shares. The Portfolios do not expect to incur 12b-1 fees with respect to
Investor A Shares (otherwise payable at the maximum rate of .10%) during
the current fiscal year.
(4) 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 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 Shares would pay the following expenses on a $1,000
investment assuming (1) 5% annual return, and (2) redemption at the end of
each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio
A Shares* $40 $61 $ 85 $151
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
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***
C Shares 18 56 96 208
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***
C Shares 18 56 96 208
Government Income Portfolio
A Shares* 55 76 99 164
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
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***
C Shares 22 69 118 253
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***
C Shares 18 56 96 208
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***
C Shares 18 56 96 208
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***
C Shares 18 56 96 208
Ohio Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares af-
ter seven years.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERAT-
ING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' independent accountants. THE FINANCIAL STATEMENTS OF THE
CORE BOND PORTFOLIO AND THE LOW DURATION BOND PORTFOLIO (FORMER-
LY, THE SHORT GOVERNMENT BOND PORTFOLIO) FOR THE YEAR ENDED JUNE
30, 1995 WERE AUDITED BY OTHER AUDITORS. PLEASE REFER TO A RE-
VISED AUDITOR'S REPORT UNDER "OTHER INFORMATION" WHICH MAKES
REFERENCE TO THE AUDITS PERFORMED BY THOSE OTHER AUDITORS. This
financial information should be read together with those finan-
cial statements. 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) 441-7762. During the periods shown, no
Investor B or Investor C Shares of the Low Duration Bond, Inter-
mediate Government Bond, Intermediate Bond and Managed Income
Portfolios and no Investor C Shares of the Core Bond, Government
Income, International Bond, Tax-Free Income, Pennsylvania Tax-
Free Income, New-Jersey Tax-Free Income and Ohio Tax-Free Income
Portfolios were outstanding. The Intermediate Bond and Managed
Income Portfolios do not currently offer Investor B or Investor
C Shares and the Ohio Tax-Free Income Portfolio does not cur-
rently offer Investor C Shares.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
APRIL 1, 1996 JANUARY 13, 1996(*)
THROUGH THROUGH
SEPTEMBER 30, 1996 MARCH 31, 1996
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.79 $ 9.91
------ ------
Net investment income 0.25 0.10
Net realized and unrealized loss on
investments (0.01) (0.12)
------ ------
Net increase from investment operations 0.24 (0.02)
------ ------
Distributions from net investment
income (0.24) (0.10)
Distributions from net realized capital
gains -- --
------ ------
Total dividends and distributions (0.24) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.79 $ 9.79
====== ======
Total investment return(***) 2.46% (0.15)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.02%**,/1/ 1.01%**,/1/
Excluding waivers 1.30%** 1.21%**
Net investment income
Excluding waivers 5.20%** 4.94%**
SUPPLEMENTAL DATA:
4.92%** 4.74%**
Portfolio turnover 228% 185%
Net assets, end of period (in
thousands) $ 938 $ 719
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Low Duration Bond Portfolio were transferred to
this Portfolio, and were combined with the assets of a pre-existing portfo-
lio of investments maintained by the Fund.
(*) Commencement of investment operations of share class.
(**) Annualized.
(***) Sales load not reflected in total return.
/1/Including interest expense, ratios would have been 1.12% for the year ended
September 30, 1996 and 1.34% for the year ended March 31, 1996.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE GOVERNMENT PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/11/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.03 $ 9.64 $10.60 $10.46 $10.05
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.55 0.55 0.53 0.54 0.24
Net gain (loss) on
investments (both
realized and
unrealized) (0.13) 0.39 (0.87) 0.16 0.41
------ ------ ------ ------ ------
Total from investment
operations 0.42 0.94 (0.34) 0.70 0.65
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.53) (0.55) (0.52) (0.54) (0.24)
Distributions from net
realized capital gains - - - - (0.10) (0.02) - -
------ ------ ------ ------ ------
Total distributions (0.53) (0.55) (0.62) (0.56) (0.24)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 9.92 $10.03 $ 9.64 $10.60 $10.46
====== ====== ====== ====== ======
Total return 4.36%/3/ 9.98%/3/ (3.36)%/3/ 6.84%/3/ 6.64%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $5,903 $9,802 $8,508 $7,666 $1,484
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.95%/4/ 0.70%/4/ 0.65% 0.76% 0.80%/2/
Before
advisory/administration
fee waivers 1.25% 1.07% 1.05% 0.84% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.64% 5.67% 5.24% 5.19% 5.28%/2/
Before
advisory/administration
fee waivers 5.35% 5.30% 4.84% 5.11% 5.28%/2/
PORTFOLIO TURNOVER RATE 580% 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including interest expense, ratios would have been 1.14% for the year ended
September 30, 1996 and 0.70% for the year ended September 30, 1995.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
(FORMERLY, THE INTERMEDIATE-TERM BOND PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 5/20/94/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $9.43 $ 9.05 $ 9.23
----- ------ ------
Income from investment operations
Net investment income 0.52 0.54 0.20
Net gain (loss) on investments (both
realized and unrealized) (0.09) 0.38 (0.17)
----- ------ ------
Total from investment operations 0.43 0.92 0.03
----- ------ ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.51) (0.54) (0.21)
Distributions from net realized capital
gains (0.03) - - - -
----- ------ ------
Total distributions (0.54) (0.54) (0.21)
----- ------ ------
NET ASSET VALUE AT END OF PERIOD $9.32 $ 9.43 $ 9.05
===== ====== ======
Total return 4.74%/3/ 10.35%/3/ 0.31%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $9.35 $ 647 $ 87
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.97%/4/ 0.76%/4/ 0.85%/2/
Before advisory/administration fee waivers 1.27% 1.19% 1.28%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 5.83% 5.89% 5.35%/2/
Before advisory/administration fee waivers 5.53% 5.55% 4.92%/2/
PORTFOLIO TURNOVER RATE 670% 262% 92%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including interest expense, ratios would have been 1.27% for the year ended
September 30, 1996 and 0.84% for the year ended September 30, 1995.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
4/1/96 1/31/96(*) 4/1/96 3/18/96*
THROUGH THROUGH THROUGH THROUGH
9/30/96 3/31/96 9/30/96 3/31/96
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.61 $ 9.99 $ 9.61 $ 9.58
------ ------ -------- --------
Net investment income 0.28 0.08 0.26 0.01
Net realized and
unrealized gains on
investments (0.06) (0.38) (0.07) 0.03
------ ------ -------- --------
Net (decrease) increase
from investment
operations 0.22 (0.30) 0.19 0.04
------ ------ -------- --------
Dividends from net
investment income (0.28) (0.08) (0.25) (0.01)
Distributions from net
realized capital gains - - - - - - - -
Total dividends and
distributions (0.28) (0.08) - - - -
------ ------ -------- --------
NET ASSET VALUE, END OF
PERIOD $ 9.55 $ 9.61 $ 9.55 $9.61
====== ====== ======== ========
Total investment return
(***) 2.36% (2.96)% 1.98% 0.33%
RATIOS TO AVERAGE NET
ASSETS:
Expenses (**) 1.02%/1/ 1.02%/1/ 1.72%/1/ 1.77%/1/
Excluding waivers (**) 1.31% 1.27% 2.01% 2.02%
Net investment income
(**) 6.29% 5.43% 5.68% 4.71%
Excluding waivers (**) 6.00% 5.19% 5.39% 4.46%
SUPPLEMENTAL DATA:
Portfolio turnover 308% 723% 308% 723%
Net assets, end of period
(in thousands) $ 320 $ 80 $ 1,497 $ 77
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and liabil-
ities of the Predecessor Core Bond Portfolio were transferred to this Port-
folio, which had no prior operating history.
(*) Commencement of investment operations of share class.
(**) Annualized.
(***) Neither front-end sales load nor contingent deferred sales load is re-
flected in total return.
/1/Including interest expense, ratios for the Investor A and Investor B Classes
would have been 1.27% and 2.00%, respectively, for the period ended Septem-
ber 30, 1996, and 1.11% and 1.86% for the period ended March 31, 1996. For
the periods prior to March 31, 1996, interest income was presented net of
interest expense.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR 10/03/94/1/ YEAR 10/03/94/1/
ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/96 9/30/95
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.68 $10.00 $10.68 $ 10.00
------ ------ ------- -------
Income from investment
operations
Net investment income 0.68 0.55 0.60 0.50
Net gain (loss) on
investments (both
realized and
unrealized) (0.22) 0.68 (0.21) 0.68
------ ------ ------- -------
Total from investment
operations 0.46 1.23 0.39 1.18
------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.66) (0.55) (0.59) (0.50)
Distribution in excess
of net investment
income
Distributions from net
realized capital gains (0.28) - - (0.28) - -
Distributions in excess
of net realized gains - - - - - - - -
------ ------ ------- -------
Total distributions (0.94) (0.55) (0.87) (0.50)
------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $10.20 $10.68 $10.20 $ 10.68
====== ====== ======= =======
Total return 4.43%/3/ 14.27%/3/ 3.68%/3/ 13.52%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $3,651 $2,990 $11,119 $10,188
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.91%/4/ 0.37%/2/, /4/ 1.64%/4/ 1.05%/2/, /4/
Before
advisory/administration
fee waivers 1.67% 1.81%/2/ 2.40% 2.50%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 8.59% 6.89%/2/ 7.81% 6.17%/2/
Before
advisory/administration
fee waivers 7.83% 5.44%/2/ 7.05% 4.72%/2/
PORTFOLIO TURNOVER RATE 434% 258% 434% 258%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
/4/Including interest expense, ratios for the Investor A and Investor B Shares
would have been 2.96% and 3.69%, respectively, for the year ended September 30,
1996, and 0.92% and 1.60%, respectively, for the period ended September 30,
1995.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 2/05/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.38 $ 9.79 $ 11.18 $10.74 $10.40
------- ------- ------- ------ ------
Income from investment
operations
Net investment income 0.59 0.60 0.57 0.66 0.46
Net gain (loss) on
investments (both
realized and
unrealized) (0.20) 0.60 (1.19) 0.57 0.34
------- ------- ------- ------ ------
Total from investment
operations 0.39 1.20 (0.62) 1.23 0.80
------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.58) (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 (0.10) - - (0.14) (0.13) - -
Distributions in excess
of net realized gains - - - - (0.01) - - - -
------- ------- ------- ------ ------
Total distributions (0.68) (0.61) (0.77) (0.79) (0.46)
------- ------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.09 $ 10.38 $ 9.79 $11.18 $10.74
======= ======= ======= ====== ======
Total return 3.83%/3/ 12.74%/3/ (5.76)%/3/ 12.13%/3/ 7.86%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $11,193 $11,977 $10,921 $7,252 $1,417
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.05% 1.05% 1.00% 0.84% 0.80%/2/
Before
advisory/administration
fee waivers 1.29% 1.25% 1.22% 0.88% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.67% 5.96% 5.66% 6.09% 6.28%/2/
Before
advisory/administration
fee waivers 5.44% 5.76% 5.44% 6.05% 6.28%/2/
PORTFOLIO TURNOVER RATE 638% 203% 61% 72% 56%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES INVESTOR C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
4/22/96/1/ 4/19/96/1/ 9/11/96/1/
THROUGH THROUGH THROUGH
9/30/96 9/30/96 9/30/96
<S> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.37 $11.36 $11.58
------ ------ ------
Income from investment
operations
Net investment income 0.26 0.22 0.02
Net (loss) gain on
investments (both
realized and
unrealized) 0.32 0.33 0.12
------ ------ ------
Total from investment
operations 0.58 0.55 0.14
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.24) (0.20) (0.01)
Distributions from net
realized capital gains - - - - - -
In Excess of Net
Realized Gains - - - - - -
------ ------ ------
Total distributions (0.24) (0.20) (0.01)
------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $11.71 $11.71 $11.71
====== ====== ======
Total return/3/ 5.13% 4.90% 1.24%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 176 $ 136 $ 19
Ratios of expenses to
average net assets 1.45%/2/ 2.09%/2/ 1.53%/2/
Excluding waivers 1.86%/2/ 2.49%/2/ 1.93%/2/
Ratios of net investment
income to average net
assets 5.29%/2/ 4.61%/2/ 2.79%/2/
Excluding waivers 4.88%/2/ 4.21%/2/ 2.38%/2/
PORTFOLIO TURNOVER RATE 108% 108% 108%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996. For the periods pre-
sented, this Portfolio received Sub-advisory services from another company
that was unaffiliated with PAMG and BlackRock.
/1Commencement/of operations of share class.
/2Annualized./
/3Total/return does not reflect front-end sales load or contingent deferred
sales load.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 5/14/90/1/ 7/18/96/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91 $10.00 $ 10.74
------ ------ ------ ------ ------ ------ ------ -------
Income from investment
operations
Net investment income 0.45 0.48 0.48 0.55 0.58 0.64 0.25 0.08
Net gain (loss) on
investments (both
realized and
unrealized) 0.21 0.59 (0.93) 0.83 0.49 0.46 (0.11) 0.10
------ ------ ------ ------ ------ ------ ------ -------
Total from investment
operations 0.66 1.07 (0.45) 1.38 1.07 1.10 0.14 0.18
------ ------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.43) (0.48) (0.48) (0.55) (0.59) (0.66) (0.23) (0.08)
Distributions from net
realized capital gains - - (0.02) (0.34) (0.12) (0.21) (0.02) - - - -
------ ------ ------ ------ ------ ------ ------ -------
Total distributions (0.43) (0.50) (0.82) (0.67) (0.80) (0.68) (0.23) (0.08)
------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE AT END OF
PERIOD $10.84 $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91 $ 10.84
====== ====== ====== ====== ====== ======
Total return 6.94%/3/ 10.99%/3/ (4.19)%/3/ 13.48%/3/ 10.67%/3/ 11.40%/3/ 1.40%/3/ 1.72%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $4,873 $6,591 $6,972 $7,831 $7,349 $3,510 $4,044 $ 10
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.04% 1.00% 0.95% 0.57% 0.53% 1.00% 1.00%/2/ 1.65%/2/
Before
advisory/administration
fee waivers 1.37% 1.78% 2.18% 1.36% 1.67% 1.89% 1.70%/2/ 1.98%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.67% 4.74% 4.53% 5.06% 5.56% 6.23% 6.56%/2/ 3.84%/2/
Before
advisory/administration
fee waivers 4.35% 3.96% 3.30% 4.27% 4.42% 5.34% 5.86%/2/ 3.51%/2/
PORTFOLIO TURNOVER RATE 268% 92% 40% 71% 38% 95% 18% 268%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 12/1/92/1/ YEAR 10/03/94/1/
ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.33 $ 9.82 $ 10.70 $ 10.00 $10.33 $ 9.82
------- ------- ------- ------- ------ ------
Income from investment
operations
Net investment income 0.48 0.48 0.52 0.42 0.40 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.11 0.51 (0.85) 0.73 0.11 0.51
------- ------- ------- ------- ------ ------
Total from investment
operations 0.59 0.99 (0.33) 1.15 0.51 0.93
------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.48) (0.52) (0.42) (0.40) (0.42)
Distributions from net
realized capital gains - - - - (0.03) (0.03) - - - -
------- ------- ------- ------- ------ ------
Total distributions (0.48) (0.48) (0.55) (0.45) (0.40) (0.42)
------- ------- ------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.44 $ 10.33 $ 9.82 $ 10.70 $10.44 $10.33
======= ======= ======= ======= ====== ======
Total return 5.81%/3/ 10.30%/3/ (3.06)%/3/ 11.69%/3/ 15.23%/3/ 9.69%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $38,031 $42,775 $46,563 $35,934 $7,974 $4,008
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.00% 0.98% 0.41% 0.07%/2/ 1.74% 1.57%/2/
Before
advisory/administration
fee waivers 1.30% 1.30% 1.01% 0.95%/2/ 2.03% 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.58% 4.88% 5.06% 5.19%/2/ 3.81% 4.07%/2/
Before
advisory/administration
fee waivers 4.29% 4.56% 4.46% 4.31%/2/ 3.51% 3.75%/2/
PORTFOLIO TURNOVER RATE 119% 66% 30% 40% 119% 66%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
20
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
2/1/96 1/26/96/1/ 7/2/96/1/
THROUGH THROUGH THROUGH
9/30/96 1/31/96 9/30/96
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $11.61 $11.54 $11.15
------ ------ ------
Income from investment operations
Net investment income 0.34 - - 0.09
Net (loss) gain on investments
(both realized and unrealized) (0.34) 0.07 0.12
------ ------ ------
Total from investment operations 0.00 0.07 0.21
------ ------ ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.34) - - (0.09)
Distributions from net realized
capital gains - - - - - -
------ ------ ------
Total distributions (0.34) - - (0.09)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $11.27 $11.61 $11.27
====== ====== ======
Total return/3/ (0.01)% 0.63% 2.04%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 894 $ 14 $ 30
Ratios of expenses to average net
assets 1.01%/2/ 1.02%/2/ 1.74%/2/
Excluding waivers 1.33%/2/ 1.36%/2/ 2.06%/2/
Ratios of net investment income to
average net assets 4.29%/2/ 2.79%/2/ 3.48%/2/
Excluding waivers 3.98%/2/ 2.45%/2/ 3.16%/2/
PORTFOLIO TURNOVER RATE 109% 26% 109%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 13, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
/1Commencement/of operations of share class.
/2Annualized./
/3Neither/front-end sales load nor contingent deferred sales load is reflected
in total return.
21
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE AND INVESTOR B SHARE OUTSTANDING THROUGHOUT EACH
PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES* INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR 12/1/92/1/ YEAR 10/13/94/1/
ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.05 $ 9.60 $10.53 $10.00 $10.05 $ 9.58
------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.46 0.52 0.53 0.36 0.38 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.10 0.45 (0.91) 0.53 0.10 0.47
------ ------ ------ ------ ------ ------
Total from investment
operations 0.56 0.97 (0.38) 0.89 0.48 0.89
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.46) (0.52) (0.53) (0.36) (0.38) (0.42)
Distributions from net
realized capital gains - - - - (0.02) - - - - - -
------ ------ ------ ------ ------ ------
Total distributions (0.46) (0.52) (0.55) (0.36) (0.38) (0.42)
------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.15 $10.05 $ 9.60 $10.53 $10.15 $10.05
====== ====== ====== ====== ====== ======
Total return/3/ 5.66% 10.46% (3.75)% 9.10% 4.78% 9.33%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $2,833 $3,303 $3,825 $2,386 $ 161 $ 106
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.91% 0.38% 0.10% 0.07%/2/ 1.66% 1.17%/2/
Before
advisory/administration
fee waivers 1.50% 1.45% 1.49% 2.58%/2/ 2.26% 2.25%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.57% 5.42% 5.18% 4.90%/2/ 3.80% 4.48%/2/
Before
advisory/administration
fee waivers 3.98% 4.35% 3.79% 2.39%/2/ 3.21% 3.41%/2/
PORTFOLIO TURNOVER RATE 136% 63% 61% 36% 136% 63%
</TABLE>
/1Commencement/of operations of share class.
/2Annualized./
/3Neither/front-end sales load nor contingent deferred sales load is reflected
in total return.
22
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to seek
their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of eleven
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Seven of these Portfolios invest solely in taxable bonds and
four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods, a
fund that invests in any one of these styles may perform above
or below the market. An investment program that combines these
multiple disciplines allows investors to select from among these
various product options in the way that most closely fits the
individual's investment goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Government Income,
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio Tax- State-Specific Tax-Free Portfolio,
Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
23
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Gov't/Agency AAA
Bond Treasury Index
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Spectrum
Gov't Income Lehman Mortgage/10 10-15 Years Gov't/Agency AAA
Year Treasury
Managed Lehman Aggregate 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' sub-adviser will normally attempt to structure the Portfo-
lios to have comparable durations to the benchmarks. Duration, which mea-
sures price sensitivity to interest rate changes, is not necessarily equal
to average maturity.
24
<PAGE>
What Types Of Securities Are In The Portfolios?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes:The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. No Elig.
Bond
Intermediate Yes Yes Yes Elig. Yes Elig. No Elig.
Gov't Bond
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Gov't Income Yes Yes Yes Elig. Yes Yes No Elig.
Managed Yes Yes Yes Elig. Yes Yes Elig. Elig.
Income
International Elig. Elig. Elig. Elig. Elig. Elig. Yes Elig.
Bond
Tax-Free Temp. No No No No No No Yes
Income
PA Tax-Free Temp. No No No No No No Yes
Income
NJ Tax-Free Temp. No No No No No No Yes
Income
OH Tax Free Temp. No No No No No No Yes
Income
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
25
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any such change. No assurance can be pro-
vided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio (as defined below), invest less than
80% of its net assets in Municipal Obligations (as defined below), except
during defensive periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), more than 5% of its total assets to be invested in securities of
any one issuer, except that up to 50% of a Portfolio's total assets may be in-
vested without regard to this limitation so long as no more than 25% of the
Portfolio's total assets are invested in any one issuer (except U.S. Government
securities).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
26
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Portfolio, Interme-
diate Government Bond Portfolio and Government Income Portfolio will be rated
in the highest rating category at the time of purchase or, if unrated, of com-
parable quality as determined by the Portfolios' sub-adviser. Securities ac-
quired by the other Portfolios will be rated investment grade at the time of
purchase (within the four highest rating 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 the Portfolios' sub-adviser. Securities rated "Baa" on
"BBB" are generally considered to be investment grade although they have specu-
lative characteristics. If a security's rating is reduced below the minimum
rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con-
sider whether the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Intermediate Government
Bond Portfolio and Government Income Portfolio (the "Government Portfolios")
will invest at least 65% of their total assets in obligations issued or guaran-
teed by the U.S. Government, its agencies or instrumentalities and related re-
purchase agreements during normal market conditions. Under normal market condi-
tions, the International Bond Portfolio will invest at least 65% of its total
assets in the debt obligations of foreign issuers located in at least three
different foreign countries. The Pennsylvania Tax-Free Income Portfolio, New
Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific Tax-Free Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name. The Tax-Free Income Portfolio intends to invest no more than 25% of
its net assets in Municipal Obligations of issuers located in the same state.
During temporary defensive periods each Tax-Free Portfolio may invest without
limitation in securities that are not Municipal Obligations and may hold with-
out limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. The Managed Income Portfolio may invest up
to 10% of its total assets in debt securities of foreign issuers and may hold
from time to time various foreign currencies pending investment or conversion
into U.S. dollars. Investing in securities of foreign issuers involves consid-
erations not typically associated with investing in securities of companies or-
ganized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a Portfolio that invests in foreign securities will be affected favorably or
unfavorably by changes in currency exchange rates.
27
<PAGE>
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions
effected on foreign stock exchanges has increased in recent years, it remains
appreciably below that of the New York Stock Exchange. Accordingly, a Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
28
<PAGE>
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
29
<PAGE>
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. The Tax-Free Portfolios may also invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no principal payments will be made on a CMO class until all other classes hav-
ing an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include
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planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at
any time. In calculating the average weighted maturity of a Portfolio, the ma-
turity of mortgage-related and other asset-backed securities held by the Port-
folio will be based on estimates of average life which take prepayments into
account. The average life of a mortgage- related instrument, in particular, is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of scheduled principal payments
and mortgage prepayments. In general, the collateral supporting non-mortgage
asset-backedsecurities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities contain-
ing loans or mortgages originated by PNC Bank, National Association ("PNC
Bank") or its affiliates. It is possible that under some circumstances, PNC
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<PAGE>
Mortgage Securities Corp. or its affiliates could have interests that are in
conflict with the holders of these mortgage-backed securities, and such holders
could have rights against PNC Mortgage Securities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
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.
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Government such as the Government National Mortgage Association are supported
by the United States' full faith and credit; others such as those of the Fed-
eral National Mortgage Association and the Student Loan Marketing Association
are supported by the right of the issuer to borrow from the Treasury; others
such as those of the Federal Farm Credit Banks or the Federal Home Loan Mort-
gage Corporation are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not obli-
gated 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 may enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their holdings, as a duration manage-
ment technique or to protect against an increase in the price of securities a
Portfolio anticipates purchasing at a later date. The Portfolios intend to use
these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or earn-
ing additional income, which may be deemed speculative, or, with respect to the
International Bond Portfolio, cross-hedging. These options may relate to par-
ticular securities, securities indices, or the yield differential between two
securities or, in the case of the International Bond Portfolio, foreign curren-
cies, and may or
33
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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 op-
tions when the aggregate premiums on outstanding options exceed 5% of its net
assets at the time of purchase, and will not write options on more than 25% of
the value of its net assets (measured at the time an option is written). Op-
tions trading is a highly specialized activity that entails greater than ordi-
nary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities in
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; (d) the
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors; and (e)
the possibility that the counterparty will default in the performance of its
obligations. For further discussion of risks involved with domestic and foreign
futures and options, see the Statement of Additional Information.
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The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for a Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value
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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 agree-
ments to purchase other securities either maturing, or under an agreement to
resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use
reverse repurchase agreements when it is anticipated that the interest income
to be earned from the investment of the proceeds of the transaction is greater
than the interest expense of the transaction. This use of reverse repurchase
agreements may be regarded as leveraging and, therefore, speculative. Reverse
repurchase agreements involve the risks that the interest income earned in the
investment of the proceeds will be less than the interest expense, that the
market value of the securities sold by a Portfolio may decline below the price
of the securities the Portfolio is obligated to repurchase and that the secu-
rities may not be returned to the Portfolio. During the time a reverse repur-
chase agreement is outstanding, a Portfolio will maintain a segregated account
with the Fund's custodian containing cash, U.S. Government or other appropri-
ate liquid debt securities having a value at least equal to the repurchase
price. A Portfolio's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its 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.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. Each Portfolio may purchase securities which are not registered un-
der the Securities Act of 1933 (the "1933 Act") but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. These securities will not be considered illiquid so long as it is deter-
mined by the Portfolios' sub-adviser that an adequate trading market exists
for the securities. This investment practice could have the effect of increas-
ing the level of illiquidity in a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase 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
36
<PAGE>
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Portfo-
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
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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 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 and may result in
the realization of short-term capital gains that are taxable to shareholders as
ordinary income.
INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce higher yields, are subject to potentially greater capital appreciation and
depreciation than securities with shorter maturities. The Portfolios are not
restricted to any maximum or minimum time to maturity in purchasing individual
portfolio securities, and the average maturity of a Portfolio's assets will
vary 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. Although the Portfolios' sub-adviser will normally attempt to
structure each Portfolio to have a comparable duration to its benchmark as
stated for that section, there can be no assurance that it will be able to do
so at all times.
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 four
years; as of June 30, 1995, the General Fund had a surplus of $688.3 million.
The deficit in the Commonwealth's unreserved/ undesignated funds also have been
eliminated. 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. Employment
growth has shifted to the trade and service sectors, with losses in more high-
paid manufacturing positions. A new governor took office in January 1995, but
the Commonwealth has continued 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
finan-
38
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cial condition of New Jersey and its political subdivisions and instrumentali-
ties. While New Jersey's economic base has become more diversified over time
and thus its economy appears to be less vulnerable during recessionary periods,
a recurrence of high levels of unemployment could adversely affect New Jersey's
overall economy and the ability of New Jersey and its political subdivisions
and instrumentalities to meet their financial obligations. In addition, New
Jersey maintains a balanced budget which restricts total appropriation 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 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. 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 pay-
ments relating to) those obligations.
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Who Manages The Fund?
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BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of its Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief
Financial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Of-
ficer of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
ADVISER AND
SUB-ADVISERS The Adviser to the Compass Capital Funds is PNC Asset Manage-
ment Group ("PAMG"). Each of the Portfolios within the Com-
pass Capital Fund family is managed by a specialized portfo-
lio manager who is a member of PAMG's fixed income portfolio
management subsidiary, BlackRock Financial Management, Inc.
("BlackRock"). BlackRock has its primary offices at 345 Park
Avenue, New York, New York 10154.
The eleven Portfolios and their portfolio managers are as
follows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -------------------------------------------------
<C> <S>
Low Duration Bond 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.
Intermediate Government Bond Robert S. Kapito, Michael P. Lustig and Scott
Amero (see above); Messrs. Kapito, Lustig and
Amero have been Portfolio co-managers since 1995.
Intermediate Bond Robert S. Kapito, Michael P. Lustig and Scott
Amero (see above); Messrs. Kapito, Lustig and
Amero have been Portfolio co-managers since 1995.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -------------------------------------------------
<C> <S>
Core Bond Scott Amero (see above); Mr. Amero has been
Portfolio manager since its inception.
Government Income 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 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 Andrew Gordon [add Gordon bio]
Tax-Free Income 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 Income Kevin Klingert (see above); Portfolio manager
since 1995.
New Jersey Tax-Free Income Kevin Klingert (see above); Portfolio manager
since 1995.
Ohio Tax-Free Income Kevin Klingert (see above); Portfolio manager
since 1995.
</TABLE>
41
<PAGE>
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-adviser 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-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1996, the Portfo-
lios (other than the Low Duration Bond, Core Bond, Interna-
tional Bond and New Jersey Tax-Free Income Portfolios) paid
investment advisory fees at the following annual rates (ex-
pressed as a percentage of average daily net assets) after
voluntary fee waivers: Intermediate Government Bond Portfo-
lio, .28%; Intermediate Bond Portfolio, .30%; Government In-
come Portfolio, .30%; Managed Income Portfolio, .35%; Tax-
Free Income Portfolio, .28%; Pennsylvania Tax-Free Income
Portfolio, .29%; and Ohio Tax-Free Income Portfolio, .06%.
For the period from April 1, 1996 through September 30, 1996,
the Low Duration Bond and Core Bond Portfolios paid invest-
ment advisory fees, after voluntary fee waivers, at the an-
nual rates of .30% and .30% of their respective average daily
net assets. For the periods from February 1, 1996 and Febru-
ary 13, 1996, respectively, through September 30, 1996, the
New Jersey Tax-Free Income and International Bond Portfolios
paid investment advisory fees, after voluntary fee waivers,
at the annual rates of .30% and .55% of their respective av-
erage daily net assets.
42
<PAGE>
The Portfolios' sub-adviser strives to achieve best execution 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 dis-
tributor, subject to the requirements of best execution.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .20% of the first $500
million of each Portfolio's average daily net assets, .18% of
the next $500 million of each Portfolio's average daily net as-
sets, .16% of the next $1 billion of each Portfolio's average
daily net assets and .15% of each Portfolio's average daily net
assets in excess of $2 billion. From time to time the Adminis-
trators may waive some or all of their administration fees from
a Portfolio.
For information about the operating expenses the Portfolios paid
for the most recent fiscal period, see "What Are the Expenses of
the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"), In-
PLAN vestor Shares of the Portfolios bear the expense of payments
("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank, for distribution
and sales support services. The distribution fees may be used to
compensate the Distributor for distribution services and to com-
pensate the Distributor and PNC Bank
43
<PAGE>
affiliates for sales support services provided in connection
with the offering and sale of Investor Shares. The distribu-
tion fees may also be used to reimburse the Distributor and
PNC Bank affiliates for related expenses, including payments
to brokers, dealers, financial institutions and industry pro-
fessionals ("Service Organizations") for sales support serv-
ices and related expenses. Distribution fees payable under
the Plan will not exceed .10% (annualized) of the average
daily net asset value of each Portfolio's outstanding In-
vestor A Shares and .75% (annualized) of the average daily
net asset value of each Portfolio's outstanding Investor B
and Investor C Shares. Payments under the Plan are not tied
directly to out-of-pocket expenses and therefore may be used
by the recipients as they choose (for example, to defray
their overhead expenses). The Plan also permits the Distribu-
tor, PAMG, the Administrators and other companies that re-
ceive 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.
Under the Plan, the Fund intends to enter into service ar-
rangements with Service Organizations (including PNC Bank and
its affiliates) with respect to each class of Investor Shares
pursuant to which Service Organizations will render certain
support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder
servicing fee of up to .25% (annualized) of the average daily
net asset value of Investor Shares owned by their customers,
Service Organizations may provide one or more of the follow-
ing services: responding to customer inquiries relating to
the services performed by the Service Organization and to
customer inquiries concerning their investments in Investor
Shares; assisting customers in designating and changing divi-
dend options, account designations and addresses; and provid-
ing other similar shareholder liaison services. In considera-
tion for a separate shareholder processing fee of up to .15%
(annualized) of the average daily net asset value of Investor
Shares owned by their customers, Service Organizations may
provide one or more of these additional services to such cus-
tomers: processing purchase and redemption requests from
customers and placing orders with the Fund's transfer agent
or the Distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with
respect to Investor Shares beneficially owned by customers or
the information necessary for sub-accounting; and providing
other similar services.
Service Organizations may charge their clients additional
fees for account services. Customers who are beneficial own-
ers of Investor Shares should read this Prospectus in light
of the terms and fees governing their accounts with Service
Organizations.
44
<PAGE>
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. Under state securities laws, banks
and financial institutions that receive payments from the Fund
may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, distribution fees, fees and expenses in registering
and qualifying the Portfolios and their shares for distribution
under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of
printing and distributing prospectuses and statements of addi-
tional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solicita-
tions, insurance premiums, the expense of independent pricing
services, and other expenses which are not expressly assumed by
PAMG or the Fund's service providers under their agreements with
the Fund. Any general expenses of the Fund that do not belong to
a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board of
Trustees in a manner the Board determines to be fair and equita-
ble.
45
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Bond Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes. These options are described below:
A SHARES (FRONT-END LOAD)
One time, front-end sales charge at time of purchase
No charges or fees at any time for redeeming shares
Lower ongoing expenses
Free exchanges with other A Shares in the Compass Capital
Funds family
A Shares may make sense for investors with a long-term in-
vestment horizon who prefer to pay a one-time front-end sales
charge and have reduced ongoing fees.
B SHARES (BACK-END LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) if shares are re-
deemed, declining over 6 years from a high of 4.50%
Free exchanges with other B Shares in the Compass Capital
Funds family
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.
C SHARES (LEVEL LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) of 1.00% if shares
are redeemed within 12 months of purchase
Free exchanges with other C Shares in the Compass Capital
Funds family
C Shares may make sense for shorter term (relative to both A
and B Shares) investors who prefer to pay for professional
investment advice on an ongoing basis (asset-based sales
charge) rather than with a traditional, one-time front-end
sales charge. Such investors may plan to make substantial
redemptions within 6 years of purchase.
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 C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
Government Income and Managed Income Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.50% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
Low Duration Bond Portfolio:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge................. 3.00% 0.00% 0.00%
12b-1 Fee............... 0.00%* 0.75% 0.75%
CDSC (Redemption
Charge)................ 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
International Bond Portfolio:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge................. 5.00% 0.00% 0.00%
12b-1 Fee............... 0.00%* 0.75% 0.75%
CDSC (Redemption
Charge)................ 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
*The Portfolios do not expect to incur any 12b-1 fees with respect to Investor
A Shares during the current fiscal year.
Investors wishing to purchase 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 and Investor C Shares will exceed the expense of
the maximum initial sales charge on Investor A Shares. For example, if net as-
set value remains constant, the Investor B Shares' and Investor C Shares' ag-
gregate 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 and Investor C Shares would bear
higher aggregate expenses. Investor B and Investor C shareholders, however,
enjoy the benefit of permitting all their dollars to work from the time the
investments are made. Any positive investment return on the additional in-
vested amount would partially or wholly offset the higher annual expenses
borne by Investor B Shares and Investor C Shares.
Because the Portfolios' future returns cannot be predicted, however, there can
be no assurance that such a positive return will be achieved.
At the end of seven years after the date of purchase, Investor B Shares will
convert automatically to Investor A Shares, based on the relative net asset
values of shares of each class. Investor B Shares acquired through 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 C Shares have no conversion feature.
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.
Unless a sales charge waiver applies, Investor B shareholders pay a contingent
deferred sales charge if they redeem during the first six years after pur-
chase, and Investor C shareholders pay a contingent deferred sales charge if
they redeem during the first twelve months after purchase. Investors expecting
to redeem during these periods should consider the cost of the applicable con-
tingent deferred sales charge in addition to the aggregate annual Investor B
or Investor C 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 or Investor C Shares.
48
<PAGE>
Waiver of Sales Charges. The entire initial sales charge on Investor A Shares
of a Portfolio may be waived for certain eligible purchasers allowing their en-
tire purchase price to be immediately invested in a Portfolio. The contingent
deferred sales charge may be waived upon redemption of certain Investor B
Shares or Investor C Shares.
49
<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-adviser, Distributor or transfer agent or em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
When placing purchase orders, investors should specify whether the order is for
Investor A, Investor B or Investor C Shares of a Portfolio. All share purchase
orders that fail to specify a class will automatically be invested in Investor
A Shares.
PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through
brokers which have entered into dealer agreements with the Distributor. 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.
50
<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 modify or waive the minimum ini-
tial or subsequent investment requirement.
51
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. Shareholders may also place redemption requests through a broker or
other institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C
SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B
or Investor C Shares in the same Portfolio, the Investor A Shares will be re-
deemed first unless the shareholder indicates otherwise. If a redeeming share-
holder owns both Investor B Shares and Investor C Shares in the same Portfolio,
the redemption order will be processed to minimize the amount of the contingent
deferred sales charge that will be charged 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.
52
<PAGE>
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 required minimum initial investment as the re-
sult of a redemption or an exchange request. A shareholder will be notified in
writing that the value of the shareholder's account in a Portfolio is less than
the required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of shares will be
reduced by the amount of any applicable contingent deferred sales charge. Un-
less another payment option is used as described above, payment for redeemed
shares is normally made by check mailed within seven days after acceptance by
PFPC of the request and any other necessary documents in proper order. Payment
may, however, be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, the Fund's transfer agent may delay the payment of redemption pro-
ceeds, 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.
53
<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 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. Exchanges 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 and Investor C Shares will not be subject to a CDSC,
which will continue to be measured from the date of the original purchase and
will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written 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
54
<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-
55
<PAGE>
ors because of the sales charges involved and, therefore, are discouraged. No
contingent deferred sales charge will be assessed on redemptions of Investor B
or Investor C Shares made through the SWP that do not exceed 12% of an ac-
count's net asset value on an annualized basis. For example, monthly, quarterly
and semi-annual SWP redemptions of Investor B or 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
or Investor C Shares in excess of this limit are still subject to the applica-
ble CDSC.
56
<PAGE>
What Is The Schedule Of Sales Charges And Exemptions?
- --------------------------------------------------------------------------------
INVESTOR A Investor A Shares are subject to a front-end sales charge deter-
SHARES mined in accordance with the following schedules:
Low Duration Bond Portfolio:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 3.00% 3.09% 2.50%
$25,000 but less than $50,000 2.75 2.83 2.25
$50,000 but less than $100,000 2.50 2.56 2.00
$100,000 but less than $250,000 2.00 2.04 1.75
$250,000 but less than $500,000 1.50 1.52 1.25
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
Intermediate Government Bond, Intermediate Bond, Core Bond, Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-Free
Income Portfolios:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 but less than $50,000 3.75 3.90 3.25
$50,000 but less than $100,000 3.50 3.63 3.00
$100,000 but less than $250,000 3.00 3.09 2.50
$250,000 but less than $500,000 2.00 2.04 1.50
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 0.75% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
57
<PAGE>
Government Income and Managed Income Portfolios:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.00%
$25,000 but less than $50,000 4.25 4.70 3.75
$50,000 but less than $100,000 4.00 4.17 3.50
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
International Bond Portfolio:
<TABLE>
<CAPTION>
REALLOWANCE
OR
SALES PLACEMENT
CHARGE AS SALES FEES
% CHARGE AS TO DEALERS
OF % (AS % OF
AMOUNT OF TRANSACTION OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000 but less than $50,000 4.75 4.99 4.25
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 4.00 4.17 3.50
$250,000 but less than $500,000 3.00 3.09 2.50
$500,000 but less than $1,000,000 2.00 2.04 1.50
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 1.00% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
58
<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-adviser or trans-
fer 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) employees and retirees
(and their spouses and minor children); (c) registered representatives of bro-
kers 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 organizations which operate
under Section 501(c)(3) of the Internal Revenue Code; (c) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio,
provided that the aggregate amount invested pursuant to this exemption equals
at least $250,000; and (d) persons participating in a "wrap account" or similar
program under which they pay advisory fees to a broker-dealer or other finan-
cial institution. INVESTORS WHO QUALIFY FOR ANY OF THESE EXEMPTIONS FROM THE
SALES CHARGE MUST PURCHASE INVESTOR A SHARES.
QUALIFIED PLANS. The sales charge (as a percentage of the offering price) pay-
able by qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate in purchases of Investor A Investor Shares of
the Portfolios aggregating less than $500,000 will be 1.00%. No sales charge
will apply to purchases by Qualified Plans of Investor A Shares aggregating
$500,000 and above. The sales charge payable by Qualified Plans having less
than 20 employees eligible to participate in purchases of Investor A Shares of
the Portfolios aggregating less than $500,000 will be 2.50% (1.50% with respect
to shares of the Low Duration Bond Portfolio.) The above schedules will apply
to purchases by such Qualified Plans of Investor A Shares aggregating $500,000
and above.
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the sales
charge price. Upon notice to the investor's broker or the transfer agent, pur-
chases of Investor A Shares made at any one time by the following persons may
be considered when calculating the sales charge: (a) an individual, his or her
spouse, and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized
for the purpose of buying redeemable securities of a registered investment com-
pany, and if the purchase is made through a central administrator, or through a
single dealer, or by other means which result in economy of sales effort or ex-
pense. An organized group does not include a group of
59
<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 or the total amount of an investor's initial in-
vestment in such shares, less redemptions (whichever is greater) may be com-
bined with the amount of the investor's current purchase in determining the ap-
plicable sales charge. IN ORDER TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION,
PREVIOUS PURCHASES OF INVESTOR A SHARES MUST BE CALLED TO THE ATTENTION OF PFPC
BY THE INVESTOR AT THE TIME OF THE CURRENT PURCHASE.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a Portfolio (or
Investor A Shares of another non-money market portfolio of the Fund), a share-
holder has a one-time right, to be exercised within 45 days, to reinvest the
redemption proceeds without any sales charges. PFPC must be notified of the re-
investment in writing by the purchaser, or by his or her broker, at the time
the purchase is made in order to eliminate a sales charge. An investor should
consult a tax adviser concerning the tax consequences of use of the reinvest-
ment privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Investor A Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of any other investment company
which were sold with a sales charge or commission. This does not include shares
of an affiliated mutual fund which were or would be subject to a contingent de-
ferred sales charge upon redemption. Such purchases must be made within 60 days
of the redemption, and the Fund must be notified by the investor in writing, or
by his or her financial institution, at the time the purchase of Investor A
Shares is made.
LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a Letter of Intent stating the investor's intention to invest
during the next 13 months a specified amount in Investor A Shares which, if
made at one time, would qualify for a reduced sales charge. The Letter of In-
tent may be signed at any time within 90 days after the first investment to be
included in the Letter of Intent. The initial investment must meet the minimum
initial investment requirement and represent at least 5% of the total intended
investment. THE INVESTOR MUST INSTRUCT PFPC UPON MAKING SUBSEQUENT PURCHASES
THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF INTENT. All dividends and capi-
tal gains of a Portfolio that are invested in additional Investor A Shares of
the same Portfolio are applied to the Letter of Intent.
During the term of a Letter of Intent, the Fund's transfer agent will hold In-
vestor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full amount indicated in the Letter of Intent is
not purchased. The escrowed Investor A Shares will
60
<PAGE>
be released when the full amount indicated has been purchased. Any redemptions
made during the 13-month period will be subtracted from the amount of purchases
in determining whether the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month period, the
investor will be required to pay an amount equal to the difference between the
sales charge actually paid and the sales charge the investor would have had to
pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the ex-
piration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.
PURCHASES OF INVESTOR B SHARES. Investor B Shares are subject to a deferred
sales charge at the rates set forth in the chart below if they are redeemed
within six years of purchase. The deferred sales charge on Investor B Shares is
based on the lesser of the offering price or the net asset value of the In-
vestor B Shares on the redemption date. Dealers will receive commissions equal
to 4.0% of the Investor B Shares sold by them plus ongoing fees under the
Fund's Distribution and Service Plan and described under "Who Manages The
Fund?" These commissions and payments may be different than the reallowances or
placement fees paid to dealers in connection with sales of Investor A Shares.
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
</TABLE>
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase. Dealers will receive commissions equal to 1.0% of
the Investor C Shares sold by them plus ongoing fees under the Fund's Distribu-
tion and Service Plan as described above under "Who Manages the Fund?" These
commissions and payments may be different than the reallowances, placement fees
and commissions paid to dealers in connection with sales of Investor A Shares
and Investor B Shares.
61
<PAGE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor B Shares and Investor C Shares is not charged in con-
nection with: (1) exchanges described in "What Are the Shareholder Features of
the Fund?--Exchange Privilege"; (2) redemptions made in connection with minimum
required distributions from IRA, 403(b)(7) and Qualified Plan accounts due to
the shareholder reaching age 70 1/2; (3) redemptions in connection with a
shareholder's death or disability (as defined in the Internal Revenue Code)
subsequent to the purchase of Investor B or Investor C Shares; (4) involuntary
redemptions of Investor B or 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 un-
der "What Are the Shareholder Features of the Fund?--Systematic Withdrawal
Plan." In addition, no contingent deferred sales charge is charged on Investor
B or Investor C Shares acquired through the reinvestment of dividends or dis-
tributions.
When an investor redeems Investor B or Investor C Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge
that will be charged. Investor B and Investor C Shares are redeemed first from
those shares that are not subject to the deferred sales load (i.e., shares that
were acquired through reinvestment of dividends or distributions) and after
that from the shares that have been held the longest.
62
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio as of the close of regular trading hours on the NYSE (currently
4:00 p.m. Eastern Time) on each Business Day by dividing the value of all secu-
rities and other assets owned by a Portfolio that are allocated to a particular
class of shares, less the liabilities charged to that class, by the number of
shares of the class that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
63
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of the same class of shares of the relevant Portfolio unless a share-
holder elects otherwise. Such election, or any revocation thereof, must be made
in writing to PFPC, and will become effective with respect to dividends paid
after its receipt by PFPC. Each Portfolio declares a dividend each day on "set-
tled" shares (i.e., shares for which the particular Portfolio has received pay-
ment in Federal funds) on the first Business Day after a purchase order is
placed with the Fund. Payments by check are normally converted to Federal funds
within two Business Days of receipt. Over the course of a year, substantially
all of the Portfolio's net investment income will be declared as dividends. The
amount of the daily dividend for each Portfolio will be based on periodic pro-
jections of its net investment income. All dividends are paid within ten days
after the end of each month. Net realized capital gains (including net short-
term capital gains), if any, will be distributed by each Portfolio at least an-
nually.
64
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), whether the
distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, "exempt interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and non-corporate taxpayers in determining alternative
minimum and environmental tax liability. Second, "exempt interest dividends"
must be taken into account by corporate taxpayers in determining certain ad-
justments for alternative minimum and environmental tax purposes. 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 Re-
tirement Act benefits should note that "exempt interest dividends" will be
taken into account in determining the taxability of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
65
<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 a taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including gen-
erally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio intends to make this election. As a result, the
amount of such foreign taxes paid by the Portfolio will be included in its
shareholders' income pro rata (in addition to taxable distributions actually
received by them), and each shareholder generally will be entitled either (a)
to credit a proportionate amount of such taxes against U.S. Federal income tax
liabilities, or (b) if a shareholder itemizes deductions, to deduct such pro-
portionate amounts from U.S. income, should the shareholder so choose.
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, 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 a
Portfolio. For additional information concerning the tax treatment of dividends
and distributions by the states listed below, including certain restrictions
applicable to such treatment, see "Taxes" in the Statement of Additional Infor-
mation.
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 indi-
66
<PAGE>
viduals, estates or trusts under the Personal income tax (in the case of insur-
ance proceeds, to the extent they are exempt for Federal Income Tax purposes);
to corporations under the Corporate Net Income Tax (in the case of insurance
proceeds, to the extent they are exempt for Federal income tax purposes); nor
to individuals under the Philadelphia School District 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 Municipal Obligations, or as interest or gain from direct U.S. Gov-
ernment obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
67
<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). Cor-
porations that are subject to the Ohio corporation franchise tax will not have
to include distributions from the Ohio Tax-Free Income Portfolio in their net
income base for purposes of calculating their Ohio corporation franchise tax
liability to the extent that such distributions either constitute exempt-inter-
est dividends for Federal income tax purposes or are properly attributable to
interest on Ohio Municipal Obligations or the U.S. obligations described above.
However, Shares of the Ohio Tax-Free Income Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions 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.
68
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio, other than the Government Income, Intermediate Bond, Managed Income
and Ohio Tax-Free Income Portfolios, offers five separate classes of shares--
Institutional Shares, Service Shares, Investor A Shares, Investor B Shares and
Investor C Shares. The Government Income Portfolio offers Investor A Shares,
Investor B Shares and Investor 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,
Investor B Shares and Investor C Shares of the 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 performance of each class of Investor Shares
may be different. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan and an
automatic withdrawal plan. For further information regarding the Fund's Insti-
tutional 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 that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On , 1996, PNC Bank held of record approximately % of the Fund's out-
standing shares, as trustee on behalf of individual and institutional invest-
ors, and may be deemed a controlling person of the Fund under the 1940 Act. PNC
Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
69
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for each class of Investor Shares of the Portfolios may
be quoted in advertisements and communications to shareholders. Total return
will be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Investor Shares of a Portfolio over the measuring pe-
riod. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to a class of
shares are reinvested in shares of the same class, and also reflect the maximum
sales load charged by the Portfolio with respect to a class of shares. When,
however, a Portfolio compares the total return of a share class to that of
other funds or relevant indices, total return may also be computed without re-
flecting the sales load.
The yield of a class of shares is computed by dividing the Portfolio's net in-
come per share allocated to that class during a 30-day (or one month) period by
the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to a Portfolio's tax-free yield. This
is done by increasing the Portfolio's yield (calculated above) by the amount
necessary to reflect the payment of Federal and/or state income tax at a stated
tax rate.
The performance of a class of a Portfolio's Investor Shares may be compared to
the performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a class of a Portfolio's
Investor Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Lehman GMNA Index, the T-Bill Index,
the "stocks, bonds and inflation index" published annually by Ibbotson Associ-
ates and the Lehman Government Corporate Bond Index, as well as the benchmarks
attached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their share classes published by nationally recog-
nized ranking services, and information as reported in financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of a class of shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
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, perfor-
70
<PAGE>
mance data for Investor Shares of a Portfolio cannot necessarily be used to
compare an investment in such shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Performance is generally a function of
the kind and quality of the instruments held in a portfolio, portfolio maturi-
ty, operating expenses and market conditions. Any fees charged by brokers or
other institutions directly to their customer accounts in connection with in-
vestments in Investor Shares will not be included in the Portfolio performance
calculations.
Other Information
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, of the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed In-
come, International Bond, Tax-Free Income and New Jersey Tax-Free Income Port-
folios of the Compass Capital Fund, and the statements of net assets of the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios of the Compass
Capital Funds as of September 30, 1996, and the related statements of opera-
tions for the periods then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented (except for those statements which
have been audited by other auditors as discussed below). These financial state-
ments and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net as-
sets for the year ended June 30, 1995, and the financial highlights for the
year ended June 30, 1995 and each of the prior periods presented of the Short
Government Bond and Core Bond Portfolios, formerly the BFM Institutional Trust
Short Duration and Core Fixed Income Portfolios (the "BFM Funds"), respectively
were audited by other auditors, whose report dated August 7, 1995 expressed an
unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of materials misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian and brokers as of September 30, 1996. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Compass Capital Funds (Short Government Bond, Intermediate Government Bond, In-
termediate Bond, Core Bond, Government Income, Managed Income, International
Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free and
Ohio Tax-Free Income Portfolios), as of September 30, 1996, and the results of
their operations for the periods then ended, the changes in their net assets
for each of the two years (or periods) in the period then ended (except for the
year ended June 30, 1995 for the BFM Funds which have been audited by other au-
ditors), and the financial highlights for each of the periods presented (except
for the year ended June 30, 1995 and prior periods for the BFM Funds which have
been audited by other auditors), in conformity with generally accepted account-
ing principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
71
<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 (888) 4COMPASS.
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.
72
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
above 9.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of 1996, the composition of the
Lehman Brothers Aggregate Index is:
% allocation to Treasury and government
securities
% allocation to mortgage-backed
securities
% allocation to corporate and asset-
backed securities
Government 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 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 1996, the composition of the
Lehman Brothers Aggregate Index is:
% allocation to Treasury and government
securities
% allocation to mortgage-backed
securities
% allocation to corporate and asset-
backed securities
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>
73
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
LOW DURATION BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CORE BOND PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
MANAGED INCOME PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
TAX-FREE INCOME PORTFOLIO
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
NEW JERSEY TAX-FREE INCOME PORTFOLIO
OHIO TAX-FREE INCOME PORTFOLIO
THE BOND
PORTFOLIOS
INVESTOR SHARES
Prospectus
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(SERVICE SHARES OF THE LARGE CAP VALUE EQUITY PORTFOLIO,
LARGE CAP GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY PORTFOLIO,
MID-CAP GROWTH EQUITY PORTFOLIO, SELECT EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO, INDEX EQUITY PORTFOLIO, INTERNATIONAL EMERGING
MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The
Expenses Of The Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund.................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance........................... What Are The Portfolios'
Financial Highlights?
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Equity Portfolios Service Shares
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Service Shares of eleven of those portfolios (the
"Portfolios"):
Large Cap Value Equity Portfolio
Large Cap Growth Equity Portfolio
Small Cap Value Equity Portfolio
Small Cap Growth Equity Portfolio
Mid-Cap Value Equity Portfolio
Mid-Cap Growth Equity Portfolio
International Equity Portfolio
International Emerging Markets Portfolio
Select Equity Portfolio
Index Equity Portfolio
Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Commis-
sion (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 Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
The Index Equity Portfolio seeks to achieve its investment ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios invest in non-U.S. international stocks and one Portfolio
invests in a combination of U.S. stocks and bonds. A detailed
description of each Portfolio begins on page 18 and a summary of
each Performance Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
COMPASS
CAPITAL
PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Large Cap Value Equity Russell 1000 Value Index Growth and Income
Large Cap Growth Equity Russell 1000 Growth Index Growth
Small Cap Value Equity Russell 2000 Index Small Company Growth
Small Cap Growth Equity Russell 2000 Growth Index Small Company Growth
Mid-Cap Value Equity Russell Midcap Value Index Midcap
Mid-Cap Growth Equity Russell Midcap Growth Index Midcap
International Equity EAFE Index International
International Emerging MSCI Emerging Markets
Markets Emerging Markets Free Index
Select Equity S&P 500 Index Growth and Income
Index Equity S&P 500 Index S&P 500 Index
Balanced S&P 500 Index and Salomon Balanced
Broad Investment Grade
Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visers Company ("PEAC") and BlackRock Financial Management, Inc.
("BlackRock") serve as sub-advisers to different Portfolios as
described in this Prospectus. Dimensional Fund Advisors Inc.
("DFA") serves as investment adviser to the Index Master Portfo-
lio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfolios.
CAPITAL We intend this document to be an effective tool as you explore
EQUITY different directions in equity investing. You may wish to use
PORTFOLIOS the table of contents on page 5 to find descriptions of the
Portfolios, including the investment objectives, portfolio man-
agement styles, risks and charges and expenses.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, foreign securities and illiquid securities; enter into
repurchase and reverse repurchase agreements; lend portfolio
securities to third parties; and enter into futures contracts
and options and forward currency exchange contracts. These and
the other investment practices set forth below, and their as-
sociated risks, deserve careful consideration. Certain risks
associated with international investments are heightened be-
cause of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies And Risks
Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "HOW ARE SHARES PURCHASED AND REDEEMED?" and
CAPITAL FUNDS "WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 18
What Are The Differences Among The Portfolios?............... 19
What Additional Investment Policies And Risks Apply?......... 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 32
Who Manages The Fund?........................................ 33
How Are Shares Purchased And Redeemed?....................... 40
What Special Purchase And Redemption Procedures May Apply?... 42
How Is Net Asset Value Calculated?........................... 44
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 45
How Are Fund Distributions Taxed?............................ 46
How Is the Fund Organized?................................... 48
How Is Performance Calculated?............................... 51
How Can I Get More Information?.............................. 52
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios for the fiscal year ended September 30, 1996 as a percentage
of average daily net assets. Because the Mid-Cap Value Equity Portfolio and
Mid-Cap Growth Equity Portfolio are new, the figures shown for these two Port-
folios under "Other expenses" are estimates for the current fiscal year. An ex-
ample based on the summary is also shown.
<TABLE>
<CAPTION>
LARGE CAP LARGE CAP SMALL CAP SMALL CAP
VALUE GROWTH VALUE GROWTH MID-CAP MID-CAP
EQUITY EQUITY EQUITY EQUITY VALUE EQUITY GROWTH EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .49% .49% .54% .54% .50% .50%
Other operating expenses .56 .56 .62 .62 .66 .66
------- ------- ----- ----- ------- -------
Administration fees
(after fee
waivers)(/1/) .18 .17 .22 .22 .10 .10
Shareholder servicing
fee .15 .15 .15 .15 .15 .15
Other expenses .23 .24 .25 .25 .41 .41
------ ------ ---- ---- ------ ------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) 1.05% 1.05% 1.16% 1.16% 1.16% 1.16%
======= ======= ===== ===== ======= =======
<CAPTION>
INTERNATIONAL
INTERNATIONAL EMERGING SELECT INDEX
EQUITY MARKETS EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/)(/2/) .70% 1.15% .50% .025% .50%
Other operating expenses .66 .93 .55 .455 .60
------- ------- ----- ----- -------
Administration fees
(after fee
waivers)(/1/) .18 .23 .17 .045 .18
Shareholder servicing
fee .15 .15 .15 .150 .15
Other expenses .33 .55 .24 .260 .27
------ ------ ---- ---- ------
Total Portfolio
operating expenses
(after fee
waivers)(/1/) 1.36% 2.08% 1.05% .480% 1.10%
======= ======= ===== ===== =======
</TABLE>
(1) Without waivers, advisory fees would be 80% for the Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios, .75%, 1.25% and .025%, respectively,
for the International Equity, International Emerging Markets and Index Eq-
uity Portfolios and .55% for each of the remaining Portfolios and adminis-
tration fees would be .21% for the Large Cap Value Equity Portfolio and
.23% for each other Portfolio. PAMG and the Portfolios' administrators are
under no obligation to waive or continue waiving their fees, but have in-
formed the Fund that they expect to waive fees as necessary to maintain the
Portfolios' total operating expenses during the remainder of the current
fiscal year at the levels set forth in the table. Without waivers, "Other
operating expenses" would be .59%, .62%, .61%, .63%, .84%, .84%, .72%,
.93%, .62%, .775% and .65%, respectively, and "Total Portfolio operating
expenses" would be 1.14%, 1.17%, 1.16%, 1.18%, 1.64%, 1.64%, 1.47%, 2.18%,
1.17%, .80% and 1.20%, respectively.
(2) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
6
<PAGE>
EXAMPLE
An investor in 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>
Large Cap Value Equity $11 $33 $ 58 $128
Large Cap Growth Equity 11 33 58 128
Small Cap Value Equity 12 37 64 141
Small Cap Growth Equity 12 37 64 141
Mid-Cap Value Equity 12 37
Mid-Cap Growth Equity 12 37
International Equity 14 43 74 164
International Emerging Markets 21 65 112 241
Select Equity 11 33 58 128
Index Equity 5 15 27 60
Balanced 11 35 61 134
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses (including the Index Equity Portfolio's pro rata
share of the Index Master Portfolio's advisory fees and operating expenses) an
investor will bear either directly or indirectly. They do not reflect any
charges that may be imposed by affiliates of the Portfolios' investment adviser
or other institutions directly on their customer accounts in connection with
investments in the Portfolios.
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are approximately equal to the
expenses which the Index Equity Portfolio would incur if the Fund retained the
services of an investment adviser for the Index Equity Portfolio and the assets
of the Index Equity Portfolio were invested directly in the type of securities
held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountant. This financial information
should be read together with those financial statements. Fur-
ther information about the performance of the Portfolios is
available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7764. Information concerning the historical in-
vestment results of Service Shares of the Index Equity Portfo-
lio reflects the financial experience of that Portfolio prior
to its conversion on June 2, 1996 to a feeder portfolio of the
Index Master Portfolio. During the periods presented the Mid-
Cap Value Equity Portfolio and Mid-Cap Growth Equity Portfolio
had not commenced investment operations.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP VALUE EQUITY PORTFOLIO
<TABLE> (FORMERLY THE VALUE EQUITY PORTFOLIO)
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 13.92 $ 11.62 $ 11.68 $ 11.21
-------- -------- -------- -------
Income from investment operations
Net investment income 0.32 0.30 0.25 0.04
Net gain (loss) on investments
(both realized and unrealized) 2.40 2.55 0.16 0.48
-------- -------- -------- -------
Total from investment operations 2.72 2.85 0.41 0.52
-------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.32) (0.30) (0.25) (0.05)
Distributions from net realized
capital gains (0.97) (0.25) (0.22) - -
-------- -------- -------- -------
Total distributions (1.29) (0.55) (0.47) (0.05)
-------- -------- -------- -------
NET ASSET VALUE AT END OF PERIOD $ 15.35 $ 13.92 $ 11.62 $ 11.68
======== ======== ======== =======
Total return 20.68% 25.40% 3.51% 4.64%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $457,283 $170,832 $105,035 $23,137
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.05% 0.95% 0.90% 0.91%/2/
Before advisory/administration fee
waivers 1.14% 1.09% 1.06% 0.94%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 2.13% 2.40% 2.24% 2.44%/2/
Before advisory/administration fee
waivers 2.04% 2.26% 2.08% 2.41%/2/
PORTFOLIO TURNOVER RATE 64% 12% 11% 11%
AVERAGE COMMISSION RATE/3/ $ 0.0556 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP GROWTH EQUITY PORTFOLIO
(FORMERLY THE GROWTH EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 13.02 $ 10.18 $ 11.57 $10.54
-------- ------- ------- ------
Income from investment operations
Net investment income 0.05 0.10 0.03 - -
Net gain (loss) on investments (both
realized and unrealized) 2.28 2.87 (1.32) 1.03
-------- ------- ------- ------
Total from investment operations 2.33 2.97 (1.29) 1.03
-------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.02) (0.13) - - - -
Distributions from capital - - - - - - - -
Distributions from net realized
capital gains (0.38) - - (0.10) - -
-------- ------- ------- ------
Total distributions (0.40) (0.13) (0.10) - -
-------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 14.95 $ 13.02 $ 10.18 $11.57
======== ======= ======= ======
Total return 18.34% 29.43% (11.20)% 9.77%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $191,023 $76,769 $36,752 $8,606
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.05% 0.95% 0.90% 0.89%/2/
Before advisory/administration fee
waivers 1.17% 1.13% 1.14% 0.95%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 0.31% 0.91% 0.51% (0.03)%/2/
Before advisory/administration fee
waivers 0.20% 0.73% 0.26% (0.09)%/2/
PORTFOLIO TURNOVER RATE 58% 55% 212% 175%
AVERAGE COMMISSION RATE/3/ $ 0.0598% N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 15.15 $ 13.59 $ 13.08 $ 12.28
------- ------- ------- -------
Income from investment operations
Net investment income 0.06 0.02 - - - -
Net gain (loss) on investments (both
realized and unrealized) 1.70 2.18 0.77 0.80
------- ------- ------- -------
Total from investment operations 1.76 2.20 0.77 0.80
------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.06) (0.03) (0.01) - -
Distributions from net realized
capital gains (0.87) (0.61) (0.25) - -
------- ------- ------- -------
Total distributions (0.93) (0.64) (0.26) - -
------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 15.98 $ 15.15 $ 13.59 $ 13.08
======= ======= ======= =======
Total return 12.30% 17.17% 5.96% 6.51%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $80,981 $61,313 $45,372 $21,689
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.15% 1.02% 0.98% 0.99%/2/
Before advisory/administration fee
waivers 1.16% 1.12% 1.10% 1.03%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 0.38% 0.16% 0.03% 0.12%/2/
Before advisory/administration fee
waivers 0.37% 0.07% (0.09)% 0.08%/2/
PORTFOLIO TURNOVER RATE 50% 31% 18% 41%
AVERAGE COMMISSION RATE/3/ $0.0580 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/15/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 15.02 $ 10.14 $ 10.47 $ 9.96
-------- ------- ------- ------
Income from investment operations
Net investment income (0.06) (0.01) 0.01 - -
Net gain (loss) on investments
(both realized and unrealized) 6.84 4.89 (0.34) 0.51
-------- ------- ------- ------
Total from investment operations 6.78 4.88 (0.33) 0.51
-------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income - - - - - - - -
Distributions from net realized
capital gains - - - - - - - -
-------- ------- ------- ------
Total distributions - - - - - - - -
-------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 21.80 $ 15.02 $ 10.14 $10.47
======== ======= ======= ======
Total return 45.14% 48.13% (3.12)% 5.12%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $158,901 $62,604 $22,648 $ 911
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.16% 1.03% 0.71% 0.99%/2/
Before advisory/administration
fee waivers 1.18% 1.16% 1.27% 1.68%/2/
Ratios of net investment income
to average net assets
After advisory/administration fee
waivers (0.38)% (0.07)% 0.21% (0.34)%/2/
Before advisory/administration
fee waivers (0.40)% (0.20)% (0.34)% (1.03)%/2/
PORTFOLIO TURNOVER RATE 89% 74% 89% 9%
AVERAGE COMMISSION RATE/3/ $ 0.0569 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $13.24 $ 13.41 $ 12.47 $ 11.76
-------- -------- ------- -------
Income from investment operations
Net investment income 0.19 0.11 0.14 0.02
Net realized gain (loss) on
investments 0.78 0.16 1.14 0.69
-------- -------- ------- -------
Total from investment operations 0.97 0.27 1.28 0.71
-------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.17) (0.08) (0.09) - -
Distributions from net realized
capital gains (0.67) (0.36) (0.25) - -
-------- -------- ------- -------
Total distributions (0.84) (0.44) (0.34) - -
-------- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 13.37 $ 13.24 $ 13.41 $ 12.47
======== ======== ======= =======
Total return 7.71% 2.19% 10.36% 6.03%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $161,321 $106,045 $75,174 $11,985
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.36% 1.25% 1.20% 1.18%/2/
Before advisory/administration fee
waivers 1.47% 1.42% 1.39% 1.24%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 0.71% 1.16% 1.09% 1.01%/2/
Before advisory/administration fee
waivers 0.60% 0.98% 0.90% 0.95%/2/
PORTFOLIO TURNOVER RATE 70% 105% 37% 31%
AVERAGE COMMISION RATE/3/ $ 0.0158 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR 6/17/94/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 8.18 $ 10.55 $10.00
------- ------- ------
Income from investment operations
Net investment income 0.04 0.06 0.02
Net gain (loss) on investments (both realized
and unrealized) 0.51 (2.15) 0.53
------- ------- ------
Total from investment operations 0.55 (2.09) 0.55
------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment income - - (0.08) - -
Distributions from Capital - - (0.01) - -
Distributions from net realized capital gains (0.01) (0.19) - -
------- ------- ------
Total distributions (0.01) (0.28) - -
------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 8.72 $ 8.18 $10.55
======= ======= ======
Total return 6.61% (19.91)% 5.50%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $37,987 $15,020 $3,505
Ratios of expenses to average net assets
After advisory/administration fee waivers 2.08% 2.06% 2.00%/2/
Before advisory/administration fee waivers 2.18% 2.30% 2.98%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 0.70% 1.72% 1.10%/2/
Before advisory/administration fee waivers 0.60% 1.48% 0.12%/2/
PORTFOLIO TURNOVER RATE 44% 75% 4%
AVERAGE COMMISSION RATE/3/ $0.0018 NA NA
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
(FORMERLY, THE CORE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR 9/15/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 11.88 $ 9.92 $ 9.97 $10.00
-------- ------- ------- ------
Income from investment operations
Net investment income 0.17 0.22 0.19 - -
Net gain (loss) on investments (both
realized and unrealized) 2.07 2.05 (0.04) (0.03)
-------- ------- ------- ------
Total from investment operations 2.24 2.27 0.15 (0.03)
-------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.17) (0.19) (0.20) - -
Distributions from net realized
capital gains (0.39) (0.12) - - - -
-------- ------- ------- ------
Total distributions (0.56) (0.31) (0.20) - -
-------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 13.56 $ 11.88 $ 9.92 $ 9.97
======== ======= ======= ======
Total return 19.43% 23.43% 1.55% (.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $113,777 $83,705 $49,293 $ 704
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.04% 0.95% 0.90% 0.90%/2/
Before advisory/administration fee
waivers 1.17% 1.13% 1.18% 1.12%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 1.41% 2.10% 1.96% 1.92%/2/
Before advisory/administration fee
waivers 1.28% 1.91% 1.68% 1.70%/2/
PORTFOLIO TURNOVER RATE 55% 51% 88% 2%
AVERAGE COMMISSION RATE/3/ $ 0.0487 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 13.58 $ 10.93 $ 11.02 $ 10.76
-------- ------- ------- -------
Income from investment
operations
Net investment income 0.29 0.35 0.29 0.05
Net gain (loss) on
investments (both realized
and unrealized) 2.10 2.73 0.02 0.29
-------- ------- ------- -------
Total from investment
operations 2.39 3.08 0.31 0.34
-------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.30) (0.31) (0.29) (0.08)
Distributions from net
realized capital gains (1.70) (0.12) (0.11) - -
-------- ------- ------- -------
Total distributions (2.00) (0.43) (0.40) (0.08)
-------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 13.97 $ 13.58 $ 10.93 $ 11.02
======== ======= ======= =======
Total return 19.45% 28.99% 2.78% 3.16%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $103,080 $61,536 $27,376 $12,441
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.48% 0.45% 0.40% 0.41%/2/
Before
advisory/administration fee
waivers 0.80%/3/ 0.79% 0.77% 0.53%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 1.98% 2.62% 2.49% 3.04%/2/
Before
advisory/administration fee
waivers 1.67% 2.28% 2.12% 2.92%/2/
PORTFOLIO TURNOVER RATE 18%/4/,/5/ 18% 17% 8%
AVERAGE COMMISSION RATE 0.0319/4/,/5/ N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including expenses allocated from The U.S. Large Company Series of The DFA
Investment Trust Company of 0.13%.
/4/For the period from October 1, 1995 through May 31, 1996.
/5/See footnotes to the financial statements of The DFA Investment Trust Compa-
ny.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 13.72 $ 11.98 $ 12.42 $ 12.05
-------- ------- ------- -------
Income from investment operations
Net investment income 0.42 0.44 0.34 0.06
Net realized gain (loss) on
investments 1.49 1.88 (0.38) 0.38
-------- ------- ------- -------
Total from investment operations 1.91 2.32 (0.04) 0.44
-------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.41) (0.44) (0.34) (0.07)
Distributions from net realized
capital gains (0.13) (0.14) (0.06) - -
-------- ------- ------- -------
Total distributions (0.54) (0.58) (0.40) (0.07)
-------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 15.09 $ 13.72 $ 11.98 $ 12.42
======== ======= ======= =======
Total return 14.11% 19.94% (0.36)% 3.66%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $134,121 $85,668 $66,024 $15,842
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.09% 0.94% 0.90% 0.93%/2/
Before advisory/administration fee
waivers 1.20% 1.16% 1.16% 1.11%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 2.87% 3.49% 2.96% 2.75%/2/
Before advisory/administration fee
waivers 2.76% 3.28% 2.70% 2.57%/2/
PORTFOLIO TURNOVER RATE 275% 154% 54% 32%
AVERAGE COMMISSION RATE/3/ $ 0.0599 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment
styles so that investors may participate across multiple dis-
ciplines in order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of
eleven investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity
sector. Eight of these Portfolios invest primarily in U.S.
stocks, two Portfolios invest in non-U.S. international stocks
and one Portfolio invests in a combination of U.S. stocks and
bonds.
In certain investment cycles and over certain holding periods,
an equity fund that invests according to a "value" style or a
"growth" style may perform above or below the market. An in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the investor's goals
and sentiments.
INVESTMENT Each of the eleven Compass Capital Equity Portfolios seeks to
OBJECTIVES provide long-term Capital Appreciation.
The Select Equity, Large Cap Value Equity and Mid-Cap Value
Equity Portfolios pursue a secondary objective of Current In-
come from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described below. No assurance
can be made that a Portfolio will achieve its investment ob-
jective.
18
<PAGE>
What Are The Differences Among The Portfolios?
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<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
Large Cap Pursues equity Stocks with price/earnings Russell 1000
Value Equity securities (defined as and price/book ratios at Value Index
common stocks or time of purchase below
securities convertible average for benchmark and
into common stocks) capitalization in excess
which the sub-adviser of $1 billion.
believes are
undervalued. A
security's earnings
trend and its dividend
growth rate will also be
factors considered in
security selection.
Large Cap Pursues stocks with Stocks with growth rate Russell 1000
Growth Equity earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization in excess
adviser considers to of $1 billion.
have favorable and
above-average earnings
growth prospects.
Small Cap Pursues small cap stocks Stocks with price/earnings Russell 2000
Value Equity which the sub-adviser and price/book ratios at Index
believes are time of purchase below
undervalued. A average for benchmark and
security's earnings capitalization below $1
trend and its dividend billion.
growth rate will also be
factors considered in
security selection.
Small Cap Pursues small cap stocks Stocks with growth rate Russell 2000
Growth Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
small cap stocks which capitalization below $1
the sub-adviser billion.
considers to have
favorable and above-
average earnings growth
prospects.
Mid-Cap Value Pursues mid cap stocks Stocks with low Russell Midcap
Equity and sectors which the price/earnings, Value Index
sub-adviser believes are price/book, price/cash
undervalued. A flow or price/sales ratios
security's earnings at the time of purchase
trend and its dividend relative to their
growth rate will also be respective sectors or the
factors considered in benchmark and
security selection. capitalization between $1
billion and $5 billion.
Mid-Cap Growth Pursues mid cap stocks Stocks with growth rate Russell Midcap
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization between $1
adviser considers to billion and $5 billion.
have favorable and
above-average earnings
growth prospects.
International Pursues non-dollar Portfolio assets are EAFE Index
Equity denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far security's home market or
East Index ("EAFE"). stock exchange.
Within this universe, a
value style of investing Diversification across
is employed to select countries, industry groups
stocks which the sub- and companies with
adviser believes are investment at all times in
undervalued. A at least three foreign
security's earnings countries.
trend and its price
momentum will also be
factors considered in
security selection. The
sub-adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
International Pursues non-dollar Portfolio assets are MSCI
Emerging denominated stocks of primarily invested in International
Markets issuers in emerging stocks of emerging market Emerging
country markets issuers. Markets Free
(generally any country Index
considered to be Stocks with price/earnings
emerging or developing ratios below average for a
by the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the
United Nations). Within Ordinarily, stocks of
this universe, a value issuers in at least three
style of investing is emerging markets will be
employed to select held.
stocks which the sub-
adviser believes are
undervalued. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
Select Equity Combines value and Similar sector weightings S&P 500 Index
growth style as sub- as benchmark, with over-
adviser identifies or under-weighting in
market opportunity. particular securities
within those sectors.
Index Equity Invests all of its The Index Master Portfolio S&P 500 Index
assets indirectly, holds substantially all
through the U.S. Large the stocks of the S&P 500
Company Series (the Index in approximately the
"Index Master same proportions as they
Portfolio") of The DFA are represented in the
Investment Trust Company Index.
in the stocks of the S&P
500 Index using a
passive investment style
that pursues the
replication of the S&P
500 Index return.
Balanced Holds a blend of equity Maintains a minimum 25% S&P 500 and
and fixed income investment in fixed income Salomon Broad
securities to deliver senior securities. Investment
total return through Grade Index
capital appreciation and
current income.
Equity Portion: Combines Equity Portion: Similar
value and growth style sector weightings as
as sub-adviser benchmark, with over- or
identifies market under weighting in
opportunity. particular securities
within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation Dollar- denominated
and security selection investment grade bonds,
across a broad universe including U.S. Government,
of fixed income mortgage-backed, asset-
securities. backed and corporate debt
securities.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
20
<PAGE>
What Additional Investment Policies And Risks Apply?
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The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
EQUITY SECURITIES. During normal market conditions each Portfolio, except the
Balanced Portfolio, will normally invest at least 80% of the value of its total
assets in equity securities. The Portfolios will invest primarily in equity se-
curities of U.S. issuers, except the International Equity and International
Emerging Markets Portfolios, which will invest primarily in foreign issuers.
Equity securities include common stock and preferred stock (including convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depositary receipts.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may
invest in both sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar global instruments. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information con-
cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs,
and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if
such instruments were sponsored by the issuer. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, securities indices, or the yield differential between
two securities, or, in the case of the International Emerging Markets Portfo-
lios, foreign currencies, and may or may not be listed on a securities exchange
and may or may not be issued by the Options Clearing Corporation. A Portfolio
will not purchase put and call options when the aggregate premiums on outstand-
ing 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 op-
tions are not subject to the protections afforded purchasers of listed options
issued by the Options Clearing Corporation, which performs the obligations of
its members if they default.
21
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Portfolio may
do so either to hedge the value of its securities portfolio as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, a Portfolio may utilize futures con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest a portion of
its assets, normally not more than 5% of its net assets, in certain short-term
fixed income obligations in order to maintain liquidity or to invest temporar-
ily uncommitted cash balances.
22
<PAGE>
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase securities from financial institutions subject to the seller's
agreement to repurchase them at an agreed upon time and price. Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities with payment and delivery taking place at a future date (perhaps one or
two months later), and permit a Portfolio to lock in a price or yield on a se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. When-issued and forward commitment transactions involve
the risk, however, that the price or yield obtained in a transaction may be
less favorable than the price or yield available in the market when the securi-
ties delivery takes place. Each Portfolio's when-issued purchases and forward
commitments are not expected to exceed 25% of the value of its total assets ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. A
Portfolio 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 Index Master Portfolio does not intend to invest in reverse repur-
chase agreements. The Balanced Portfolio may utilize reverse repurchase agree-
ments when it is anticipated that the interest income to be earned from the in-
vestment of the proceeds of the transaction is greater than the interest ex-
pense of the transaction. This use of reverse repurchase agreements may be re-
garded as leveraging and, therefore, speculative. Reverse repurchase agreements
involve the risks that the interest income earned in the investment of the pro-
ceeds will be less than the interest expense, that the market value of the se-
curities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase and that the securities may not be re-
turned to the Portfolio. During the time a reverse repurchase agreement is out-
standing, a Portfolio will maintain a segregated account with the Fund's custo-
dian containing cash, U.S. Government or other appropriate liquid securities
having a value at least equal to the repurchase price. A Portfolio's reverse
repurchase agreements, together with any other borrowings, will not exceed, in
the aggregate, 33 1/3% of the value of its
23
<PAGE>
total assets (33% in the case of the Index Master Portfolio). In addition, the
Balanced Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes. Whenever borrowings exceed 5% of a Portfolio's total as-
sets, the Portfolios (other than the Index Master Portfolio and the Balanced
Portfolio) will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) may invest in
securities issued by other investment companies which invest in short-term debt
securities and which seek to maintain a $1.00 net asset value per share. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (SPDRs) and shares of other investment
companies that are structured to seek a similar correlation to the performance
of the S&P 500 Index. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained on a current basis equal in value to at least the market value of the
loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of
the value of its total assets. Securities loans involve risks of delay in re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly loss of rights in the collateral if the borrower of the securities becomes
insolvent.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% (10% with
respect to the Index Master Portfolio) of the value of its net assets in secu-
rities that are illiquid. Variable and floating rate instruments that cannot be
disposed of within seven days, and repurchase agreements and time deposits that
do not provide for payment within seven days after notice, without taking a re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties which are not registered under the Securities Act of 1933 (the "1933 Act")
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
24
<PAGE>
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of smaller-capitalized organizations (less than $1 billion at
the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid-
Cap Growth Equity Portfolio will invest, under normal market conditions, at
least 90% (and in any event at least 65%) or their respective total assets in
equity securities of medium-capitalized organizations (between $1 billion and
$5 billion at the time of purchase). These organizations will normally have
more limited product lines, markets and financial resources and will be more
dependent upon a limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500 (R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and, therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the stocks that comprise the S&P 500 Index, including
mergers, reorganizations and similar transactions and, to the extent necessary,
to provide cash to pay redemptions of the Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio and the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash. S&P has
- ------
* "Standard & Poor's(R)," "S&P," "S&P 500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
25
<PAGE>
no obligation or liability in connection with the administration, marketing or
trading of the Index Equity Portfolio or Index Master Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities involves considerations not typically associated with investing
in securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Portfolio that invests in foreign securities
as measured in U.S. dollars will be affected favorably or unfavorably by
changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios can be expected to be higher than those of Portfolios investing
primarily in domestic securities. The costs attributable to investing abroad
are usually higher for several reasons, such as the
26
<PAGE>
higher cost of investment research, higher cost of custody of foreign securi-
ties, higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
As stated, the International Emerging Markets Portfolio will invest its assets
in countries with emerging economies or securities markets. These countries may
include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub-
lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay-
sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af-
rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and
Zimbabwe. Political and economic structures in many of these countries may be
undergoing significant evolution and rapid development, and these countries may
lack the social, political and economic stability characteristic of more devel-
oped countries. Some of these countries may have in the past failed to recog-
nize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of investments in these countries and the availability to a Portfolio of addi-
tional investments in emerging market countries. The small size and inexperi-
ence of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the
countries illiquid and more volatile than investments in Japan or most Western
European countries. There may be little financial or accounting information
available with respect to issuers located in certain emerging market countries,
and it may be difficult to assess the value or prospects of an investment in
such issuers.
The International Equity Portfolio invests primarily in equity securities of
issuers located in countries included in EAFE. Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United
Kingdom are currently included in EAFE. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) use forward foreign currency exchange contracts to hedge
against movements in the value of foreign currencies (including the European
Currency Unit (ECU)) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A forward for-
eign currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Foreign currency exchange contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow a Portfolio to establish a rate of ex-
change for a future point in time.
27
<PAGE>
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating agency.
If unrated, the securities will be determined at the time of purchase to be of
comparable quality by the sub-adviser. Securities rated "Baa" by Moody's or
"BBB" by S&P, respectively, are generally considered to be investment grade al-
though they have speculative characteristics. If a fixed income security is re-
duced below Baa by Moody's or BBB by S&P, the Portfolio's sub-adviser will dis-
pose of the security in an orderly fashion as soon as practicable. Investments
in securities of foreign issuers, which present additional investment consider-
ations as described above under "International Portfolios," will be limited to
5% of the Portfolio's total assets.
The Balanced Portfolio may make significant investments in residential and com-
mercial mortgage-related and other asset-backed securities (i.e., securities
backed by home equity loans, installment sale contracts, credit card receiv-
ables or other assets) issued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, including guaranteed mortgage pass-through certificates, which provide
the holder with a pro rata interest in the underlying mortgages, adjustable
rate mortgage-related securities ("ARMs") and collateralized mortgage obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers of CMOs frequently elect to be taxed as a pass-through entity known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multi-
ple classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the
28
<PAGE>
underlying obligations. If the servicer were to sell these obligations to an-
other party, there is a risk that the purchaser would acquire an interest supe-
rior to that of the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustees for the holders of the
automobile receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility
that recoveries on repossessed collateral may not, in some cases, be able to
support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may be prepaid at any time be-
cause the underlying assets (i.e. loans) generally may be prepaid at any time.
The average life of a mortgage-related instrument, in particular, is likely to
be substantially less than the original maturity of the mortgage pools under-
lying the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to ex-
perience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally be at lower rates than the rates that were carried by the obligations that
have been prepaid. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank, National Association
("PNC Bank") or its affiliates. It is possible that, under some circumstances,
PNC Mortgage Securities Corp. or its affiliates could have interests that are
in conflict with the holders of these mortgage-backed securities, and such
holders could have rights against PNC Mortgage Securities Corp. or its affili-
ates.
The Balanced Fund may also purchase obligations issued or guaranteed by the
U.S. Government and U.S. Government agencies and instrumentalities. Obligations
of certain agencies and instrumentalities of the U.S. Government are supported
by the full faith and credit of the U.S. Treasury. Others are supported by the
right of the issuer to borrow from the U.S. Treasury; and still others are sup-
ported only by the credit of the agency or instrumentality issuing the obliga-
tion. No assurance can be given that the U.S. Government will provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law. Certain U.S.
29
<PAGE>
Treasury and agency securities may be held by trusts that issue participation
certificates (such as Treasury income growth receipts ("TIGRs") and certifi-
cates of accrual on Treasury certificates ("CATs")). The Balanced Portfolio may
purchase these certificates, as well as Treasury receipts and other stripped
securities, which represent beneficial ownership interests in either future in-
terest payments or the future principal payments on U.S. Government obliga-
tions. These instruments are issued at a discount to their "face value" and may
(particularly in the case of stripped mortgage-backed securities) exhibit
greater price volatility than ordinary debt securities because of the manner in
which their principal and interest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments) and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's sub-adviser believes that their return, on a
pre-tax basis, will be comparable to the returns of other permitted invest-
ments. Dividends paid by the Portfolio that are derived from interest on munic-
ipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-backed or other security concurrently with an agreement by the Portfolio
to repurchase a similar security at a later date at an agreed-upon price. The
securities that are repurchased will bear the same interest rate and stated ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in additional instruments for the Portfolio, and the income
from these investments will generate income for the Portfolio. If such income
does not exceed the income, capital appreciation and gain or loss that would
have been realized on the securities sold as part of the dollar roll, the use
of this technique will diminish the investment performance of the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
Government securities or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
30
<PAGE>
The market value of the Balanced Portfolio's investments in fixed income secu-
rities will change in response to changes in interest rates and the relative
financial strength of each issuer. During periods of falling interest rates,
the values of long-term fixed income securities generally rise. Conversely,
during periods of rising interest rates the values of such securities generally
decline. Changes in the financial strength of an issuer or changes in the rat-
ings of any particular security may also affect the value of these investments.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Mid-Cap Value Equity and Mid-Cap
Growth Equity Portfolios will not exceed 100%. The past portfolio turnover
rates of the other Portfolios are set forth above under "What Are The Portfo-
lios' Financial Highlights?" A Portfolio's annual portfolio turnover rate will
not be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover rates (i.e., over 100%) will generally result in
higher transaction costs to a Portfolio and may result in the realization of
short-term capital gains that are taxable to shareholders as ordinary income.
31
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. No assurance
can be provided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of a Portfolio's total assets may be invested without regard
to this 5% limitation;
(2) subject to the foregoing 25% exception (other than with respect to the In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets
(33% of net assets in the case of the Index Master Portfolio) at the time
of such borrowing.
These investment limitations are applied at the time investment securities are
purchased. Notwithstanding the investment limitations, the Index Equity Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions as that Portfolio.
32
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund and of The DFA Investment
TRUSTEES Trust Company (in which the assets of the Fund's Index Equity
Portfolio are invested) are managed under the direction of their
separate Boards of Trustees. The following persons currently
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional in-
formation about the trustees and officers of both the Fund and
The DFA Investment Trust Company.
ADVISER AND
SUB- The Adviser to Compass Capital Funds is PNC Asset Management
ADVISERS Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund family (except the Index Equity Portfolio) is managed by a
specialized portfolio manager who is a member of one of PAMG's
portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ----------- -----------------
<S> <C> <C>
Large Cap Value Equity PCM(/1/) Benedict E. Capaldi; Vice President
of PCM since 1995; prior to joining
PCM, Senior Vice President and
portfolio manager with Radnor
Capital Management, President of
Chestnut Hill Advisors, Inc. and
Managing Director of Brandywine
Asset Management, Inc.; Portfolio
manager since 1995.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------ -----------------
<S> <C> <C>
Large Cap Growth Equity PEAC(/2/) Robert K. Urquhart; investment
manager with PEAC since 1995; prior
to joining PEAC, Chief Investment
Officer and partner of Cole
Financial Group, Inc., a partner of
Seacliff Holdings, Inc. and of RCM
Capital Management; Portfolio
manager since 1995.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice
President of PCM since July 1996;
prior to joining PCM, Portfolio
Manager and Research Analyst with
Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank, National
Association since 1986; Portfolio
manager since its inception.
Mid-Cap Value Equity PCM(/1/) Benedic E. Capaldi (see above);
Portfolio co-manager since its
inception.
Daniel B. Egan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; Portfolio co-manager since its
inception.
Mid-Cap Growth Equity PEAC(/2/) William J. Wykle (see above);
Portfolio co-manager since its
inception.
William C. McVail; investment
manager with PEAC since 1994; prior
to joining PEAC, equity and fixed
income analyst with PNC Bank; since
its inception.
International Equity CastleInternational(/4/) Gordon Anderson; Managing and
Investment Director since 1996;
prior to joining
CastleInternational, Investment
Director of Dunedin Fund Managers
Ltd.; Portfolio manager since 1996.
International Emerging CastleInternational(/4/) Euan Rae; Senior Investment Manager
Markets since 1996; prior to joining
CastleInternational, Head of
Emerging Markets at Dunedin Fund
Managers Ltd. and investment manager
with Edinburgh Fund Managers;
Portfolio manager since 1996.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- -------------------- -----------------
<S> <C> <C>
Select Equity PCM(/1/) Daniel B. Eagan (see above);
Portfolio manager since 1995.
Balanced PCM and R. Andrew Damm; senior investment
BlackRock(/1/) (/3/) strategist with PAMG since 1995;
portfolio manager with PNC Bank from
1988 to 1995; Portfolio co-manager
since 1996.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since 1995.
Keith T. Anderson; Managing Director
and co-chair of Portfolio Management
Group and Investment Strategy
Committee of BlackRock since 1988;
Portfolio co-manager since 1995.
</TABLE>
(1) Provident Capital Management, Inc. ("PCM") has its primary offices at 1600
Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1600 Market
Street, 27th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary offices
at 345 Park Avenue, New York, New York 10154.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary offices at 7 Castle Street, Edinburgh, Scotland, EH2 3AH.
PAMG was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103. PAMG is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank
holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, computed
daily on a portfolio-by-portfolio basis and payable monthly, at
the maximum annual rates set forth below. As stated under "What
Are the Expenses of the Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG and do not rep-
resent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH
PORTFOLIO EXCEPT THE INDEX EQUITY, MID-CAP
VALUE EQUITY, MID-CAP GROWTH EQUITY AND THE
INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
Average Daily Net Assets
first $1 billion .550% .400%
$1 billion--$2 billion .500 .350
$2 billion--$3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
35
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP
VALUE EQUITY AND MID-CAP GROWTH EQUITY PORTFOLIOS
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
Average Daily Net Assets
first $1 billion .800% .650%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .500
greater than $3 billion .625 .475
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EQUITY PORTFOLIO
(BEFORE WAIVERS)
<CAPTION>
Investment Sub-Advisory
Advisory Fee Fee
------------ ------------
<S> <C> <C>
Average Daily Net Assets
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EMERGING MARKETS PORTFOLIO
(BEFORE WAIVERS)
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 0.950
</TABLE>
Although the advisory fee rate payable by the International
Emerging Markets Portfolio is higher than the rate payable by
mutual funds investing in domestic securities, the Fund be-
lieves it is comparable to the rates paid by many other funds
with similar investment objectives and policies and is appro-
priate for the Portfolio in light of its investment objective
and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Large Cap Value Equity Portfolio, .49%; Large Cap Growth
Equity Portfolio, .49%; Small Cap Value
36
<PAGE>
Equity Portfolio, .54%; Small Cap Growth Equity Portfolio, .54%;
International Equity Portfolio, .68%; International Emerging
Markets Portfolio, 1.15%; Select Equity Portfolio, .49%; and
Balanced Portfolio, .49%. For the period from October 1, 1995
through June 1, 1996, the Index Equity Portfolio paid investment
advisory fees to its former investment adviser at the annual
rate of % of its average daily net assets.
The Portfolios' sub-advisers strive to achieve best execution on
all transactions. Infrequently, brokerage transactions for the
Portfolios may be directed to registered broker/dealers who have
entered into dealer agreements with Compass Capital's distribu-
tor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
MASTER adviser to the Index Master Portfolio.
PORTFOLIO
DFA was organized in May 1981 and is engaged in the business of
providing investment management services to institutional in-
vestors. DFA's assets under management totalled approximately
$18.5 billion at October 31, 1996. David G. Booth and Rex A.
Sinquefield, both of whom are trustees and officers of The DFA
Investment Trust Company and directors, officers and sharehold-
ers of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made by
the Investment Committee of DFA, which meets on a regular basis
and also as needed to consider investment issues. The Investment
Committee is composed of certain officers and directors of DFA
who are elected annually. DFA provides the Index Master Portfo-
lio with a trading department and selects brokers and dealers to
effect securities transactions.
For the investment advisory services provided to the Index Mas-
ter Portfolio under the advisory agreement, DFA is entitled to
receive a fee at the annual rate of .025% of the Index Master
Portfolio's average daily net assets. For the Index Master Port-
folio's fiscal year ended November 30, 1996, DFA received a
monthly fee for its investment advisory services which, on an
annual basis, equaled .025% of the Index Master Portfolio's net
assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
37
<PAGE>
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating
to the maintenance of financial records and fund accounting.
As compensation for these services, CCG is entitled to receive
a fee, computed daily and payable monthly, at an annual rate
of .03% of each Portfolio's average daily net assets, and PFPC
and CDI are entitled to receive a combined fee, computed daily
and payable monthly, at an annual rate of .20% of the first
$500 million of each Portfolio's average daily net assets,
.18% of the next $500 million of each Portfolio's average
daily net assets, .16% of the next $1 billion of each Portfo-
lio's average daily net assets and .15% of each Portfolio's
average daily net assets in excess of $2 billion. From time to
time the Administrators may waive some or all of their admin-
istration fees from a Portfolio. PFPC serves as the adminis-
trative services, dividend disbursing and transfer agent to
the Index Master Portfolio, for which PFPC is entitled to com-
pensation at the annual rate of .015% of the Index Master
Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The
Expenses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER
SERVICING The Fund intends to enter into service arrangements with in-
stitutional investors ("Institutions") (including PNC Bank and
its affiliates) which provide that the Institutions will ren-
der support services to their customers who are the beneficial
owners of Service Shares. These services are intended to sup-
plement the services provided by the Fund's Administrators and
transfer agent to the Fund's shareholders of record. In con-
sideration for payment of a shareholder processing fee of up
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 the following
services: processing purchase and redemption requests from
customers and placing orders with the Fund's transfer agent or
the distributor; processing dividend payments from the Fund on
behalf of customers; providing sub-accounting with respect to
Service Shares beneficially owned by customers or the informa-
tion necessary for sub-accounting; and providing other similar
services. In consideration for payment of a separate share-
holder servicing fee of up to .15% (on an annualized basis) of
the average daily net asset value of Service Shares owned ben-
eficially by their customers, Institutions may
38
<PAGE>
provide one or more of these additional services to such custom-
ers: responding to customer inquiries relating to the services
performed by the Institution and to customer inquiries concern-
ing their investments in Service Shares; assisting customers in
designating and changing dividend options, account designations
and addresses; and providing other similar shareholder liaison
services. Customers who are beneficial owners of Service Shares
should read this Prospectus in light of the terms and fees gov-
erning their accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment
of fiduciary funds in Portfolio shares. Institutions, including
banks regulated by the Comptroller of the Currency, Federal Re-
serve Board and state banking commissions, and investment advis-
ers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor or state securities commissions,
are urged to consult their legal counsel before entering into
agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Institutions under their service agreements will not be prohib-
ited under these laws. Under state securities laws, banks and
financial institutions that receive payments from the Fund may
be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to the investment adviser and
the Administrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servicing
and processing fees, fees and expenses in registering and quali-
fying the Portfolios and their shares for distribution under
Federal and state securities laws, expenses of preparing pro-
spectuses and statements of additional information and of print-
ing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to
shareholder reports, shareholder meetings and proxy solicita-
tions, insurance premiums, the expense of independent pricing
services, and other expenses which are not expressly assumed by
PAMG or the Fund's service providers under their agreements with
the Fund. Any general expenses of the Fund that do not belong to
a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board of
Trustees in a manner the Board determines to be fair and equita-
ble.
39
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous
basis by CDI as distributor (the "Distributor"). CDI maintains its principal
offices at 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Service Shares.
PURCHASE OF SHARES. Service Shares are offered without a sales load to
Institutions acting on behalf of their customers, as well as to certain persons
who were shareholders of Compass Capital Group of Funds at the time of its
combination with The PNC(R) Fund during the first quarter of 1996. Service
Shares will normally be held of record by Institutions or in the names of
nominees of Institutions. Share purchases are normally effected through a
customer's account at an Institution through procedures established in
connection with the requirements of the account. In these cases, confirmations
of share purchases and redemptions will be sent to the Institutions. Beneficial
ownership of shares will be recorded by the Institutions and reflected in the
account statements provided by such Institutions to their customers. Investors
wishing to purchase shares should contact their Institutions.
Service Shares are sold at their net asset value per share next computed after
an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern
Time) on a Business Day are priced the same day. A "Business Day" is any week-
day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of Philadelphia (the "FRB") are open for business. Purchase orders may be
placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after
4:00 p.m. (Eastern Time) are priced on the following Business Day.
Payment for Service Shares must normally be made in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information. The minimum initial investment is $5,000;
however, Institutions may set a higher minimum for their customers. There is no
minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for Service Shares.
REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in
accordance with the procedures applicable to their accounts with the
Institutions. These procedures will vary according to the type of account and
the Institution involved, and customers should consult their account managers
in this regard. It is the responsibility of Institutions to transmit
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<PAGE>
redemption orders to PFPC and credit their customers' accounts with redemption
proceeds on a timely basis. In the case of shareholders holding share
certificates, the certificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the Administrators and the
Distributor will employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. The Fund and its service providers will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed by the Fund, although Institutions may charge their customer accounts for
redemption services. Information relating to such redemption services and
charges, if any, should be obtained by customers from their Institutions.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may redeem Service Shares in any Portfolio account if the account bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count falls below that minimum, the customer may be obligated to redeem all or
part of his or her shares in the Portfolios to the extent necessary to maintain
the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
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<PAGE>
What Special Purchase And Redemption Procedures May Apply?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC(R) Fund
may also purchase and redeem Service Shares of the same Portfolio and for the
same account in which they held shares on that date through the procedures de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. The minimum investment
is $100. Purchases through the Automatic Investment Plan described below are
subject to a lower purchase minimum. The name of the Portfolio with respect to
which shares are purchased must appear on the check or Federal Reserve Draft.
Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders which
are received by PFPC, together with payment, before the close of regular trad-
ing hours on the NYSE (currently 4:00 p.m. Eastern Time) on any Business Day
(as defined above) are priced according to the net asset value next determined
on that day.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an investor
in shares of a Portfolio may arrange for periodic investments in that Portfolio
through automatic deductions from a checking or savings account by completing
the AIP Application Form which may be obtained from PFPC. The minimum pre-au-
thorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to Compass Capital Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Dela-
ware 19899-8907.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding share certificates must send
their certificates with the redemption request. Additional documentary evidence
of authority is required by PFPC in the event redemption is requested by a cor-
poration, partnership, trust, fiduciary, executor or administrator.
If a shareholder has given authorization for expedited redemption, shares can
be redeemed by telephone and the proceeds sent by check to the shareholder or
by Federal wire transfer to a
42
<PAGE>
single previously designated bank account. Once authorization is on file, PFPC
will honor requests by any person by telephone at (800) 441-7762 (in Delaware
call collect (302) 791-1194) or other means. The minimum amount that may be
sent by check is $500, while the minimum amount that may be wired is $10,000.
Compass Capital reserves the right to change these minimums or to terminate
these redemption privileges. If the proceeds of a redemption would exceed
$25,000, the redemption request must be in writing and will be subject to the
signature guarantee requirement described above. This privilege may not be used
to redeem shares in certificated form.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed by the shareholder's bank. To change the name of the single designated
bank account to receive wire redemption proceeds, it is necessary to send a
written request (with a guaranteed signature as described above) to Compass
Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, the Administrators and the Distributor
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions reasonably believed to be genuine in accordance with
such procedures.
Compass Capital offers a Systematic Withdrawal Plan ("SWP") which may be used
by investors who wish to receive regular distributions from their accounts.
Upon commencement of the SWP, the account must have a current value of $10,000
or more in a Portfolio. Shareholders may elect to receive automatic cash pay-
ments of $100 or more either monthly, every other month, quarterly, three times
a year, semi-annually, or annually. Automatic withdrawals are normally proc-
essed on the 25th day of the applicable month or, if such day is not a Business
Day, on the next Business Day and are paid promptly thereafter. An investor may
utilize the SWP by completing the SWP Application Form which may be obtained
from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
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<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio (including, for the Index Equity Portfolio,
all of its shares in the Index Master Portfolio) that are allocated to its
Service Shares, less the liabilities charged to its Service Shares, by the num-
ber of its Service Shares that are outstanding. The net asset value per share
of the Index Master Portfolio is calculated as of the close of the NYSE by di-
viding the total market value of its investments and other assets, less any li-
abilities, by the total outstanding shares of the Index Master Portfolio.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees or, in the case of the Index Master Portfolio,
The DFA Investment Trust Company's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless a Portfolio's sub-adviser under the super-
vision of the Board of Trustees determines such method does not represent fair
value.
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<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund will distribute substantially all of its net invest-
ment income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to in-
vestors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the
end of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by each Portfolio of the Fund at least annu-
ally. The period for which dividends are payable and the time for payment are
subject to change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional Service Shares of the relevant Portfolio, unless a shareholder elects to
receive distributions in cash. This election, or any revocation thereof, must
be made in writing to PFPC, and will become effective with respect to distribu-
tions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses of
the Index Master Portfolio. This net income, less the Index Equity Portfolio's
expenses incurred in operations, is the Index Equity Portfolio's net investment
income from which dividends are distributed as described above. The Index Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
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<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities may be subject to foreign withholding taxes or other taxes. So long as
more than 50% of the value of a Portfolio's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Port-
folio may elect, for U.S. Federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid by its shareholders. It is possible that the Interna-
tional Equity and International Emerging Markets Portfolios will make this
election in certain years. If a Portfolio makes the election, the amount of
such foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and each
46
<PAGE>
shareholder will be entitled either (a) to credit a proportionate amount of
such taxes against a shareholder's U.S. Federal income tax liabilities, or (b)
if a shareholder itemizes deductions, to deduct such proportionate amounts from
U.S. Federal taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. The application of state and local income taxes to investments in
the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
47
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Service Shares of the eleven Portfolios described here-
in.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. In addition, each class of Investor
Shares is sold with different sales charges. Because of these "class expenses"
and sales charges, the performance of a Portfolio's Institutional Shares is ex-
pected to be higher than the performance of the Portfolio's Service Shares, and
the performance of both the Institutional Shares and Service Shares of a Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. The performance of each class of Investor Shares
may be different. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan and an
automatic withdrawal plan. For further information regarding the Fund's Insti-
tutional or Investor Share classes, contact PFPC at (800) 441-7764 (Institu-
tional Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On , 1996, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The
48
<PAGE>
Index Equity Portfolio purchases shares of the Index Master Portfolio at net
asset value. The net asset value of the Index Equity Portfolio responds to in-
creases and decreases in the value of the Index Master Portfolio's securities
and to the expenses of the Index Master Portfolio allocable to the Index Equity
Portfolio (as well as its own expenses). The Index Equity Portfolio may with-
draw its investment in the Index Master Portfolio at any time upon 30 days no-
tice to the Index Master Portfolio if the Board of Trustees of the Fund deter-
mines that it is in the best interests of the Index Equity Portfolio to do so.
Upon withdrawal, the Board of Trustees would consider what action might be tak-
en, including the investment of all of the assets of the Index Equity Portfolio
in another pooled investment entity having the same investment objective as the
Index Equity Portfolio or the hiring of an investment adviser to manage the In-
dex Equity Portfolio's assets in accordance with the investment policies de-
scribed above with respect to the Index Equity Portfolio.
The Index Master Portfolio is a separate series of The DFA Investment Trust
Company (the "Trust"), which is a business trust created under the laws of the
State of Delaware. The Index Equity Portfolio and other institutional investors
that may invest in the Index Master Portfolio from time to time (e.g. other in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
Master Portfolio have the same limitation of personal liability as shareholders
of a Delaware corporation. Accordingly, Fund management believes that neither
the Index Equity Portfolio nor its shareholders will be adversely affected by
reason of the Index Equity Portfolio's investing in the Index Master Portfolio.
The shares of the Index Master Portfolio are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns may differ from those of the Index Equity Portfolio. While investment in
the Index Master Portfolio by other institutional investors offers potential
benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act and (iii) on such other matters as the trustees of
the Trust may consider necessary or desirable. In addition, approval of the
shareholders of the Trust is required to adopt any amendments to the Agreement
and Declaration of Trust of the Trust which would adversely affect to a mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Port-
49
<PAGE>
folio's shareholders will also be asked to vote on any proposal to change a
fundamental policy (i.e. a policy that may be changed only with the approval of
shareholders) of the Index Master Portfolio.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity Portfolio, if required under the 1940 Act or other applicable law, would
hold a meeting of its shareholders and would cast its votes proportionately as
instructed by Index Equity Portfolio shareholders. In such cases, shareholders
of the Index Equity Portfolio, in effect, would have the same voting rights
they would have as direct shareholders of the Index Master Portfolio.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees fails to approve a similar change in the investment objective of the Index
Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its
investment in the Index Master Portfolio and either seek to invest its assets
in another registered investment company with the same investment objective as
the Index Equity Portfolio, which might not be possible, or retain an invest-
ment adviser to manage the Index Equity Portfolio's assets in accordance with
its own investment objective, possibly at increased cost. A withdrawal by the
Index Equity Portfolio of its investment in the Index Master Portfolio could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Index Equity Portfolio. Should such a distribution occur,
the Index Equity Portfolio could incur brokerage fees or other transaction
costs in converting such securities to cash in order to pay redemptions. In ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity of the Portfolio.
The conversion of the Index Equity Portfolio into a feeder fund of the Index
Master Portfolio was approved by shareholders of the Index Equity Portfolio at
a meeting held on November 30, 1995. The policy of the Index Equity Portfolio,
and other similar investment companies, to invest their investable assets in
funds such as the Index Master Portfolio is a relatively recent development in
the mutual fund industry and, consequently, there is a lack of substantial ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Master Index Portfolio, please
contact DFA at (310) 395-8005.
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<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Service Shares of the Portfolios may be quoted in
advertisements and communications to shareholders. Total return will be calcu-
lated on an average annual total return basis for various periods. Average an-
nual total return reflects the average annual percentage change in value of an
investment in Service Shares of a Portfolio over the measuring period. Total
return may also be calculated on an aggregate total return basis. Aggregate to-
tal return reflects the total percentage change in value over the measuring pe-
riod. Both methods of calculating total return assume that dividend and capital
gain distributions made by a Portfolio with respect to its Service Shares are
reinvested in shares of the same class.
The yield of Service Shares of the Balanced Portfolio is computed by dividing
the net income allocated to its Service Shares during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis.
The performance of a Portfolio's Service Shares may be compared to the perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Portfolio's Service Shares may be com-
pared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and to the per-
formance of the Dow Jones Industrial Average, the "stocks, bonds and inflation
Index" published annually by Ibbotson Associates, the Lipper International Fund
Index, the Lehman Government Corporate Bond Index and the Financial Times World
Stock Index, as well as the benchmarks attached to this Prospectus. Performance
information may also include evaluations of the Portfolios and their Service
Shares published by nationally recognized ranking services, and information as
reported in financial publications such as Business Week, Fortune, Institu-
tional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Service Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for
Service Shares of a Portfolio cannot necessarily be used to compare an invest-
ment in such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in
Service Shares will not be included in the Portfolio performance calculations.
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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 (888) 4COMPASS.
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>
Large Cap Value Equity Russell 1000 An index composed of those Russell 1000
Value Index securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Large Cap Growth Equity Russell 1000 The Russell 1000 Growth Index contains
Growth Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Equity Russell 2000 An index of the smallest 2000 companies in
Index the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Growth Equity Russell 2000 An index composed of those Russell 2000
Growth Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Equity Russell Midcap The Russell Midcap Value Index consists of
Value Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Equity Russell Midcap The Russell Midcap Growth Index consists of
Growth Index the bottom 800 securities of the Russell
1000 Index with greater-than-average growth
orientation as ranked by total market
capitalization.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
International Emerging MSCI Emerging The Morgan Stanley Capital International
Markets Markets Free (MSCI) Emerging Markets Free Index (EMF) is
Index a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, Africa
and the Pacific Basin. The MSCI EMF Index
excludes closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad An unmanaged index of 3500 bonds. The Broad
Investment Investment Grade Index is market
Grade Index capitalization weighted and includes
Treasury, Government sponsored mortgages
and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
54
<PAGE>
The Compass Capital Funds
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-----------------
LARGE CAP VALUE EQUITY PORTFOLIO
LARGE CAP GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
SERVICE SHARES
Prospectus
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF THE LARGE CAP VALUE EQUITY PORTFOLIO,
LARGE CAP GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY PORTFOLIO,
MID-CAP GROWTH EQUITY PORTFOLIO, SELECT EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO, INDEX EQUITY PORTFOLIO, INTERNATIONAL EMERGING
MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund.................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance........................... What Are The Portfolios'
Financial Highlights?
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Equity Portfolios Institutional Shares
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Institutional Shares of eleven of those portfolios
(the "Portfolios"):
Large Cap Value Equity Portfolio
[_] Large Cap Growth Equity Portfolio
[_] Small Cap Value Equity Portfolio
[_] Small Cap Growth Equity Portfolio
[_] Mid-Cap Value Equity Portfolio
[_] Mid-Cap Growth Equity Portfolio
[_] International Equity Portfolio
[_] International Emerging Markets Portfolio
[_] Select Equity Portfolio
[_] Index Equity Portfolio
[_] Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Commis-
sion (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 Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
The Index Equity Portfolio seeks to achieve its investment ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios invest in non-U.S. international stocks and one Portfolio
invests in a combination of U.S. stocks and bonds. A detailed
description of each Portfolio begins on page 18 and a summary of
each Performance Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Large Cap Value Eq- Russell 1000 Value
uity Index Growth and Income
Large Cap Growth Eq- Russell 1000 Growth
uity Index Growth
Small Cap Value Eq-
uity Russell 2000 Index Small Company Growth
Small Cap Growth Eq- Russell 2000 Growth
uity Index Small Company Growth
Russell Midcap Value
Mid-Cap Value Equity Index Midcap
Mid-Cap Growth Equity Russell Midcap Growth
Index Midcap
International Equity EAFE Index International
MSCI Emerging Markets
International Emerg- Emerging Markets Free
ing Markets Index
Select Equity S&P 500 Index Growth and Income
Index Equity S&P 500 Index S&P 500 Index
Balanced S&P 500 Index and Balanced
Salomon Broad
Investment Grade
Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visors Company ("PEAC"), BlackRock Financial Management, Inc.
("BlackRock") and CastleInternational Asset Management Limited
("CastleInternational") serve as sub-advisers to different Port-
folios as described in this Prospectus. Dimensional Fund Advi-
sors Inc. ("DFA") serves as investment adviser to the Index Mas-
ter Portfolio.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
EQUITY We intend this document to be an effective tool as you explore
PORTFOLIOS different directions in equity investing.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, foreign securities and illiquid securities; enter into
repurchase and reverse repurchase agreements; lend portfolio
securities to third parties; and enter into futures contracts
and options and forward currency exchange contracts. These and
the other investment practices set forth below, and their as-
sociated risks, deserve careful consideration. Certain risks
associated with international investments are heightened be-
cause of currency fluctuations and investments in emerging
markets. See "What Additional Investment Policies And Risks
Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "HOW ARE SHARES PURCHASED AND REDEEMED?"
CAPITAL FUNDS
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 8
What Are The Portfolios?..................................... 18
What Are The Differences Among The Portfolios?............... 19
What Additional Investment Policies And Risks Apply?......... 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 32
Who Manages The Fund?........................................ 33
How Are Shares Purchased And Redeemed?....................... 40
How Is Net Asset Value Calculated?........................... 42
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 43
How Are Fund Distributions Taxed?............................ 44
How Is The Fund Organized?................................... 46
How Is Performance Calculated?............................... 49
How Can I Get More Information?.............................. 51
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a per-
centage of average daily net assets. Because the Mid-Cap Value Equity Portfolio
and Mid-Cap Growth Equity Portfolio are new, the figures shown for these two
Portfolios under "Other expenses" are estimates for the current fiscal year. An
example based on the summary is also shown.
<TABLE>
<CAPTION>
LARGE LARGE SMALL SMALL INTER-
CAP CAP CAP CAP MID-CAP MID-CAP INTER- NATIONAL
VALUE GROWTH VALUE GROWTH VALUE GROWTH NATIONAL EMERGING SELECT
EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY MARKETS EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/1/)(/2/) .49% .49% .54% .54% .50% .50% .70% 1.15% .50%
Other operating
expenses .26 .26 .32 .32 .36 .36 .36 .63 .25
---- ---- ---- ---- ---- ---- ----- ----- ----
Administration
fees (after fee
waivers)(/1/) .18 .17 .22 .22 .10 .10 .18 .23 .17
Other expenses .08 .09 .10 .10 .26 .26 .18 .40 .08
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/1/) .75% .75% .86% .86% .86% .86% 1.06% 1.78% .75%
==== ==== ==== ==== ==== ==== ===== ===== ====
<CAPTION>
INDEX
EQUITY BALANCED
PORTFOLIO+ PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/1/)(/2/) .025% .49%
Other operating
expenses .155 .30
------ -----
Administration
fees (after fee
waivers)(/1/) .045 .18
Other expenses .110 .12
----- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/1/) .18% .79%
====== =====
</TABLE>
(1) Without waivers, advisory fees would be .80% for the Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios, .75%, 1.25%, and .025%, respectively,
for the International Equity, International Emerging Markets and Index Eq-
uity Portfolios and .55% for each of the other Portfolios and administra-
tion fees would be .21% for the Large Cap Value Equity Portfolio and .23%
for each other Portfolio. PAMG and the Portfolios' administrators are under
no obligation to waive or continue waiving their fees, but have informed
the Fund that they expect to waive fees as necessary to maintain the Port-
folios' total operating expenses during the remainder of the current fiscal
year at the levels set forth in the table. Without waivers, "Other operat-
ing expenses" would be .29%, .31%, .31%, .33%, .54%, .54%, .42%, .63%,
.32%, .475% and .35%, respectively, and "Total Portfolio operating ex-
penses" would be .84%, .86%, .86%, .88%, 1.34%, 1.34%, 1.17%, 1.88%, .87%,
.50% and .90%, respectively.
(2) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
6
<PAGE>
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Value Equity $ 8 $24 $42 $ 93
Growth Equity 8 24 42 93
Small Cap Value Equity 9 27 48 106
Small Cap Growth Equity 9 27 48 106
Mid-Cap Value Equity 9 27 48 106
Mid-Cap Growth Equity 9 27 48 106
International Equity 11 34 58 129
International Emerging Markets 18 56 96 209
Select Equity 8 24 42 93
Index Equity 2 6 10 23
Balanced 8 26 44 99
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses (including the Index Equity Portfolio's pro rata
share of the Index Master Portfolio's advisory fees and operating expenses) an
investor will bear either directly or indirectly. They do not reflect any
charges that may be imposed by affiliates of the Portfolios' investment adviser
or other institutions directly on their customer accounts in connection with
investments in the Portfolios.
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are approximately equal to the
expenses which the Index Equity Portfolio would incur if the Fund retained the
services of an investment adviser for the Index Equity Portfolio and the assets
of the Index Equity Portfolio were invested directly in the type of securities
held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
7
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountant. This financial information
should be read together with those financial statements. Fur-
ther information about the performance of the Portfolios is
available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder
reports may be obtained from the Fund free of charge by call-
ing (800) 441-7764. Information concerning the historical in-
vestment results of Institutional Shares of the Index Equity
Portfolio reflects the financial experience of that Portfolio
prior to its conversion on June 2, 1996 to a feeder portfolio
of the Index Master Portfolio. During the periods presented
the Mid-Cap Value Equity Portfolio and Mid-Cap Growth Equity
Portfolio had not commenced investment operations.
8
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP VALUE EQUITY PORTFOLIO
(FORMERLY THE VALUE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.92 $ 11.62 $ 11.68 $ 9.78 $ 10.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.35 0.34 0.27 0.22 0.12
Net gain (loss) on
investments (both
realized and
unrealized) 2.41 2.54 0.16 1.91 (0.24)
-------- -------- -------- -------- --------
Total from investment
operations 2.76 2.88 0.43 2.13 (.12)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.36) (0.33) (0.27) (0.23) (0.10)
Distributions from net
realized capital gains (0.97) (0.25) (0.22) - - - -
-------- -------- -------- -------- --------
Total distributions (1.33) (0.58) (0.49) (0.23) (0.10)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 15.35 $ 13.92 $ 11.62 $ 11.68 $ 9.78
======== ======== ======== ======== ========
Total return 21.01% 25.73% 3.76% 21.92% 1.19%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $731,024 $508,273 $577,996 $432,776 $322,806
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.75% 0.67% 0.65% 0.80% 0.85%/2/
Before
advisory/administration
fee waivers 0.84% 0.81% 0.81% 0.83% 0.85%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.40% 2.68% 2.44% 2.07% 2.62%/2/
Before
advisory/administration
fee waivers 2.32% 2.53% 2.28% 2.04% 2.62%/2/
PORTFOLIO TURNOVER RATE 64% 12% 11% 11% 13%
AVERAGE COMMISSION
RATE/3/ $ 0.0556 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
9
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP GROWTH EQUITY PORTFOLIO
(FORMERLY THE GROWTH EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.03 $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98 $ 10.00
-------- -------- ------- -------- ------- ------- -------
Income from investment
operations
Net investment income 0.08 0.13 0.06 0.06 0.21 0.24 0.31
Net gain (loss) on
investments (both
realized and
unrealized) 2.29 2.88 (1.34) 2.07 0.30 1.51 (0.26)
-------- -------- ------- -------- ------- ------- -------
Total from investment
operations 2.37 3.01 (1.28) 2.13 0.51 1.75 0.05
-------- -------- ------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.06) (0.17) (0.01) (0.07) (0.37) (0.32) (0.07)
Distributions from
capital - - - - - - (0.01) - - - - - -
Distributions from net
realized capital gains (0.38) - - (0.10) (0.39) (0.50) (1.13) - -
-------- -------- ------- -------- ------- ------- -------
Total distributions (0.44) (0.17) (0.11) (0.47) (0.87) (1.45) (0.07)
-------- -------- ------- -------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 14.96 $ 13.03 $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98
======== ======== ======= ======== ======= ======= =======
Total return 18.67% 29.88% (11.14)% 22.18% 4.98% 19.47% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $481,171 $211,543 $97,834 $100,049 $58,372 $54,912 $39,790
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.75% 0.67% 0.65% 0.81% 0.85% 0.85% 0.85%/2/
Before
advisory/administration
fee waivers 0.86% 0.85% 0.89% 0.87% 0.86% 0.91% 0.88%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.63% 1.20% 0.62% 0.50% 2.07% 2.59% 2.75%/2/
Before
advisory/administration
fee waivers 0.51% 1.01% 0.38% 0.44% 2.06% 2.53% 2.72%/2/
PORTFOLIO TURNOVER RATE 58% 55% 212% 175% 162% 211% 149%
AVERAGE COMMISSION
RATE/3/ $ 0.0598 N/A N/A N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
10
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/13/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 15.16 $ 13.62 $ 13.08 $ 10.14 $ 10.00
-------- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.10 0.06 0.04 0.04 0.02
Net gain (loss) on
investments (both
realized and
unrealized) 1.70 2.17 0.77 3.02 0.13
-------- -------- -------- -------- -------
Total from investment
operations 1.80 2.23 0.81 3.06 0.15
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.11) (0.08) (0.02) (0.04) (0.01)
Distributions from net
realized capital gains (0.87) (0.61) (0.25) (0.08) - -
-------- -------- -------- -------- -------
Total distributions (0.98) (0.69) (0.27) (0.12) (0.01)
-------- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ 15.98 $ 15.16 $ 13.62 $ 13.08 $ 10.14
======== ======== ======== ======== =======
Total return 12.64% 17.43% 6.28% 30.36% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $214,828 $168,334 $168,360 $128,805 $75,045
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.85% 0.75% 0.73% 0.83% 0.85%/2/
Before
advisory/administration
fee waivers 0.86% 0.84% 0.85% 0.87% 0.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.68% 0.44% 0.28% 0.31% 0.51%/2/
Before
advisory/administration
fee waivers 0.67% 0.35% 0.16% 0.27% 0.47%/2/
PORTFOLIO TURNOVER RATE 50% 31% 18% 41% 17%
AVERAGE COMMISSION
RATE/3/ $0.0580 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
11
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/14/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 15.06 $ 10.16 $ 10.47 $ 10.00
-------- -------- ------- -------
Income from investment operations
Net investment income (0.01) 0.02 0.03 - -
Net gain (loss) on investments
(both realized and unrealized) 6.91 4.90 (0.33) 0.47
-------- -------- ------- -------
Total from investment operations 6.90 4.92 (0.30) 0.47
-------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) (0.02) (0.01) - -
Distributions from net realized
capital gains - - - - - - - -
-------- -------- ------- -------
Total distributions (0.02) (0.02) (0.01) - -
-------- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 21.94 $ 15.06 $ 10.16 $ 10.47
======== ======== ======= =======
Total return 45.87% 48.50% (2.89)% 4.70%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $299,563 $145,915 $65,612 $11,310
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.86% 0.75% 0.48% 0.73%/2/
Before advisory/administration
fee waivers 0.88% 0.88% 1.04% 1.42%/2/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers (0.07)% 0.22% 0.45% (0.11)%/2/
Before advisory/administration
fee waivers (0.09)% 0.09% (0.10)% (0.80)%/2/
PORTFOLIO TURNOVER RATE 89% 74% 89% 9%
AVERAGE COMMISSION RATE/3/ $ 0.0569 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/27/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.27 $ 13.44 $ 12.48 $ 9.87 $ 10.00
-------- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.17 0.17 0.15 0.11 0.11
Net realized gain (loss)
on investments 0.84 0.13 1.17 2.61 (0.17)
-------- -------- -------- -------- -------
Total from investment
operations 1.01 0.30 1.32 2.72 (0.06)
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.18) (0.11) (0.11) (0.11) (0.07)
Distributions from net
realized capital gains (0.67) (0.36) (0.25) - - - -
-------- -------- -------- -------- -------
Total distributions (0.85) (0.47) (0.36) (0.11) (0.07)
-------- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ 13.43 $ 13.27 $ 13.44 $ 12.48 $ 9.87
======== ======== ======== ======== =======
Total return 8.01% 2.46% 10.71% 27.72% (0.61)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $388,588 $312,588 $284,905 $131,052 $60,357
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.06% 0.97% 0.95% 1.10% 1.20%/2/
Before
advisory/administration
fee waivers 1.17% 1.14% 1.14% 1.16% 1.21%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.90% 1.42% 1.27% 1.17% 2.59%/2/
Before
advisory/administration
fee waivers 0.79% 1.24% 1.08% 1.11% 2.58%/2/
PORTFOLIO TURNOVER RATE 70% 105% 37% 31% 15%
AVERAGE COMMISSION
RATE/3/ $ 0.0158 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 6/17/94/1/
ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 8.19 $ 10.56 $10.00
------- ------- ------
Income from investment operations
Net investment income 0.08 0.08 0.03
Net gain (loss) on investments (both realized
and unrealized) 0.50 (2.15) 0.53
------- ------- ------
Total from investment operations 0.58 2.07 0.56
------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment income - - (0.10) - -
Distributions from Capital - - (0.01) - -
Distributions from net realized capital gains (0.01) (0.19) - -
------- ------- ------
Total distributions (0.01) (0.30) - -
------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 8.76 $ 8.19 $10.56
======= ======= ======
Total return 6.97% (19.72)% 5.60%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $68,664 $29,319 $2,511
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.78% 1.78% 1.75%/2/
Before advisory/administration fee waivers 1.88% 2.02% 2.73%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 0.96% 1.90% 1.19%/2/
Before advisory/administration fee waivers 0.87% 1.66% 0.21%/2/
PORTFOLIO TURNOVER RATE 44% 75% 4%
AVERAGE COMMISSION RATE/3/ $0.0018 N/A N/A
</TABLE>
/1/Commencement of operations of share classes.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
(FORMERLY, THE CORE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 9/13/93/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 11.88 $ 9.92 $ 9.97 $ 10.00
-------- -------- ------- -------
Income from investment operations
Net investment income 0.21 0.22 0.22 0.01
Net gain (loss) on investments
(both realized and unrealized) 2.08 2.08 (0.04) (0.04)
-------- -------- ------- -------
Total from investment operations 2.29 2.30 0.18 (0.03)
-------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.21) (0.22) (0.23) - -
Distributions from net realized
capital gains (0.39) (0.12) - - - -
-------- -------- ------- -------
Total distributions (0.60) (0.34) (0.23) - -
-------- -------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 13.57 $ 11.88 $ 9.92 $ 9.97
======== ======== ======= =======
Total return 19.84% 23.76% 1.79% (.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $274,434 $238,813 $48,123 $69,268
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.74% 0.67% 0.65% 0.65%/2/
Before advisory/administration fee
waivers 0.87% 0.85% 0.93% 0.87%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 1.70% 2.35% 2.11% 2.17%/2/
Before advisory/administration fee
waivers 1.58% 2.17% 1.82% 1.95%/2/
PORTFOLIO TURNOVER RATE 55% 51% 88% 2%
AVERAGE COMMISSION RATE/3/ $ 0.0487 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.58 $ 10.93 $ 11.02 $ 10.06 $ 10.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.30 0.38 0.31 0.27 0.13
Net realized gain (loss)
on investments 2.13 2.73 0.03 0.97 0.03
-------- -------- -------- -------- --------
Total from investment
operations 2.43 3.11 0.34 1.24 0.16
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.34) (0.34) (0.32) (0.28) (0.10)
Distributions from net
realized capital gains (1.70) (0.12) (0.11) - - - -
-------- -------- -------- -------- --------
Total distributions (2.04) (0.46) (0.43) (0.28) (0.10)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 13.17 $ 13.58 $ 10.93 $ 11.02 $ 10.06
======== ======== ======== ======== ========
Total return 19.82% 29.30% 3.07% 12.40% 1.62%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $127,076 $109,433 $147,746 $186,163 $175,888
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.18% 0.17% 0.15% 0.40% 0.45%/2/
Before
advisory/administration
fee waivers 0.50%/3/ 0.50% 0.52% 0.52% 0.64%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.29% 2.92% 2.72% 2.46% 2.85%/2/
Before
advisory/administration
fee waivers 1.98% 2.59% 2.35% 2.34% 2.66%/2/
PORTFOLIO TURNOVER RATE 18%/4/, /5/ 18% 17% 8% 23%
AVERAGE COMMISSION RATE $ 0.0319 /4/, /5/ N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including expenses allocated from the U.S. Large Company Series of The DFA
Investment Trust Company of 0.13%.
/4/For the period from October 1, 1995 through May 31, 1996.
/5/See footnotes to the financial statements of The DFA Investment Trust
Company.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/1/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 13.73 $ 11.98 $ 12.42 $ 11.53 $11.01
------- ------- ------- ------- ------
Income from investment
operations
Net investment income 0.46 0.46 0.38 0.30 0.17
Net realized gain (loss) on
investments 1.49 1.90 (0.39) 1.15 0.51
------- ------- ------- ------- ------
Total from investment
operations 1.95 2.36 (0.01) 1.45 0.68
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.47) (0.37) (0.30) (0.16)
Distributions from net
realized capital gains (0.13) (0.14) (0.06) (0.26) - -
------- ------- ------- ------- ------
Total distributions (0.58) (0.61) (0.43) (0.56) (0.16)
------- ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 15.10 $ 13.73 $ 11.98 $ 12.42 $11.53
======= ======= ======= ======= ======
Total return 14.43% 20.32% (0.11)% 12.86% 6.23%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $37,567 $24,525 $17,610 $12,928 $2,501
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.79% 0.67% 0.65% 0.80% 0.95%/2/
Before
advisory/administration fee
waivers 0.90% 0.88% 0.91% 0.98% 1.51%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 3.16% 3.78% 3.16% 2.89% 3.28%/2/
Before
advisory/administration fee
waivers 3.06% 3.56% 2.89% 2.71% 2.72%/2/
PORTFOLIO TURNOVER RATE 275% 154% 54% 32% 36%
AVERAGE COMMISSION RATE/3/ $0.0599 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
17
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 30 portfolios and
has been structured to include many different investment
styles so that investors may participate across multiple dis-
ciplines in order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of
eleven investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity
sector. Eight of these Portfolios invest primarily in U.S.
stocks, two Portfolios invest in non-U.S. international stocks
and one Portfolio invests in a combination of U.S. stocks and
bonds.
In certain investment cycles and over certain holding periods,
an equity fund that invests according to a "value" style or a
"growth" style may perform above or below the market. An in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the investor's goals
and sentiments.
INVESTMENT Each of the eleven Compass Capital Equity Portfolios seeks to
OBJECTIVES provide long-term Capital Appreciation.
The Select Equity, Large Cap Value Equity and Mid-Cap Value
Equity Portfolios pursue a secondary objective of Current In-
come from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described below. No assurance
can be made that a Portfolio will achieve its investment ob-
jective.
18
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
Large Cap Pursues equity securities Stocks with price/earnings Russell 1000
Value Equity (defined as common stocks or and price/book ratios at Value Index
securities convertible into time of purchase below
common stocks) which the average for benchmark and
sub-adviser believes are capitalization in excess of
undervalued. A security's $1 billion.
earnings trend and its
dividend growth rate will
also be factors considered
in security selection.
Large Cap Pursues stocks with earnings Stocks with growth rate Russell 1000
Growth Equity growth potential. Emphasizes estimates in excess of Growth Index
stocks which the sub-adviser average for benchmark and
considers to have favorable capitalization in excess of
and above-average earnings $1 billion.
growth prospects.
Small Cap Value Equity Pursues small cap stocks Stocks with price/earnings Russell 2000
which the sub-adviser and price/book ratios at Index
believes are undervalued. A time of purchase below
security's earnings trend average for benchmark and
and its dividend growth rate capitalization below $1
will also be factors billion.
considered in security
selection.
Small Cap Growth Equity Pursues small cap stocks Stocks with growth rate Russell 2000
with earnings growth estimates in excess of Growth Index
potential. Emphasizes small average for benchmark and
cap stocks which the sub- capitalization below $1
adviser considers to have billion.
favorable and above-average
earnings growth prospects.
Mid-Cap Pursues mid cap stocks and Stocks with low Russell
Value Equity sectors which the sub- price/earnings, price/book, Midcap
adviser believes are price/cash flow or Value Index
undervalued. A security's price/sales ratios at the
earnings trend and its time of purchase relative to
dividend growth rate will their respective sectors or
also be factors considered the benchmark and
in security selection. capitalization between $1
billion and $5 billion.
Mid-Cap Pursues mid cap stocks with Stocks with growth rate Russell
Growth Equity earnings growth potential. estimates in excess of Midcap
Emphasizes stocks which the average for benchmark and Growth Index
sub-adviser considers to capitalization between $1
have favorable and above- billion and $5 billion.
average earnings growth
prospects.
International Equity Pursues non-dollar Portfolio assets are EAFE Index
denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far East security's home market or
Index ("EAFE"). Within this stock exchange.
universe, a value style of
investing is employed to Diversification across
select stocks which the sub- countries, industry groups
adviser believes are and companies with
undervalued. A security's investment at all times in
earnings trend and its price at least three foreign
momentum will also be countries.
factors considered in
security selection. The sub-
adviser will also consider
macroeconomic factors such
as the prospects for
relative economic growth
among certain foreign
countries, expected levels
of inflation, government
policies influencing
business conditions and the
outlook for currency
relationships.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
International Emerging Pursues non-dollar Portfolio assets are MSCI
Markets denominated stocks of primarily invested in stocks International
issuers in emerging country of emerging market issuers. Emerging
markets (generally any Markets Free
country considered to be Stocks with price/earnings Index
emerging or developing by ratios below average for a
the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the United
Nations). Within this Ordinarily, stocks of
universe, a value style of issuers in at least three
investing is employed to emerging markets will be
select stocks which the sub- held.
adviser believes are
undervalued. The sub-adviser
will also consider
macroeconomic factors such
as the prospects for
relative economic growth
among certain foreign
countries, expected levels
of inflation, government
policies influencing
business conditions and the
outlook for currency
relationships.
Select Equity Combines value and growth Similar sector weightings as S&P 500 Index
style as sub-adviser benchmark, with over- or
identifies market under-weighting in
opportunity. particular securities within
those sectors.
Index Equity Invests all of its assets The Index Master Portfolio S&P 500 Index
indirectly, through the U.S. holds substantially all the
Large Company Series (the stocks of the S&P 500 Index
"Index Master Portfolio") of in approximately the same
The DFA Investment Trust proportions as they are
Company in the stocks of the represented in the Index.
S&P 500 Index using a
passive investment style
that pursues the replication
of the S&P 500 Index return.
Balanced Holds a blend of equity and Maintains a minimum 25% S&P 500 and
fixed income securities to investment in fixed income Salomon Broad
deliver total return through senior securities. Investment
capital appreciation and Grade Index
current income.
Equity Portion: Equity Portion:
Combines value and growth Similar sector weightings as
style as sub-adviser benchmark, with over- or
identifies market under- weighting in
opportunity. particular securities within
those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and Dollar-denominated
security selection across a investment grade bonds,
broad universe of fixed including U.S. Government,
income securities. mortgage-backed, asset-
backed and corporate debt
securities.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
20
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
EQUITY SECURITIES. During normal market conditions each Portfolio, except the
Balanced Portfolio, will normally invest at least 80% of the value of its total
assets in equity securities. The Portfolios will invest primarily in equity se-
curities of U.S. issuers, except the International Equity and International
Emerging Markets Portfolios, which will invest primarily in foreign issuers.
Equity securities include common stock and preferred stock (including convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depositary receipts.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may
invest in both sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar global instruments. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information con-
cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs,
and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if
such instruments were sponsored by the issuer. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, securities indices, or the yield differential between
two securities, or, in the case of the International Equity and International
Emerging Markets Portfolios, foreign currencies, and may or may not be listed
on a securities exchange and may or may not be issued by the Options Clearing
Corporation. A Portfolio will not purchase put and call options when the aggre-
gate premiums on outstanding options exceed 5% of its net assets at the time of
purchase, and will not write options on more than 25% of the value of its net
assets (measured at the time an option is written). Options trading is a highly
specialized activity that entails greater than ordinary investment risks. In
addition, unlisted options are not subject to the protections afforded purchas-
ers of listed options issued by the Options Clearing Corporation, which per-
forms the obligations of its members if they default.
21
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Portfolio may
do so either to hedge the value of its securities portfolio as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, a Portfolio may utilize futures con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest a portion of
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<PAGE>
its assets, normally not more than 5% of its net assets, in certain short-term
fixed income obligations in order to maintain liquidity or to invest temporar-
ily uncommitted cash balances.
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase securities from financial institutions subject to the seller's
agreement to repurchase them at an agreed upon time and price. Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities with payment and delivery taking place at a future date (perhaps one or
two months later), and permit a Portfolio to lock in a price or yield on a se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. When-issued and forward commitment transactions involve
the risk, however, that the price or yield obtained in a transaction may be
less favorable than the price or yield available in the market when the securi-
ties delivery takes place. Each Portfolio's when-issued purchases and forward
commitments are not expected to exceed 25% of the value of its total assets ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. A
Portfolio 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 Index Master Portfolio does not intend to invest in reverse repur-
chase agreements. The Balanced Portfolio may utilize reverse repurchase agree-
ments when it is anticipated that the interest income to be earned from the in-
vestment of the proceeds of the transaction is greater than the interest ex-
pense of the transaction. This use of reverse repurchase agreements may be re-
garded as leveraging and, therefore, speculative. Reverse repurchase agreements
involve the risks that the interest income earned in the investment of the pro-
ceeds will be less than the interest expense, that the market value of the se-
curities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase and that the securities may not be re-
turned to the Portfolio. During the time a reverse repurchase agreement is out-
standing, a Portfolio will maintain a segregated account with the Fund's custo-
dian containing cash, U.S. Government or other appropriate liquid securities
having a
23
<PAGE>
value at least equal to the repurchase price. A Portfolio's reverse repurchase
agreements, together with any other borrowings, will not exceed, in the aggre-
gate, 33 1/3% of the value of its total assets (33% in the case of the Index
Master Portfolio). In addition, the Balanced Portfolio may borrow up to an ad-
ditional 5% of its total assets for temporary purposes. Whenever borrowings ex-
ceed 5% of a Portfolio's total assets, the Portfolios (other than the Index
Master Portfolio and the Balanced Portfolio) will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) may invest in
securities issued by other investment companies which invest in short-term debt
securities and which seek to maintain a $1.00 net asset value per share. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (SPDRs) and shares of other investment
companies that are structured to seek a similar correlation to the performance
of the S&P 500 Index. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained on a current basis equal in value to at least the market value of the
loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of
the value of its total assets. Securities loans involve risks of delay in re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly loss of rights in the collateral if the borrower of the securities becomes
insolvent.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% (10% with
respect to the Index Master Portfolio) of the value of its net assets in secu-
rities that are illiquid. Variable and floating rate instruments that cannot be
disposed of within seven days, and repurchase agreements and time deposits that
do not provide for payment within seven days after notice, without taking a re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties which are not registered under the Securities Act of 1933 (the "1933 Act")
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
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<PAGE>
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of smaller-capitalized organizations (less than $1 billion at
the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid-
Cap Growth Equity Portfolio will invest, under normal market conditions, at
least 90% (and in any event at least 65%) of their respective total assets in
equity securities of medium-capitalized organizations (between $1 billion and
$5 billion at the time of purchase). These organizations will normally have
more limited product lines, markets and financial resources and will be depen-
dent upon a more limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and, therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the stocks that comprise the S&P 500 Index, including
mergers, reorganizations and similar transactions and, to the extent necessary,
to provide cash to pay redemptions of the Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash.
- ------
* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
25
<PAGE>
S&P has no obligation or liability in connection with the administration, mar-
keting or trading of the Index Equity Portfolio or Index Master Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities involves considerations not typically associated with investing
in securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Portfolio that invests in foreign securities
as measured in U.S. dollars will be affected favorably or unfavorably by
changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios can be expected to be higher than those of Portfolios investing
primarily in domestic securities. The costs attributable to investing abroad
are usually higher for several reasons, such as the
26
<PAGE>
higher cost of investment research, higher cost of custody of foreign securi-
ties, higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
As stated, the International Emerging Markets Portfolio will invest its assets
in countries with emerging economies or securities markets. These countries may
include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub-
lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay-
sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af-
rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and
Zimbabwe. Political and economic structures in many of these countries may be
undergoing significant evolution and rapid development, and these countries may
lack the social, political and economic stability characteristic of more devel-
oped countries. Some of these countries may have in the past failed to recog-
nize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of investments in these countries and the availability to a Portfolio of addi-
tional investments in emerging market countries. The small size and inexperi-
ence of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the
countries illiquid and more volatile than investments in Japan or most Western
European countries. There may be little financial or accounting information
available with respect to issuers located in certain emerging market countries,
and it may be difficult to assess the value or prospects of an investment in
such issuers.
The International Equity Portfolio invests primarily in equity securities of
issuers located in countries included in EAFE. Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United
Kingdom are currently included in EAFE. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) use forward foreign currency exchange contracts to hedge
against movements in the value of foreign currencies (including the European
Currency Unit (ECU)) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A forward for-
eign currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Foreign currency exchange contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow a Portfolio to establish a rate of ex-
change for a future point in time.
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<PAGE>
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local Municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating organi-
zation. If unrated, the securities will be determined at the time of purchase
to be of comparable quality by the sub-adviser. Securities rated "Baa" by
Moody's or "BBB" by S&P, respectively, are generally considered to be invest-
ment grade although they have speculative characteristics. If a fixed income
security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's sub-
adviser will dispose of the security in an orderly fashion as soon as practica-
ble. Investments in securities of foreign issuers, which present additional in-
vestment considerations as described above under "International Portfolios,"
will be limited to 5% of the Portfolio's total assets.
The Balanced Portfolio may make significant investments in residential and com-
mercial mortgage-related and other asset-backed securities (i.e., securities
backed by home equity loans, installment sale contracts, credit card receiv-
ables or other assets) issued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, including guaranteed mortgage pass-through certificates, which provide
the holder with a pro rata interest in the underlying mortgages, adjustable
rate mortgage-related securities ("ARMs") and collateralized mortgage obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers of CMOs frequently elect to be taxed as a pass-through entity known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multi-
ple classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the
28
<PAGE>
underlying obligations. If the servicer were to sell these obligations to an-
other party, there is a risk that the purchaser would acquire an interest supe-
rior to that of the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustees for the holders of the
automobile receivables may not have an effective security interest in all of
the obligations backing such receivable. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may be prepaid at any time be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
The average life of a mortgage-related instrument, in particular, is likely to
be substantially less than the original maturity of the mortgage pools under-
lying the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to ex-
perience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally be at lower rates than the rates that were carried by the obligations that
have been prepaid. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank, National Association
("PNC Bank") or its affiliates. It is possible that, under some circumstances,
PNC Mortgage Securities Corp. or its affiliates could have interests that are
in conflict with the holders of these mortgage-backed securities, and such
holders could have rights against PNC Mortgage Securities Corp. or its affili-
ates.
The Balanced Fund may also purchase obligations issued or guaranteed by the
U.S. Government and U.S. Government agencies and instrumentalities. Obligations
of certain agencies and instrumentalities of the U.S. Government are supported
by the full faith and credit of the U.S. Treasury. Others are supported by the
right of the issuer to borrow from the U.S. Treasury; and still others are sup-
ported only by the credit of the agency or instrumentality issuing the obliga-
tion. No assurance can be given that the U.S. Government will provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law. Certain U.S. Treasury and agency securities may be held by
trusts that issue participation certificates (such as Treasury income growth
receipts ("TIGRs") and certificates of accrual on Treasury certifi-
29
<PAGE>
cates ("CATs")). The Balanced Portfolio may purchase these certificates, as
well as Treasury receipts and other stripped securities, which represent bene-
ficial ownership interests in either future interest payments or the future
principal payments on U.S. Government obligations. These instruments are issued
at a discount to their "face value" and may (particularly in the case of
stripped mortgage-backed securities) exhibit greater price volatility than or-
dinary debt securities because of the manner in which their principal and in-
terest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments) and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's sub-adviser believes that their return, on a
pre-tax basis, will be comparable to the returns of other permitted invest-
ments. Dividends paid by the Portfolio that are derived from interest on munic-
ipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-backed or other security concurrently with an agreement by the Portfolio
to repurchase a similar security at a later date at an agreed-upon price. The
securities that are repurchased will bear the same interest rate and stated ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in additional instruments for the Portfolio, and the income
from these investments will generate income for the Portfolio. If such income
does not exceed the income, capital appreciation and gain or loss that would
have been realized on the securities sold as part of the dollar roll, the use
of this technique will diminish the investment performance of the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
Government securities or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
The market value of the Balanced Portfolio's investments in fixed income secu-
rities will change in response to changes in interest rates and the relative
financial strength of each issuer. Dur
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<PAGE>
ing periods of falling interest rates, the values of long-term fixed income se-
curities generally rise. Conversely, during periods of rising interest rates
the values of such securities generally decline. Changes in the financial
strength of an issuer or changes in the ratings of any particular security may
also affect the value of these investments.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Mid-Cap Value Equity and Mid-Cap
Growth Equity Portfolios will not exceed 100%. The past portfolio turnover
rates of the other Portfolios are set forth above under "What Are The Financial
Highlights?" A Portfolio's annual portfolio turnover rate will not be a factor
preventing a sale or purchase when the adviser or sub-adviser believes invest-
ment considerations warrant such sale or purchase. Portfolio turnover may vary
greatly from year to year as well as within a particular year. High portfolio
turnover rates (i.e., over 100%) will generally result in higher transaction
costs to a Portfolio and may result in the realization of short-term capital
gains that are taxable to shareholders as ordinary income.
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<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. No assurance
can be provided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of a Portfolio's total assets may be invested without regard
to this 5% limitation;
(2) subject to the foregoing 25% exception (other than with respect to the In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets
(33% of net assets in the case of the Index Master Portfolio) at the time
of such borrowing.
These investment limitations are applied at the time investment securities are
purchased. Notwithstanding the investment limitations, the Index Equity Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions as that Portfolio.
32
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund and of The DFA Investment
Trust Company (in which the assets of the Fund's Index Equity
Portfolio are invested) are managed under the direction of their
separate Boards of Trustees. The following persons currently
serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional in-
formation about the trustees and officers of both the Fund and
The DFA Investment Trust Company.
ADVISER AND
SUB- The Adviser to Compass Capital Funds is PNC Asset Management
ADVISERS Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund family (except the Index Equity Portfolio) is managed by a
specialized portfolio manager who is a member of one of PAMG's
portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and their
investment sub-advisers and portfolio managers are as follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ----------- ------------------------------------
<S> <C> <C>
Large Cap Value Equity PCM(/1/) Benedict E. Capaldi; Vice President
of PCM since 1995; prior to joining
PCM, Senior Vice President and
portfolio manager with Radnor
Capital Management, President of
Chestnut Hill Advisors, Inc. and
Managing Director of Brandywine
Asset Management, Inc.; Portfolio
manager since 1995.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------ ------------------------------------
<S> <C> <C>
Large Cap Growth Equity PEAC(/2/) Robert K. Urquhart; investment
manager with PEAC since 1995; prior
to joining PEAC, Chief Investment
Officer and partner of Cole
Financial Group, Inc., a partner of
Seacliff Holdings, Inc. and of RCM
Capital Management; Portfolio
manager since 1995.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice
President of PCM since July 1996;
prior to joining PCM, Portfolio
Manager and Research Analyst with
Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank, National
Association since 1986; Portfolio
manager since its inception.
Mid-Cap Value Equity PCM(/1/) Benedict E. Capaldi (see above);
Portfolio co-manager since its
inception.
Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; Portfolio co-manager since its
inception.
Mid-Cap Growth Equity PEAC(/2/) William J. Wykle (see above);
Portfolio co-manager since its
inception.
William C. McVail; investment
manager with PEAC since 1994; prior
to joining PEAC, equity and fixed
income analyst with PNC Bank; since
its inception.
International Equity CastleInternational(/4/) Gordon Anderson; Managing and
Investment Director since 1996;
prior to joining
CastleInternational, Investment
Director of Dunedin Fund Managers
Ltd.; Portfolio manager since 1996.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ------------------------ ------------------------------------
<S> <C> <C>
International Emerging CastleInternational(/4/) Euan Rae; Senior Investment Manager
Markets since 1996; prior to joining
CastleInternational, Head of
Emerging Markets at Dunedin Fund
Managers Ltd. and investment manager
with Edinburgh Fund Managers;
Portfolio manager since 1996.
Select Equity PCM(/1/) Daniel B. Eagan (see above);
Portfolio manager since 1995.
Balanced PCM and R. Andrew Damm; Senior investment
BlackRock(/1/)(/3/) strategist with PAMG since 1995;
portfolio manager with PNC Bank from
1988 to 1995; Portfolio co-manager
since 1996.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since 1995.
Keith T. Anderson; Managing Director
and co-chair of Portfolio Management
Group and Investment Strategy
Committee of BlackRock since 1988;
Portfolio co-manager since 1995.
</TABLE>
(1) Provident Capital Management, Inc. ("PCM") has its primary offices at 1600
Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1600 Market
Street, 27th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary offices
at 345 Park Avenue, New York, New York 10154.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary offices at 7 Castle Street, Edinburgh, Scotland, EH2 3AH.
PAMG was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103. PAMG is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank
holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, computed
daily on a portfolio-by-portfolio basis and payable monthly, at
the maximum annual rates set forth below. As stated under "What
Are the Expenses of the Portfolios?" PAMG and the sub-advisers
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG and do not rep-
resent an extra charge to the Portfolios.
35
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO EXCEPT
THE INDEX EQUITY, MID-CAP VALUE EQUITY, MID-CAP GROWTH EQUITY
AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .550% .400%
$1 billion -- $2 billion .500 .350
$2 billion -- $3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE
EQUITY AND MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .800% .650%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .500
greater than $3 billion .625 .475
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EQUITY PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</TABLE>
36
<PAGE>
Although the advisory fee rate payable by the International
Emerging Markets Portfolio is higher than the rate payable by
mutual funds investing in domestic securities, the Fund believes
it is comparable to the rates paid by many other funds with sim-
ilar investment objectives and policies and is appropriate for
the Portfolio in light of its investment objective and policies.
For their last fiscal year the Portfolios paid investment advi-
sory fees at the following annual rates (expressed as a percent-
age of average daily net assets) after voluntary fee waivers:
Large Cap Value Equity Portfolio, .49%; Large Cap Growth Equity
Portfolio, .49%; Small Cap Value Equity Portfolio, .54%; Small
Cap Growth Equity Portfolio, .54%; International Equity Port-
folio, .68%; International Emerging Markets Portfolio, 1.15%;
Select Equity Portfolio, .49%; and Balanced Portfolio, .49%. For
the period from October 1, 1995 through June 1, 1996, the Index
Equity Portfolio paid investment advisory fees to its former in-
vestment adviser at the annual rate of % of its average daily
net assets.
The Portfolios' sub-advisers strive to achieve best execution on
all transactions. Infrequently, brokerage transactions for the
Portfolios may be directed to registered broker/dealers who have
entered into dealer agreements with Compass Capital's distribu-
tor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
MASTER adviser to the Index Master Portfolio.
PORTFOLIO
DFA was organized in May 1981 and is engaged in the business of
providing investment management services to institutional in-
vestors. DFA's assets under management totalled approximately
$18.5 billion at October 31, 1996. David G. Booth and Rex A.
Sinquefield, both of whom are trustees and officers of The DFA
Investment Trust Company and directors,officers and shareholders
of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made by
the Investment Committee of DFA, which meets on a regular basis
and also as needed to consider investment issues. The Investment
Committee is composed of certain officers and directors of DFA
who are elected annually. DFA provides the Index Master Portfo-
lio with a trading department and selects brokers and dealers to
effect securities transactions.
For the investment advisory services provided to the Index Mas-
ter Portfolio under the advisory agreement, DFA is entitled to
receive a fee at
37
<PAGE>
the annual rate of .025% of the Index Master Portfolio's aver-
age daily net assets. For the Index Master Portfolio's fiscal
year ended November 30, 1996, DFA received a monthly fee for
its investment advisory services which, on an annual basis,
equaled .025% of the Index Master Portfolio's net assets.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). A majority of the outstanding stock of PDI is owned
by its officers and the remaining outstanding stock is owned
by Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating
to the maintenance of financial records and fund accounting.
As compensation for these services, CCG is entitled to receive
a fee, computed daily and payable monthly, at an annual rate
of .03% of each Portfolio's average daily net assets, and PFPC
and CDI are entitled to receive a combined fee, computed daily
and payable monthly, at an annual rate of .20% of the first
$500 million of each Portfolio's average daily net assets,
.18% of the next $500 million of each Portfolio's average
daily net assets, .16% of the next $1 billion of each Portfo-
lio's average daily net assets and .15% of each Portfolio's
average daily net assets in excess of $2 billion. From time to
time the Administrators may waive some or all of their admin-
istration fees from a Portfolio. PFPC serves as the adminis-
trative services, dividend disbursing and transfer agent to
the Index Master Portfolio, for which PFPC is entitled to com-
pensation at the annual rate of .015% of the Index Master
Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to the investment adviser
and the Administrators,
38
<PAGE>
transfer agency and custodian fees, trustee fees, taxes, inter-
est, professional fees, fees and expenses in registering and
qualifying the Portfolios and their shares for distribution un-
der Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of
printing and distributing prospectuses and statements of addi-
tional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solicita-
tions, insurance premiums, the expense of independent pricing
services, and other expenses which are not expressly assumed by
PAMG or the Fund's service providers under their agreements with
the Fund. Any general expenses of the Fund that do not belong to
a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board of
Trustees in a manner the Board determines to be fair and equita-
ble.
39
<PAGE>
How Are Shares Purchased And Redeemed?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous
basis by CDI as distributor. CDI maintains its principal offices at 259 Radnor-
Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them. The Fund is not required or permitted under the Plan to make
distribution payments with respect to Institutional Shares.
PURCHASE OF SHARES. Institutional Shares are offered to institutional invest-
ors, including registered investment advisers with a minimum investment of
$500,000 and individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per Share next computed
after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East-
ern Time) on a Business Day are priced the same day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders re-
ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi-
ness Day.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also, in
the discretion of the Fund, be made in the form of securities that are permis-
sible investments for the respective Portfolios. For further information, see
the Statement of Additional Information. The minimum initial investment for in-
stitutions is $5,000. There is no minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for Institutional Shares.
REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed
by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. The Fund and its service providers will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for
40
<PAGE>
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 custo-
dian is open for business. The Fund reserves the right to wire redemption pro-
ceeds 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.
41
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio as of the close of regular trading hours on the NYSE (currently 4:00 p.m.
Eastern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio (including, for the Index Equity Portfolio,
all of its shares in the Index Master Portfolio) that are allocated to its In-
stitutional Shares, less the liabilities charged to its Institutional Shares,
by the number of its Institutional Shares that are outstanding. The net asset
value per share of the Index Master Portfolio is calculated as of the close of
the NYSE by dividing the total market value of its investments and other as-
sets, less any liabilities, by the total outstanding shares of the Index Master
Portfolio.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees or, in the case of the Index Master Portfolio,
The DFA Investment Trust Company's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless a Portfolio's sub-adviser under the super-
vision of the Board of Trustees determines such method does not represent fair
value.
42
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund will distribute substantially all of its net invest-
ment income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to in-
vestors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the
end of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by each Portfolio of the Fund at least annu-
ally. The period for which dividends are payable and the time for payment are
subject to change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional Institutional Shares of the relevant Portfolio, unless a shareholder
elects to receive distributions in cash. This election, or any revocation
thereof, must be made in writing to PFPC, and will become effective with re-
spect to distributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses of
the Index Master Portfolio. This net income, less the Index Equity Portfolio's
expenses incurred in operations, is the Index Equity Portfolio's net investment
income from which dividends are distributed as described above. The Index Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
43
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities may be subject to foreign withholding taxes or other taxes. So long as
more than 50% of the value of a Portfolio's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Port-
folio may elect, for U.S. Federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid by its shareholders. It is possible that the Interna-
tional Equity and International Emerging Markets Portfolios will make this
election in certain years. If a Portfolio makes the election, the amount of
such foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and each
44
<PAGE>
shareholder will be entitled either (a) to credit a proportionate amount of
such taxes against a shareholder's U.S. Federal income tax liabilities, or (b)
if a shareholder itemizes deductions, to deduct such proportionate amounts from
U.S. Federal taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. The application of state and local income taxes to investments in
the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
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 SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Institutional Shares of the eleven Portfolios described
herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees and amounts payable under the
Fund's Distribution and Service Plan. In addition, each class of Investor
Shares is sold with different sales charges. Because of these "class expenses"
and sales charges, the performance of a Portfolio's Institutional Shares is ex-
pected to be higher than the performance of the Portfolio's Service Shares, and
the performance of both the Institutional Shares and Service Shares of a Port-
folio is expected to be higher than the performance of the Portfolio's three
classes of Investor Shares. The performance of each class of Investor Shares
may be different. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan and an
automatic withdrawal plan. 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 that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On , 1996, PNC Bank held of record approximately % of the Fund's outstand-
ing shares, as trustee on behalf of individual and institutional investors, and
may be deemed a controlling person of the Fund under the 1940 Act. PNC Bank is
a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The
46
<PAGE>
Index Equity Portfolio purchases shares of the Index Master Portfolio at net
asset value. The net asset value of the Index Equity Portfolio responds to in-
creases and decreases in the value of the Index Master Portfolio's securities
and to the expenses of the Index Master Portfolio allocable to the Index Equity
Portfolio (as well as its own expenses). The Index Equity Portfolio may with-
draw its investment in the Index Master Portfolio at any time upon 30 days no-
tice to the Index Master Portfolio if the Board of Trustees of the Fund deter-
mines that it is in the best interests of the Index Equity Portfolio to do so.
Upon withdrawal, the Board of Trustees would consider what action might be tak-
en, including the investment of all of the assets of the Index Equity Portfolio
in another pooled investment entity having the same investment objective as the
Index Equity Portfolio or the hiring of an investment adviser to manage the In-
dex Equity Portfolio's assets in accordance with the investment policies de-
scribed above with respect to the Index Equity Portfolio.
The Index Master Portfolio is a separate series of The DFA Investment Trust
Company (the "Trust"), which is a business trust created under the laws of the
State of Delaware. The Index Equity Portfolio and other institutional investors
that may invest in the Index Master Portfolio from time to time (e.g. other in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
Master Portfolio have the same limitation of personal liability as shareholders
of a Delaware corporation. Accordingly, Fund management believes that neither
the Index Equity Portfolio nor its shareholders will be adversely affected by
reason of the Index Equity Portfolio's investing in the Index Master Portfolio.
The shares of the Index Master Portfolio are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns may differ from those of the Index Equity Portfolio. While investment in
the Index Master Portfolio by other institutional investors offers potential
benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act and (iii) on such other matters as the trustees of
the Trust may consider necessary or desirable. In addition, approval of the
shareholders of the Trust is required to adopt any amendments to the Agreement
and Declaration of Trust of the Trust which would adversely affect to a mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Port-
47
<PAGE>
folio's shareholders will also be asked to vote on any proposal to change a
fundamental policy (i.e. a policy that may be changed only with the approval of
shareholders) of the Index Master Portfolio.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity Portfolio, if required under the 1940 Act or other applicable law, would
hold a meeting of its shareholders and would cast its votes proportionately as
instructed by Index Equity Portfolio shareholders. In such cases, shareholders
of the Index Equity Portfolio, in effect, would have the same voting rights
they would have as direct shareholders of the Index Master Portfolio.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees fails to approve a similar change in the investment objective of the Index
Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its
investment in the Index Master Portfolio and either seek to invest its assets
in another registered investment company with the same investment objective as
the Index Equity Portfolio, which might not be possible, or retain an invest-
ment adviser to manage the Index Equity Portfolio's assets in accordance with
its own investment objective, possibly at increased cost. A withdrawal by the
Index Equity Portfolio of its investment in the Index Master Portfolio could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Index Equity Portfolio. Should such a distribution occur,
the Index Equity Portfolio could incur brokerage fees or other transaction
costs in converting such securities to cash in order to pay redemptions. In ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity of the Portfolio.
The conversion of the Index Equity Portfolio into a feeder fund of the Index
Master Portfolio was approved by shareholders of the Index Equity Portfolio at
a meeting held on November 30, 1995. The policy of the Index Equity Portfolio,
and other similar investment companies, to invest their investable assets in
funds such as the Index Master Portfolio is a relatively recent development in
the mutual fund industry and, consequently, there is a lack of substantial ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Index Master Portfolio, please
contact DFA at (310) 395-8005.
48
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for Institutional Shares of the Portfolios may be
quoted in advertisements and communications to shareholders. Total return will
be calculated on an average annual total return basis for various periods. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the measur-
ing period. Total return may also be calculated on an aggregate total return
basis. Aggregate total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total return assume that
dividend and capital gain distributions made by a Portfolio with respect to its
Institutional Shares are reinvested in Institutional Shares.
The yield of Institutional Shares of the Balanced Portfolio is computed by di-
viding the net income allocated to that class during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis.
The performance of a Portfolio's Institutional Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a Portfolio's Institu-
tional Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and to the performance of the Dow Jones Industrial Average, the
"stocks, bonds and inflation Index" published annually by Ibbotson Associates,
the Lipper International Fund Index, the Lehman Government Corporate Bond Index
and the Financial Times World Stock Index, as well as the benchmarks attached
to this Prospectus. Performance information may also include evaluations of the
Portfolios and their Institutional Shares published by nationally recognized
ranking services, and information as reported in financial publications such as
Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional Shares of a particular Portfolio, a Portfolio
may provide other information demonstrating hypothetical investment returns.
This information may include, but is not limited to, illustrating the com-
pounding effects of dividends in a dividend reinvestment plan or the impact of
tax-deferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Institutional Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Institutional Shares of a Portfolio cannot necessarily be used to compare
an investment in such shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Perfor-
49
<PAGE>
mance is generally a function of the kind and quality of the instruments held
in a portfolio, portfolio maturity, operating expenses and market conditions.
Any fees charged by brokers or other institutions directly to their customer
accounts in connection with investments in Institutional Shares will not be in-
cluded in the Portfolio performance calculations.
50
<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 (888) 4COMPASS.
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.
51
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Large Cap Value Equity Russell 1000 Value Index An index composed of those Russell 1000
securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Large Cap Growth Equity Russell 1000 Growth The Russell 1000 Growth Index contains
Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Equity Russell 2000 Index An index of the smallest 2000 companies in
the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Growth Equity Russell 2000 Growth An index composed of those Russell 2000
Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Equity Russell Midcap Value The Russell Midcap Value Index consists of
Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Equity Russell Midcap Growth The Russell Midcap Growth Index consists of
Index the bottom 800 securities of the Russell
1000 Index with greater-than-average growth
orientation as ranked by total market
capitalization.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
International Emerging MSCI Emerging Markets The Morgan Stanley Capital International
Markets Free Index (MSCI) Emerging Markets Free Index (EMF) is
a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, Africa
and the Pacific Basin. The MSCI EMF Index
excludes closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad Investment An unmanaged index of 3500 bonds. The Broad
Grade Index Investment Grade Index is market
capitalization weighted and includes
Treasury, Government sponsored mortgages
and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
52
<PAGE>
The Compass Capital Funds
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL IN-
FORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS
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.
----------------
LARGE CAP VALUE EQUITY PORTFOLIO
LARGE CAP GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
INSTITUTIONAL SHARES
Prospectus
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INVESTOR A, INVESTOR B AND INVESTOR C SHARES OF THE LARGE CAP VALUE EQUITY
PORTFOLIO, LARGE CAP GROWTH EQUITY PORTFOLIO, SMALL CAP GROWTH EQUITY
PORTFOLIO, MID-CAP GROWTH EQUITY PORTFOLIO, SELECT EQUITY PORTFOLIO,
SMALL CAP VALUE EQUITY PORTFOLIO, MID-CAP VALUE EQUITY PORTFOLIO,
INDEX EQUITY PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, INTERNATIONAL
EMERGING MARKETS PORTFOLIO AND BALANCED PORTFOLIO)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- ---------------- ----------
PART A PROSPECTUS
1. Cover page................................ Cover Page
2. Synopsis.................................. What Are The Expenses Of The
Portfolios?
3. Condensed Financial
Information............................... What Are The Portfolios'
Financial Highlights?
4. General Description of
Registrant................................ Cover Page; What Are The
Portfolios?; What Additional
Investment Policies Apply?;
What Are The Portfolios'
Fundamental Investment
Limitations?
5. Management of the Fund.................... Who Manages The Fund?
5A. Managements Discussion of Fund
Performance............................ What Are The Portfolios'
Financial Highlights?
6. Capital Stock and Other
Securities................................ How Frequently Are Dividends
And Distributions Made To
Investors?; How Are Fund
Distributions Taxed?; How Is
The Fund Organized?
7. Purchase of Securities Being
Offered................................... How Are Shares Purchased And
Redeemed?; How Is Net Asset
Value Calculated?; How Is The
Fund Organized?
8. Redemption or Repurchase.................. How Are Shares Purchased and
Redeemed?
9. Legal Proceedings......................... Inapplicable
<PAGE>
The Equity Portfolios Investor Shares
- --------------------------------------------------------------------------------
Compass Capital Funds SM ("Compass Capital" or the "Fund")
consists of thirty investment portfolios. This Prospectus de-
scribes the Investor Shares of eleven of those portfolios (the
"Portfolios"):
Large Cap Value Equity Portfolio
Large Cap Growth Equity Portfolio
Small Cap Value Equity Portfolio
Small Cap Growth Equity Portfolio
Mid-Cap Value Equity Portfolio
Mid-Cap Growth Equity Portfolio
International Equity Portfolio
International Emerging Markets Portfolio
Select Equity Portfolio
Index Equity Portfolio
Balanced Portfolio
This Prospectus contains information that a prospective in-
vestor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated
has been filed with the Securities and Exchange Com-
mission (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 Information, as supple-
mented from time to time, is incorporated by reference into
this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION
OR ANY OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLI-
GATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
The Index Equity Portfolio seeks to achieve its investment ob-
jective by investing all of its investable assets in a series
of shares (the "Index Master Portfolio") of The DFA Investment
Trust Company, another open-end management investment company,
rather than through a portfolio of various securities. The in-
vestment experience of the Index Equity Portfolio corresponds
directly with the investment experience of the Index Master
Portfolio. The Index Master Portfolio has substantially the
same investment objective, policies and limitations as the In-
dex Equity Portfolio and, except as specifically noted, is
also referred to as a "Portfolio" in this Prospectus. For ad-
ditional information, see "How Is The Fund Organized?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
The Equity Portfolios Of Compass Capital Funds
- --------------------------------------------------------------------------------
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
diversified investment portfolios that provide investors with a
broad spectrum of investment alternatives within the equity sec-
tor. Eight of these Portfolios invest in U.S. stocks, two Port-
folios invest in non-U.S. international stocks and one Portfolio
invests in a combination of U.S. stocks and bonds. A detailed
description of each Portfolio begins on page 20 and a summary of
each Performance Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
Large Cap Value Eq- Russell 1000 Value
uity Index Growth and Income
Large Cap Growth Eq- Russell 1000 Growth
uity Index Growth
Small Cap Value Eq-
uity Russell 2000 Index Small Company Growth
Small Cap Growth Eq- Russell 2000 Growth
uity Index Small Company Growth
Russell Midcap Value
Mid-Cap Value Equity Index Midcap
Mid-Cap Growth Equity Russell Midcap Growth
Index Midcap
International Equity EAFE Index International
International Emerg-
ing MSCI Emerging Markets
Emerging Markets Free
Markets Index
Select Equity S&P 500 Index Growth and Income
Index Equity S&P 500 Index S&P 500 Index
Balanced S&P 500 Index and Balanced
Salomon Broad
Investment Grade
Index
</TABLE>
PNC Asset Management Group, Inc. ("PAMG") serves as the invest-
ment adviser to each portfolio except the Index Equity Portfo-
lio. Provident Capital Management, Inc. ("PCM"), PNC Equity Ad-
visors Company ("PEAC"), BlackRock Financial Management, Inc.
("BlackRock") and CastleInternational Asset Management Limited
("CastleInterna- tional") serve as sub-advisers to different
Portfolios as described in this Prospectus. Dimensional Fund Ad-
visors Inc. ("DFA") serves as investment adviser to the Index
Master Portfolio.
UNDERSTANDING
THE COMPASS This Prospectus has been crafted to provide detailed, accurate
CAPITAL and comprehensive information on the Compass Capital Portfolios.
EQUITY We intend this document to be an effective tool as you explore
PORTFOLIOS different directions in equity investing.
3
<PAGE>
CONSIDERING There can be no assurance that any mutual fund will achieve
THE RISKS IN its investment objective. The Portfolios will hold equity se-
EQUITY curities, and some or all of the Portfolios may acquire war-
INVESTING rants, foreign securities and illiquid securities; enter into
repurchase and reverse repurchase agreements; lend portfolio
securities to third parties; and enter into futures contracts
and options and forward currency exchange contracts. These
and the other investment practices set forth below, and their
associated risks, deserve careful consideration. Certain
risks associated with international investments are height-
ened because of currency fluctuations and investments in
emerging markets. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "HOW ARE SHARES PURCHASED" and "HOW ARE
CAPITAL FUNDS SHARES REDEEMED?"
4
<PAGE>
Asking The Key Questions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 6
What Are The Portfolios' Financial Highlights?............... 10
What Are The Portfolios?..................................... 20
What Are The Differences Among The Portfolios?............... 21
What Additional Investment Policies And Risks Apply?......... 23
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 34
Who Manages The Fund?........................................ 35
What Pricing Options Are Available To Investors?............. 43
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 45
How Are Shares Purchased?.................................... 47
How Are Shares Redeemed?..................................... 49
What Are The Shareholder Features Of The Fund?............... 51
What Is The Schedule Of Sales Charges And Exemptions?........ 54
How Is Net Asset Value Calculated?........................... 60
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 61
How Are Fund Distributions Taxed?............................ 62
How Is The Fund Organized?................................... 64
How Is Performance Calculated?............................... 67
How Can I Get More Information?.............................. 69
</TABLE>
5
<PAGE>
What Are The Expenses Of The Portfolios?
- -------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor
Shares of the Portfolios for the fiscal year ended September 30, 1996 as a
percentage of average daily net assets. Because no Investor C Shares of the
Large Cap Growth Equity, Small Cap Value Equity, International Equity, Inter-
national Emerging Markets and Balanced Portfolios and no shares of any class
of the Mid-Cap Value Equity and Mid-Cap Growth Equity Portfolios were out-
standing during the fiscal year ended September 30, 1996, the figures shown
for these share classes under "Other expenses" are estimates for the current
fiscal year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LARGE CAP LARGE CAP SMALL CAP
VALUE EQUITY GROWTH EQUITY VALUE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.5% None None 4.5% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES
(AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .49% .49% .49% .49% .49% .49% .54% .54% .54%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses
(after fee
waivers) (/3/) .73 .73 .73 .73 .73 .73 .79 .79 .79
------ ------ ------ ------ ------ ------ ------ ------ ------
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .33 .33 .33 .33 .33 .33 .39 .39 .39
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses
(after fee
waivers)(/3/) 1.22% 1.97% 1.97% 1.22% 1.97% 1.97% 1.33% 2.08% 2.08%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. 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 for Investor B Shares decreases for redemptions made in sub-
sequent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and administration fees
would be .21% for each class of the Large Cap Value Equity Portfolio and
.23% for each class of each other Portfolio. PAMG and the Portfolios' ad-
ministrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .76%, .79% and
.80%, respectively, for Investor A Shares, Investor B Shares, and Investor
C Shares, and "Total Portfolio operating expenses" would be: (ii) 1.31%,
1.34% and 1.33%, respectively, for Investor A Shares; and (iii) 2.05%,
2.09% and 2.08%, respectively, for Investor B Shares and Investor C
Shares. The Portfolios do not expect to incur any 12b-1 fees with respect
to Investor A Shares (otherwise payable at the maximum rate of .10%) dur-
ing the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as
described under "What Are The Key Considerations In Selecting A Pricing
Option?" on page 44. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules
of the National Association of Securities Dealers, Inc. ("NASD").
6
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP MID-CAP MID-CAP
GROWTH VALUE GROWTH
EQUITY EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.5% None None 4.5% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .54% .54% .54% .50% .50% .50% .50% .50% .50%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .79 .79 .79 .83 .83 .83 .83 .83 .83
------ ------ ------ ------ ------ ------ ------ ------ ------
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .39 .39 .39 .43 .43 .43 .43 .43 .43
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.33% 2.08% 2.08% 1.33% 2.08% 2.08% 1.33% 2.08% 2.08%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .80% and .80% for the
Small Cap Growth Equity, Mid-Cap Value Equity and Mid-Cap Growth Equity
Portfolios, respectively, and administration fees would be .23% for each
class of each Portfolio. PAMG and the Portfolios' administrators are under
no obligation to waive or continue waiving their fees, but have informed
the Fund that they expect to waive fees as necessary to maintain the Port-
folios' total operating expenses during the remainder of the current fiscal
year at the levels set forth in the table. Without waivers, "Other operat-
ing expenses" would be: (i) .80%, 1.26% and 1.26% respectively, for In-
vestor A Shares; and (ii) .80%, .96% and .96% respectively, for Investor B
Shares and Investor C Shares; and "Total Portfolio operating expenses"
would be: (iii) 1.35%, 2.06% and 2.06%, respectively, for Investor A
Shares; and (iv) 2.10%, 2.81% and 2.81%, respectively, for Investor B
Shares and Investor C Shares. The Portfolios do not expect to incur any
12b-1 fees with respect to Investor A Shares (otherwise payable at the max-
imum rate of .10%) during the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" on page 44. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor Shares may pay more than the economic equivalent
of the maximum front-end sales charges permitted by the rules of the NASD.
7
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL
INTERNATIONAL EMERGING
EQUITY MARKETS
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>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/)
(as a percentage of
offering price) 5.0% None None 5.0% None None
Maximum Deferred Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested Dividends None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .70% .70% .68% 1.15% 1.15% 1.15%
12b-1 fees(/3/)(/4/) .00 .75 .75 .00 .75 .75
Other operating expenses
(after fee
waivers)(/3/) .83 .83 .85 1.10 1.10 1.10
------ ------ ------ ------ ------ ------
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .43 .43 .45 .70 .70 .70
---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.53% 2.28% 2.28% 2.25% 3.00% 3.00%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares
that are purchased with no initial sales charge as part of an investment
of $1,000,000 or more. See "What Is the Schedule of Sales Charges and Ex-
emptions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in sub-
sequent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .75% and 1.25% for the In-
ternational Equity and International Emerging Markets Portfolios, respec-
tively, and administration fees would be .23% for each class of each Port-
folio. 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 oper-
ating expenses during the remainder of the current fiscal year at the lev-
els set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .90% and 1.10%, respectively, for Investor A Shares; and
(ii) .90% and 1.10%, respectively, for Investor B Shares and Investor C
Shares; and "Total Portfolio operating expenses" would be: (iii) 1.65% and
2.35%, respectively, for Investor A Shares; and (iv) 2.40% and 3.10%, re-
spectively, for Investor B Shares and Investor C Shares. The Portfolios do
not expect to incur any 12b-1 fees with respect to Investor A Shares (oth-
erwise 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 44. Investor A Shares do not currently pay 12b-1 fees.
Long-term investors in Investor Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules
of the NASD.
8
<PAGE>
What Are The Expenses Of The Portfolios? (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECT EQUITY INDEX EQUITY BALANCED
PORTFOLIO PORTFOLIO+ PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.5% None None 3.0% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/)(/4/) .49% .49% .49% .025% .025% .025% .49% .49% .49%
12b-1
fees(/3/)(/5/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .73 .73 .73 .585 .585 .585 .72 .78 .78
------ ------ ------ ----- ------ ------ ------ ------ ------
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .33 .33 .33 .225 .225 .225 .32 .38 .38
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.22% 1.97% 1.97% .65% 1.40% 1.40% 1.21% 2.02% 2.02%
====== ====== ====== ===== ====== ====== ====== ====== ======
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and .55% for the Select
Equity and Balanced Portfolios, respectively, and administration fees would
be .23% for each class of each Portfolio. PAMG and the Portfolios' adminis-
trators 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 Portfolio's total operating expenses during the remainder of
the current fiscal year at the levels set forth in the table. Without waiv-
ers, "Other operating expenses" would be: (i) .79%, .785% and .77% , re-
spectively, for Investor A Shares, Investor B Shares and Investor C Shares;
and (ii) .79%, .785% and .83%, respectively, for Investor B Shares and In-
vestor C Shares; and "Total Portfolio operating expenses" would be: (iii)
1.34%, .97% and 1.32%, respectively, for Investor A Shares; and (iv) 2.09%,
1.71% and 2.13%, respectively, for Investor B Shares and Investor C Shares.
The Portfolios do not expect to incur any 12b-1 fees with respect to In-
vestor A Shares (otherwise payable at the maximum rate of .10%) during the
current fiscal year.
(4) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
(5) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selection A Pricing Op-
tion?" on page 44. Investor A Shares do not currently pay 12b-1 fees. Long-
term investors in Investor Shares may pay more than the economic equivalent
of the maximum front-end sales charges permitted by the rules of the NASD.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
9
<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>
Large Cap Value Equity Portfolio
A Shares* $57 $82 $109 $186
B Shares (Redemption)** 65 99 129 210***
B Shares (No Redemption) 20 62 106 210***
C Shares 20 62 106 230
Large Cap Growth Equity Portfolio
A Shares* 57 82 109 186
B Shares (Redemption)** 65 99 129 210***
B Shares (No Redemption) 20 62 106 210***
C Shares 20 62 106 230
Small Cap Value Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 134 222***
B Shares (No Redemption) 21 65 112 222***
C Shares 21 65 112 241
Small Cap Growth Equity Portfolio
A Shares* 58 85 115 198
B Shares (Redemption)** 66 102 134 222***
B Shares (No Redemption) 21 65 112 222***
C Shares 21 65 112 241
Mid-Cap Value Equity Portfolio
A Shares* 58 85
B Shares (Redemption)** 66 102
B Shares (No Redemption) 21 65
C Shares 21 65
Mid-Cap Growth Equity Portfolio
A Shares* 58 85
B Shares (Redemption)** 66 102
B Shares (No Redemption) 21 65
C Shares 21 65
International Equity Portfolio
A Shares* 65 96 129 223
B Shares (Redemption)** 68 108 144 242***
B Shares (No Redemption) 23 71 122 242***
C Shares 23 71 122 262
International Emerging Markets
Portfolio
A Shares* 72 117 164 296
B Shares (Redemption)** 75 129 179 314***
B Shares (No Redemption) 30 93 158 314***
C Shares 30 93 158 332
Select Equity Portfolio
A Shares* 57 82 109 186
B Shares (Redemption)** 65 99 129 210***
B Shares (No Redemption) 20 62 106 210***
C Shares 20 62 106 230
Index Equity Portfolio
A Shares* 36 50 65 109
B Shares (Redemption)** 59 82 100 147***
B Shares (No Redemption) 14 44 77 147***
C Shares 17 44 77 168
Balanced Portfolio
A Shares* 57 82 108 185
B Shares (Redemption)** 66 100 131 214***
B Shares (No Redemption) 21 63 109 214***
C Shares 21 63 109 235
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares after
eight years.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses (including the Index Equity Portfolio's pro
rata share of the Index Master Portfolio's advisory fees and operating ex-
penses) an investor will bear either directly or indirectly. They do not re-
flect any charges that may be imposed by brokers or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
For a detailed description of the expenses, see "Who Manages The Fund?"
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are approximately equal to the
expenses which the Index Equity Portfolio would incur if the Fund retained the
services of an investment adviser for the Index Equity Portfolio and the assets
of the Index Equity Portfolio were invested directly in the type of securities
held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
10
<PAGE>
What Are The Portfolios' Financial Highlights?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the Port-
folios' independent accountants. This financial information
should be read together with those financial statements. Further
information about the performance of the Portfolios is available
in the Fund's annual shareholder reports. Both the Statement of
Additional Information and the annual shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-7762.
Information concerning the historical investment results of In-
vestor A Shares of the Index Equity Portfolio reflects the fi-
nancial experience of that Portfolio prior to its conversion on
June 2, 1996 to a feeder portfolio of the Index Master Portfo-
lio. During the periods presented the Large Cap Growth Equity,
Small Cap Value Equity, International Equity, International
Emerging Markets and Balanced Portfolios had no Investor C
Shares outstanding, and the Mid-Cap Value Equity Portfolio and
Mid-Cap Growth Equity Portfolio had not commenced investment
operations.
11
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP VALUE EQUITY PORTFOLIO
(FORMERLY THE VALUE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR YEAR 5/02/92/1/ 1/18/96/1/ 8/16/96/1/
ENDED ENDED ENDED ENDED THROUGH THROUGH THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.92 $ 11.62 $ 11.69 $ 9.78 $10.00 $ 13.56 $ 14.91
------- ------- ------- ------ ------ ------- -------
Income from investment
operations
Net investment income .28 0.27 0.23 0.22 0.12 0.13 0.02
Net gain (loss) on
investments (both
realized and
unrealized) 2.41 2.56 0.15 1.91 (0.24) 1.80 0.45
------- ------- ------- ------ ------ ------- -------
Total from investment
operations 2.69 2.83 0.38 2.13 (0.12) 1.93 0.47
------- ------- ------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.29) (0.28) (0.23) (0.22) (0.10) (0.17) (0.06)
Distributions from net
realized capital gains (0.97) (0.25) (0.22) - - - - - - - -
------- ------- ------- ------ ------ ------- -------
Total distributions (1.26) (0.53) (0.45) (0.22) (0.10) (0.17) (0.06)
------- ------- ------- ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 15.35 $ 13.92 $ 11.62 $11.69 $ 9.78 $ 15.32 $ 15.32
======= ======= ======= ====== ====== ======= =======
Total return 20.52%/3/ 25.22%/3/ 3.32%/3/ 21.95%/3/ (1.19)%/3/ 14.26%/4/ 3.16%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $26,190 $16,910 $10,412 $4,865 $ 16 $ 3,152 $ 205
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.22% 1.11% 1.05% 0.92% 0.85%/2/ 1.92%/2/ 1.80%/2/
Before
advisory/administration
fee waivers 1.31% 1.25% 1.21% 0.95% 0.85%/2/ 2.00%/2/ 1.88%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.93% 2.24% 2.08% 1.96% 2.62%/2/ 1.34%/2/ 1.29%/2/
Before
advisory/administration
fee waivers 1.84% 2.10% 1.92% 1.93% 2.62%/2/ 1.25%/2/ 1.20%/2/
PORTFOLIO TURNOVER RATE 64% 12% 11% 11% 13% 64% 64%
AVERAGE COMMISSION
RATE/5/ $0.0556 N/A N/A N/A N/A $0.0556 $0.0556
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
12
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP GROWTH EQUITY PORTFOLIO
(FORMERLY THE GROWTH EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES B SHARES
FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 5/02/92/1/ 1/24/96/1/
ENDED ENDED ENDED ENDED THROUGH THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.01 $ 10.16 $ 11.57 $ 9.92 $10.09 $ 13.08
------- ------- ------- ------ ------ -------
Income from investment
operations
Net investment income 0.02 0.08 0.02 0.02 0.08 (0.02)
Net gain (loss) on
investments (both
realized and
unrealized) 2.29 2.87 (1.33) 2.10 (0.10) 1.80
------- ------- ------- ------ ------ -------
Total from investment
operations 2.31 2.95 (1.31) 2.12 (0.02) 1.78
------- ------- ------- ------ ------ -------
LESS DISTRIBUTIONS
Distributions from net
investment income - - (0.10) - - (0.07) (0.15) - -
Distributions from
capital (0.38) - - - - (0.01) - - - -
Distributions from net
realized capital gains - - (0.10) (0.39) - - - -
------- ------- ------- ------ ------ -------
Total distributions (0.38) (0.10) (0.10) (0.47) (0.15) - -
------- ------- ------- ------ ------ -------
NET ASSET VALUE AT END OF
PERIOD $ 14.94 $ 13.01 $ 10.16 $11.57 $ 9.92 $ 14.86
======= ======= ======= ====== ====== =======
Total return 18.18%/3/ 29.26%/3/ (11.38)%/3/ 22.08%/3/ (0.17)%/3/ 13.61%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $16,579 $10,034 $ 5,049 $2,362 $ 239 $ 2,364
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.22% 1.11% 1.05% 0.91% 0.85%/2/ 1.93%/2/
Before
advisory/administration
fee waivers 1.34% 1.29% 1.29% 0.97% 0.86%/2/ 2.05%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.15% 0.76% 0.29% 0.18% 2.07%/2/ (0.47)%/2/
Before
advisory/administration
fee waivers 0.04% 0.58% 0.05% 0.12% 2.06%/2/ (0.58)%/2/
PORTFOLIO TURNOVER RATE 58% 55% 212% 175% 162% 58%
AVERAGE COMMISSION
RATE/5/ $0.0598 N/A N/A N/A N/A $0.0598
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
13
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 6/02/92/1/ YEAR 10/03/94/1/
ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 15.14 $ 13.58 $ 13.07 $10.14 $10.06 $ 15.06 $ 13.51
------- ------- ------- ------ ------ ------- -------
Income from investment
operations
Net investment income 0.03 - - (0.01) 0.03 0.02 (0.04) (0.05)
Net gain (loss) on
investments (both
realized and
unrealized) 1.69 2.17 0.77 3.02 0.07 1.65 2.21
------- ------- ------- ------ ------ ------- -------
Total from investment
operations 1.72 2.17 0.76 3.05 0.09 1.61 2.16
------- ------- ------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) - - - - (0.04) (0.01) - - - -
Distributions from net
realized capital gains (0.87) (0.61) (0.25) (0.08) - - (0.87) (0.61)
------- ------- ------- ------ ------ ------- -------
Total distributions (0.89) (0.61) (0.25) (0.12) (0.01) (0.87) (0.61)
------- ------- ------- ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 15.97 $ 15.14 $ 13.58 $13.07 $10.14 $ 15.80 $ 15.06
======= ======= ======= ====== ====== ======= =======
Total return 12.06%/3/ 16.96%/3/ 5.93%/3/ 30.36%/3/ 0.89%/4/ 11.34%/4/ 16.95%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $24,605 $21,563 $16,884 $9,084 $ 62 $ 2,357 $ 1,477
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.32% 1.18% 1.13% 0.94% 0.85%/2/ 2.04% 1.80%/2/
Before
advisory/administration
fee waivers 1.33% 1.28% 1.25% 0.98% 0.89%/2/ 2.05% 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.20% 0.00% (0.11)% 0.19% 0.51%/2/ (0.50)% (0.61)%/2/
Before
advisory/administration
fee waivers 0.19% (0.09)% (0.23)% 0.15% 0.47%/2/ (0.51)% (0.70)%/2/
PORTFOLIO TURNOVER RATE 50% 31% 18% 41% 17% 50% 31%
AVERAGE COMMISSION
RATE/5/ $0.0580 N/A N/A N/A N/A $0.0580 N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
14
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR 9/15/93/1/ 1/18/96/1/ 9/6/96/1/
ENDED ENDED ENDED THROUGH THROUGH THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/96 9/30/96
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.98 $10.12 $10.47 $ 9.96 $ 14.87 $ 19.66
------- ------ ------ ------ ------- -------
Income from investment
operations
Net investment income (0.06) (0.02) - - - - (0.07) (0.01)
Net gain (loss) on
investments (both
realized and
unrealized) 6.77 4.88 (0.35) 0.51 6.73 1.88
------- ------ ------ ------ ------- -------
Total from investment
operations 6.71 4.86 (0.35) 0.51 6.66 1.87
------- ------ ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income - - - - - - - - - - - -
Distributions from net
realized capital gains - - - - - - - - - - - -
------- ------ ------ ------ ------- -------
Total distributions - - - - - - - - - - - -
------- ------ ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 21.69 $14.98 $10.12 $10.47 $ 21.53 $ 21.53
======= ====== ====== ====== ======= =======
Total return 44.79%/3/ 48.02%/3/ (3.33)%/3/ 5.12%/3/ 38.27%/4/ 9.51%/4/
RATIOS/SUPPLEMENTAL DATA
NET ASSETS AT END OF
PERIOD (IN THOUSANDS) $27,954 $7,348 $1,620 $ 41 $ 6,520 $ 329
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.33% 1.20% 0.86% 1.13%/2/ 2.06%/2/ 1.74%/2/
Before
advisory/administration
fee waivers 1.35% 1.33% 1.42% 1.82%/2/ 2.08%/2/ 1.76%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers (0.55)% (0.24)% 0.07% (0.48)%/2/ (1.34)%/2/ (0.93)%
Before
advisory/administration
fee waivers (0.57)% (0.36)% (0.49)% (1.17)%/2/ (1.36)%/2/ (0.95)%/2/
PORTFOLIO TURNOVER RATE 89% 74% 89% 9% 89% 89%
AVERAGE COMMISSION
RATE/5/ $0.0569 N/A N/A N/A $0.0569 $0.0569
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
15
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 6/02/92/1/ YEAR 10/03/94/1/
ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.24 $ 13.40 $ 12.47 $ 9.87 $10.68 $ 13.20 $ 13.35
------- ------- ------- ------ ------ ------- -------
Income from investment
operations
Net investment income 0.14 0.11 0.12 0.12 0.09 0.08 0.05
Net gain (loss) on
investments
(both realized and
unrealized) 0.81 0.13 1.15 2.59 (0.83) 0.77 0.16
------- ------- ------- ------ ------ ------- -------
Total from investment
operations 0.95 0.24 1.27 2.71 (0.74) 0.85 0.21
------- ------- ------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.16) (0.04) (0.09) (0.11) (0.07) (0.15) - -
Distributions from net
realized capital gains (0.67) (0.36) (0.25) - - - - (0.67) (0.36)
------- ------- ------- ------ ------ ------- -------
Total distributions (0.83) (0.40) (0.34) (0.11) (0.07) (0.82) (0.36)
------- ------- ------- ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 13.36 $ 13.24 $ 13.40 $12.47 $ 9.87 $ 13.23 $ 13.20
======= ======= ======= ====== ====== ======= =======
Total return 7.58%/3/ 2.00%/3/ 10.24%/3/ 27.72%/3/ (6.94)%/3/ 6.81%/4/ 1.77%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $19,842 $17,721 $14,433 $3,669 $ 58 $ 2,692 $ 1,071
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.53% 1.40% 1.35% 1.25% 1.20%/2/ 2.23% 2.06%/2/
Before
advisory/administration
fee waivers 1.64% 1.58% 1.54% 1.31% 1.21%/2/ 2.34% 2.23%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.45% 0.97% 0.96% 1.27% 2.59%/2/ (0.18)% 0.59%/2/
Before
advisory/administration
fee waivers 0.34% 0.80% 0.77% 1.21% 2.58%/2/ (0.29)% 0.41%/2/
PORTFOLIO TURNOVER RATE 70% 105% 37% 31% 16% 70% 105%
AVERAGE COMMISSION
RATE/5/ $0.0158 N/A N/A N/A N/A $0.0158 N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
4Contingent deferred sales charge not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
16
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 6/17/94/1/ 7/2/96/1/
ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/96
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.18 $10.54 $10.00 $ 8.85
------- ------ ------ -------
Income from investment
operations
Net investment income 0.02 0.03 0.02 - -
Net gain (loss) on
investments (both
realized and unrealized) 0.52 (2.14) 0.52 (0.16)
------- ------ ------ -------
Total from investment
operations 0.54 (2.11) 0.54 (0.16)
------- ------ ------ -------
LESS DISTRIBUTIONS
Distributions from net
investment income - - (0.05) - - - -
Distribution from capital - - (0.01) - - - -
Distributions from net
realized capital gains (0.01) (0.19) - - - -
------- ------ ------ -------
Total distributions (0.01) (0.25) - - - -
------- ------ ------ -------
NET ASSET VALUE AT END OF
PERIOD $ 8.71 $ 8.18 $10.54 $ 8.69
======= ====== ====== =======
Total return 6.49%/3/ (20.12)%/3/ 5.40%/3/ (1.81)%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 2,996 $2,563 $2,857 $ 216
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 2.25% 2.20% 2.15%/2/ 2.90%/2/
Before
advisory/administration
fee waivers 2.35% 2.44% 3.13%/2/ 3.00%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.45% 1.54% 0.74% 0.17%/2/
Before
advisory/administration
fee waivers 0.35% 1.30% (0.24)%/2/ 0.07%/2/
PORTFOLIO TURNOVER RATE 44% 75% 4% 44%
AVERAGE COMMISSION RATE/5/ $0.0018 N/A N/A $0.0018
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
17
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
(FORMERLY THE CORE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR 10/13/93/1/ 3/27/96/1/ 9/27/96/1/
ENDED ENDED THROUGH THROUGH THROUGH
9/30/96 9/30/95 9/30/94 9/30/96 9/30/96
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.88 $ 9.92 $ 9.96 $ 12.83 $ 13.52
------- ------ ------ ------- -------
Income from investment
operations
Net investment income 0.15 0.20 0.18 0.04 - -
Net gain (loss) on
investments (both
realized and
unrealized) 2.07 2.06 (0.03) 0.73 0.02
------- ------ ------ ------- -------
Total from investment
operations 2.22 2.26 0.15 0.77 0.02
------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.15) (0.18) (0.19) (0.06) - -
Distributions from net
realized capital gains (0.39) (0.12) - - - - - -
------- ------ ------ ------- -------
Total distributions (0.54) (0.30) (0.19) (0.06) - -
------- ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 13.56 $11.88 $ 9.92 $ 13.54 $ 13.54
======= ====== ====== ======= =======
Total return 19.23%/3/ 23.29%/3/ 1.54%/3/ 6.58%/4/ 0.15%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 6,228 $3,808 $ 601 $ 1,196 $ 50
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.21% 1.12% 1.05%/2/ 1.92%/2/ 0.00%/2/
Before
advisory/administration
fee waivers 1.34% 1.30% 1.34%/2/ 2.04%/2/ 0.00%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.24% 1.91% 1.89%/2/ 0.59%/2/ 0.00%/2/
Before
advisory/administration
fee waivers 1.11% 1.73% 1.60%/2/ 0.46%/2/ 0.00%/2/
PORTFOLIO TURNOVER RATE .55% 51% 88% 55% 55%
AVERAGE COMMISSION
RATE/5/ $0.0487 N/A N/A $0.0487 $0.0487
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
18
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR YEAR 7/29/92/1/ 2/7/96/1/ 8/14/96/1/
ENDED ENDED ENDED ENDED THROUGH THROUGH THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/96 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.58 $10.93 $11.02 $10.06 $10.07 $ 13.20 $ 13.47
------- ------ ------ ------ ------ ------- -------
Income from investment
operations
Net investment income 0.27 0.34 0.25 0.27 0.10 0.08 0.02
Net gain (loss) on
investments (both
realized and
unrealized) 2.09 2.73 0.04 0.96 (0.01) 0.77 0.50
------- ------ ------ ------ ------ ------- -------
Total from investment
operations 2.36 3.07 0.29 1.23 0.09 0.85 0.52
------- ------ ------ ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28) (0.30) (0.27) (0.27) (0.10) (0.12) (0.06)
Distributions from net
realized capital gains (1.70) (0.12) (0.11) - - - - - - - -
------- ------ ------ ------ ------ ------- -------
Total distributions (1.98) (0.42) (0.38) (0.27) (0.10) (0.12) - -
------- ------ ------ ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 13.96 $13.58 $10.93 $11.02 $10.06 $ 13.93 $ 13.93
======= ====== ====== ====== ====== ======= =======
Total return 19.31%/3/ 28.77%/3/ 2.66%/3/ 12.33%/3/ 0.91%/3/ 6.50%/5/ 3.90%/5/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $12,752 $6,501 $2,632 $1,263 $ 56 $ 2,904 $ 432
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.65%/4/ 0.61% 0.55% 0.49% 0.45%/2/ 1.38%/2/ 1.25%/2/
Before
advisory/administration
fee waivers 0.97% 0.95% 0.92% 0.61% 0.64%/2/ 1.60%/2/,/4/ 1.43%/2/,/4/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.81% 2.44% 2.35% 2.48% 2.85%/2/ 0.93%/2/ 0.71%/2/
Before
advisory/administration
fee waivers 1.49% 2.10% 1.98% 2.36% 2.66%/2/ 0.71%/2/ 0.53%/2/
PORTFOLIO TURNOVER RATE 18%/6/,/7/ 18% 17% 8% 23% 18%/6/,/7/ 18%/6/,/7/
AVERAGE COMMISSION RATE $0.0319/6/,/7/ N/A N/A N/A N/A $0.0319/6/,/7/ $0.0319/6/,/7/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including expenses allocated from The U.S. Large Company Series of The DFA
Investment Trust Company of 0.13%.
/5/Contingent deferred sales load not reflected in total return.
/6/For the period from October 1, 1995 through May 31, 1996.
/7/See footnotes to the financial statements of The DFA Investment Trust
Company.
19
<PAGE>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
<CAPTION>
INVESTOR B
SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 5/14/90/1/
ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
FOR THE
PERIOD
YEAR 10/03/94/1/
ENDED THROUGH
9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.73 $ 11.98 $ 12.42 $ 11.53 $10.82 $ 9.13 $10.00
------- ------- ------- ------- ------ ------ ------
Income from investment
operations
Net investment income 0.40 0.43 0.32 0.30 0.34 0.38 0.12
Net realized gain (loss)
on investments 1.49 1.88 (0.38) 1.14 1.22 1.77 (0.88)
------- ------- ------- ------- ------ ------ ------
Total from investment
operations 1.89 2.31 (0.06) 1.44 1.56 2.15 (0.76)
------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.39) (0.42) (0.32) (0.29) (0.39) (0.34) (0.11)
Distributions from net
realized capital gains (0.13) (0.14) (0.06) (0.26) (0.46) (0.12) - -
------- ------- ------- ------- ------ ------ ------
Total distributions (0.52) (0.56) (0.38) (0.55) (0.85) (0.46) (0.11)
------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 15.10 $ 13.73 $ 11.98 $ 12.42 $11.53 $10.82 $ 9.13
======= ======= ======= ======= ====== ====== ======
Total return 13.98%/3/ 19.86%/3/ (0.50)%/3/ 12.80%/3/ 15.17%/3/ 24.04%/3/ (7.64)%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period
(in thousands) $71,899 $67,892 $62,307 $39,529 $8,481 $4,265 $3,960
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.19% 1.07% 1.05% 0.91% 0.95% 1.15% 1.15%/2/
Before
advisory/administration
fee waivers 1.30% 1.28% 1.31% 1.09% 1.51% 1.86% 1.90%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.75% 3.38% 2.77% 2.79% 3.28% 3.70% 3.07%/2/
Before
advisory/administration
fee waivers 2.65% 3.16% 2.51% 2.61% 2.72% 2.99% 2.32%/2/
PORTFOLIO TURNOVER RATE 275% 154% 54% 32% 36% 45% 37%
AVERAGE COMMISSION
RATE/5/ $0.0599 N/A N/A N/A N/A N/A N/A
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.69 $11.95
----------- -------------
Income from investment
operations
Net investment income 0.31 0.33
Net realized gain (loss)
on investments 1.47 1.93
----------- -------------
Total from investment
operations 1.78 2.26
----------- -------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.30) (0.38)
Distributions from net
realized capital gains (0.13) (0.14)
----------- -------------
Total distributions (0.43) (0.52)
----------- -------------
NET ASSET VALUE AT END OF
PERIOD $ 15.04 $13.69
=========== =============
Total return 13.14%/4/ 19.38%/4/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period
(in thousands) $ 7,333 $3,124
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.98% 1.72%/2/
Before
advisory/administration
fee waivers 2.09% 1.94%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.99% 2.71%/2/
Before
advisory/administration
fee waivers 1.88% 2.49%/2/
PORTFOLIO TURNOVER RATE 275% 154%/2/
AVERAGE COMMISSION
RATE/5/ $0.0599 N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Contingent deferred sales load not reflected in total return.
/5/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
20
<PAGE>
What Are The Portfolios?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 30 portfolios and
has been structured to include many different investment styles
so that investors may participate across multiple disciplines in
order to seek their long-term financial goals.
The Equity Portfolios of COMPASS CAPITAL FUNDS consist of eleven
investment portfolios that provide investors with a broad spec-
trum of investment alternatives within the equity sector. Eight
of these Portfolios invest primarily in U.S. stocks, two Portfo-
lios invest in non-U.S. international stocks and one Portfolio
invests in a combination of U.S. stocks and bonds.
In certain investment cycles and over certain holding periods,
an equity fund that invests according to a "value" style or a
"growth" style may perform above or below the market. An invest-
ment program that combines these multiple disciplines allows in-
vestors to select from among these various product options in
the way that most closely fits the individual's investment goals
and sentiments.
INVESTMENT Each of the eleven Compass Capital Equity Portfolios seeks to
OBJECTIVES provide long-term Capital Appreciation.
The Select Equity, Large Cap Value Equity and Mid-Cap Value Eq-
uity Portfolios pursue a secondary objective of Current Income
from dividends.
The Balanced Portfolio pursues a secondary objective of Current
Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a spe-
cific investment style, as described below. No assurance can be
given that a Portfolio will achieve its investment objective.
21
<PAGE>
What Are The Differences Among The Portfolios?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
Large Cap Value Equity Pursues equity securities Stocks with price/earnings Russell 1000
(defined as common stocks or and price/book ratios at Value Index
securities convertible into time of purchase below
common stocks) which the average for benchmark and
sub-adviser believes are capitalization in excess of
undervalued. A security's $1 billion.
earnings trend and its
dividend growth rate will
also be factors considered
in security selection.
Large Cap Growth Equity Pursues stocks with earnings Stocks with growth rate Russell 1000
growth potential. Emphasizes estimates in excess of Growth Index
stocks which the sub-adviser average for benchmark and
considers to have favorable capitalization in excess of
and above-average earnings $1 billion.
growth prospects.
Small Cap Value Equity Pursues small cap stocks Stocks with price/earnings Russell 2000
which the sub-adviser and price/book ratios at Index
believes are undervalued. A time of purchase below
security's earnings trend average for benchmark and
and its dividend growth rate capitalization below $1
will also be factors billion.
considered in security
selection.
Small Cap Growth Equity Pursues small cap stocks Stocks with growth rate Russell 2000
with earnings growth estimates in excess of Growth Index
potential. Emphasizes small average for benchmark and
cap stocks which the sub- capitalization below $1
adviser considers to have billion.
favorable and above-average
earnings growth prospects.
Mid-Cap Value Equity Pursues mid cap stocks and Stocks with low Russell
sectors which the sub- price/earnings, price/book, Midcap Value
adviser believes are price/cash flow or Index
undervalued. A security's price/sales ratios at the
earnings trend and its time of purchase relative to
dividend growth rate will their respective sectors or
also be factors considered the benchmark and
in security selection. capitalization between $1
billion and $5 billion.
Mid-Cap Growth Equity Pursues mid cap stocks with Stocks with growth rate Russell
earnings growth potential. estimates in excess of Midcap
Emphasizes stocks which the average for benchmark and Growth Index
sub-adviser considers to capitalization between $1
have favorable and above- billion and $5 billion.
average earnings growth
prospects.
International Equity Pursues non-dollar Portfolio assets are EAFE Index
denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with price/earnings
International Europe, ratios below average for a
Australia and the Far East security's home market or
Index ("EAFE"). Within this stock exchange.
universe, a value style of
investing is employed to Diversification across
select stocks which the sub- countries, industry groups
adviser believes are and companies with
undervalued. A security's investment at all times in
earnings trend and its price at least three foreign
momentum will also be countries.
factors considered in
security selection. The sub-
adviser will also consider
macroeconomic factors such
as the prospects for
relative economic growth
among certain foreign
countries, expected levels
of inflation, government
policies influencing
business conditions and the
outlook for currency
relationships.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
COMPASS PERFORMANCE
CAPITAL FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<S> <C> <C> <C>
International Emerging Pursues non-dollar Portfolio assets are MSCI
Markets denominated stocks of primarily invested in stocks Emerging
issuers in emerging country of emerging market issuers. Markets Free
markets (generally any Index
country considered to be Stocks with price/earnings
emerging or developing by ratios below average for a
the World Bank, the security's home market or
International Finance stock exchange.
Corporation or the United
Nations). Within this Ordinarily, stocks of
universe, a value style of issuers in at least three
investing is employed to emerging markets will be
select stocks which the sub- held.
adviser believes are
undervalued. The sub-adviser
will also consider
macroeconomic factors such
as the prospects for
relative economic growth
among certain foreign
countries, expected levels
of inflation, government
policies influencing
business conditions and the
outlook for currency
relationships.
Select Equity Combines value and growth Similar sector weightings as S&P 500
style as sub-adviser benchmark, with over- or Index
identifies market under-weighting in
opportunity. particular securities within
those sectors.
Index Equity Invests all of its assets The Index Master Portfolio S&P 500
indirectly, through the U.S. holds substantially all the Index
Large Company Series (the stocks of the S&P 500 Index
"Index Master Portfolio") of in approximately the same
The DFA Investment Trust proportions as they are
Company, in the stocks of represented in the Index.
the S&P 500 Index using a
passive investment style
that pursues the replication
of the S&P 500 Index return.
Balanced Holds a blend of equity and Maintains a minimum 25% S&P 500 and
fixed income securities to investment in fixed income Salomon
deliver total return through senior securities. Broad
capital appreciation and Investment
current income. Grade Index
Equity Portion: Equity Portion:
Combines value and growth Similar sector weightings as
style as sub-adviser benchmark, with over- or
identifies market under- weighting in
opportunity. particular securities within
those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation and Dollar-denominated
security selection across a investment grade bonds,
broad universe of fixed including U.S. Government,
income securities. mortgage-backed, asset-
backed and corporate debt
securities.
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
23
<PAGE>
What Additional Investment Policies And Risks Apply?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
EQUITY SECURITIES. During normal market conditions each Portfolio, except the
Balanced Portfolio, will normally invest at least 80% of the value of its total
assets in equity securities. The Portfolios will invest primarily in equity se-
curities of U.S. issuers, except the International Equity and International
Emerging Markets Portfolios, which will invest primarily in foreign issuers.
Equity securities include common stock and preferred stock (including convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depositary receipts.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may
invest in both sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar global instruments. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information con-
cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs,
and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if
such instruments were sponsored by the issuer. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write cov-
ered call options, buy put options, buy call options and write secured put op-
tions for the purpose of hedging or earning additional income, which may be
deemed speculative or, with respect to the International Equity and Interna-
tional Emerging Markets Portfolios, cross-hedging. These options may relate to
particular securities, securities indices, or the yield differential between
two securities, or, in the case of the International Equity and International
Emerging Markets Portfolios, foreign currencies, and may or may not be listed
on a securities exchange and may or may not be issued by the Options Clearing
Corporation. A Portfolio will not purchase put and call options when the aggre-
gate premiums on outstanding options exceed 5% of its net assets at the time of
purchase, and will not write options on more than 25% of the value of its net
assets (measured at the time an option is written). Options trading is a highly
specialized activity that entails greater than ordinary investment risks. In
addition, unlisted options are not subject to the protections afforded purchas-
ers of listed options issued by the Options Clearing Corporation, which per-
forms the obligations of its members if they default.
24
<PAGE>
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Portfolio may
do so either to hedge the value of its securities portfolio as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, a Portfolio may utilize futures con-
tracts in anticipation of changes in the composition of its holdings or in cur-
rency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) a
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re-
quests, or as a temporary defensive measure if its sub-adviser determines that
market conditions warrant, each Portfolio other than the Index Master Portfolio
may also invest without limitation in high quality money market instruments.
The Balanced Portfolio may also invest in these securities in furtherance of
its investment objective. The Index Master Portfolio may invest a portion of
its assets, normally not more than 5% of its net assets, in certain short-term
fixed income obligations in order to maintain liquidity or to invest temporar-
ily uncommitted cash balances.
25
<PAGE>
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, a Portfolio agrees
to purchase securities from financial institutions subject to the seller's
agreement to repurchase them at an agreed upon time and price. Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These transac-
tions involve a commitment by a Portfolio to purchase or sell particular secu-
rities with payment and delivery taking place at a future date (perhaps one or
two months later), and permit a Portfolio to lock in a price or yield on a se-
curity it owns or intends to purchase, regardless of future changes in interest
rates or market action. When-issued and forward commitment transactions involve
the risk, however, that the price or yield obtained in a transaction may be
less favorable than the price or yield available in the market when the securi-
ties delivery takes place. Each Portfolio's when-issued purchases and forward
commitments are not expected to exceed 25% of the value of its total assets ab-
sent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by each Portfolio (except the Index Master Portfolio) through reverse repur-
chase agreements under which the Portfolio sells portfolio securities to finan-
cial institutions such as banks and broker-dealers and agrees to repurchase
them at a particular date and price. A Portfolio may use the proceeds of re-
verse repurchase agreements to purchase other securities either maturing, or
under an agreement to resell, on a date simultaneous with or prior to the expi-
ration of the reverse repurchase agreement. The Index Master Portfolio does not
intend to invest in reverse repurchase agreements. The Balanced Portfolio may
utilize reverse repurchase agreements when it is anticipated that the interest
income to be earned from the investment of the proceeds of the transaction is
greater than the interest expense of the transaction. This use of reverse re-
purchase 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 re-
purchase agreement is outstanding, a Portfolio will maintain a segregated ac-
count with the Fund's custodian containing cash, U.S. Government or other ap-
propriate liquid securities having a value at least equal to the repurchase
price. A Portfolio's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value
26
<PAGE>
of its total assets (33% in the case of the Index Master Portfolio). In addi-
tion, the Balanced Portfolio may borrow up to an additional 5% of its total as-
sets for temporary purposes. Whenever borrowings exceed 5% of a Portfolio's to-
tal assets, the Portfolios (other than the Index Master Portfolio and the Bal-
anced Portfolio) will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) may invest in
securities issued by other investment companies which invest in short-term debt
securities and which seek to maintain a $1.00 net asset value per share. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (SPDRs) and shares of other investment
companies that are structured to seek a similar correlation to the performance
of the S&P 500 Index. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained on a current basis equal in value to at least the market value of the
loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of
the value of its total assets. Securities loans involve risks of delay in re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly loss of rights in the collateral if the borrower of the securities becomes
insolvent.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% (10% with
respect to the Index Master Portfolio) of the value of its net assets in secu-
rities that are illiquid. Variable and floating rate instruments that cannot be
disposed of within seven days, and repurchase agreements and time deposits that
do not provide for payment within seven days after notice, without taking a re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties which are not registered under the Securities Act of 1933 (the "1933 Act")
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
SMALL CAP AND MID-CAP PORTFOLIOS.
Under normal market conditions, the Small Cap Growth Equity Portfolio and Small
Cap Value Equity Portfolio will invest at least 90% (and in any event at least
65%) of their respective total
27
<PAGE>
assets in equity securities of smaller-capitalized organizations (less than $1
billion at the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio
and Mid-Cap Growth Equity Portfolio will invest, under normal market condi-
tions, at least 90% (and in any event at least 65%) of their respective total
assets in equity securities of medium-capitalized organizations (between $1
billion and $5 billion at the time of purchase). These organizations will nor-
mally have more limited product lines, markets and financial resources and will
be dependent upon a more limited management group than larger capitalized com-
panies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Portfolio operates as an index
portfolio and, therefore, is not actively managed (through the use of economic,
financial or market analysis), and adverse performance will ordinarily not re-
sult in the elimination of a stock from the Portfolio. The Portfolio will re-
main fully invested in common stocks even when stock prices are generally fall-
ing. Ordinarily, portfolio securities will not be sold except to reflect addi-
tions or deletions of the stocks that comprise the S&P 500 Index, including
mergers, reorganizations and similar transactions and, to the extent necessary,
to provide cash to pay redemptions of the Portfolio's shares. The investment
performance of the Index Master Portfolio and the Index Equity Portfolio is ex-
pected to approximate the investment performance of the S&P 500 Index, which
tends to be cyclical in nature, reflecting periods when stock prices generally
rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash. S&P has no obligation or liability in connection with the ad-
ministration, marketing or trading of the Index Equity Portfolio or Index Mas-
ter Portfolio.
- -------
* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been li-
censed for use by the Fund and The DFA Investment Trust Company.
28
<PAGE>
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio and International Emerging Markets Portfolio (the "Interna-
tional Portfolios") will invest at least 90% (and in any event at least 65%) of
their total assets in equity securities of foreign issuers. Investing in for-
eign securities involves considerations not typically associated with investing
in securities of companies organized and operated in the United States. Because
foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Portfolio that invests in foreign securities
as measured in U.S. dollars will be affected favorably or unfavorably by
changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Equity and International Emerging Mar-
kets Portfolios can be expected to be higher than those of Portfolios investing
primarily in domestic securities. The costs attributable to investing abroad
are usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
29
<PAGE>
As stated, the International Emerging Markets Portfolio will invest its assets
in countries with emerging economies or securities markets. These countries may
include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub-
lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay-
sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af-
rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and
Zimbabwe. Political and economic structures in many of these countries may be
undergoing significant evolution and rapid development, and these countries may
lack the social, political and economic stability characteristic of more devel-
oped countries. Some of these countries may have in the past failed to recog-
nize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of investments in these countries and the availability to a Portfolio of addi-
tional investments in emerging market countries. The small size and inexperi-
ence of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the
countries illiquid and more volatile than investments in Japan or most Western
European countries. There may be little financial or accounting information
available with respect to issuers located in certain emerging market countries,
and it may be difficult to assess the value or prospects of an investment in
such issuers.
The International Equity Portfolio invests primarily in equity securities of
issuers located in countries included in EAFE. Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United
Kingdom are currently included in EAFE. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Equity and International Emerging Markets Portfolios may (but
are not required to) use forward foreign currency exchange contracts to hedge
against movements in the value of foreign currencies (including the European
Currency Unit (ECU)) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A forward for-
eign currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Foreign currency exchange contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow a Portfolio to establish a rate of ex-
change for a future point in time.
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guar-
30
<PAGE>
anteed investment contracts (GICs), obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities and state and local munic-
ipal obligations. These securities will be rated at the time of purchase within
the four highest rating groups assigned by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") or another nationally
recognized statistical rating organization. If unrated, the securities will be
determined at the time of purchase to be of comparable quality by the sub-ad-
viser. Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are
generally considered to be investment grade although they have speculative
characteristics. If a fixed income security is reduced below Baa by Moody's or
BBB by S&P, the Portfolio's sub-adviser will dispose of the security in an or-
derly fashion as soon as practicable. Investments in securities of foreign is-
suers, which present additional investment considerations as described above
under "International Portfolios," will be limited to 5% of the Portfolio's to-
tal assets.
The Balanced Portfolio may make significant investments in residential and com-
mercial mortgage-related and other asset-backed securities (i.e., securities
backed by home equity loans, installment sale contracts, credit card receiv-
ables or other assets) issued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, including guaranteed mortgage pass-through certificates, which provide
the holder with a pro rata interest in the underlying mortgages, adjustable
rate mortgage-related securities ("ARMs") and collateralized mortgage obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers of CMOs frequently elect to be taxed as a pass-through entity known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multi-
ple classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the
31
<PAGE>
automobile receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility
that recoveries on repossessed collateral may not, in some cases, be able to
support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may be prepaid at any time be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
The average life of a mortgage-related instrument, in particular, is likely to
be substantially less than the original maturity of the mortgage pools under-
lying the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to ex-
perience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally be at lower rates than the rates that were carried by the obligations that
have been prepaid. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank, National Association
("PNC Bank") or its affiliates. It is possible that, under some circumstances,
PNC Mortgage Securities Corp. or its affiliates could have interests that are
in conflict with the holders of these mortgage-backed securities, and such
holders could have rights against PNC Mortgage Securities Corp. or its affili-
ates.
The Balanced Fund may also purchase obligations issued or guaranteed by the
U.S. Government and U.S. Government agencies and instrumentalities. Obligations
of certain agencies and instrumentalities of the U.S. Government are supported
by the full faith and credit of the U.S. Treasury. Others are supported by the
right of the issuer to borrow from the U.S. Treasury; and still others are sup-
ported only by the credit of the agency or instrumentality issuing the obliga-
tion. No assurance can be given that the U.S. Government will provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law. Certain U.S. Treasury and agency securities may be held by
trusts that issue participation certificates (such as Treasury income growth
receipts ("TIGRs") and certificates of accrual on Treasury certificates
("CATs")). The Balanced Portfolio may purchase these certificates, as well as
Treasury receipts and other stripped securities, which represent beneficial
ownership interests in either future interest payments or the future principal
payments on U.S. Government obligations.
32
<PAGE>
These instruments are issued at a discount to their "face value" and may (par-
ticularly in the case of stripped mortgage-backed securities) exhibit greater
price volatility than ordinary debt securities because of the manner in which
their principal and interest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments) and state and local
government obligations. Zero-coupon bonds are subject to greater market fluctu-
ations from changing interest rates than debt obligations of comparable maturi-
ties which make current distributions of interest. Municipal obligations may be
purchased when the Portfolio's sub-adviser believes that their return, on a
pre-tax basis, will be comparable to the returns of other permitted invest-
ments. Dividends paid by the Portfolio that are derived from interest on munic-
ipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to en-
hance current income, the Balanced Portfolio may enter into dollar roll trans-
actions. A dollar roll transaction involves a sale by the Portfolio of a mort-
gage-backed or other security concurrently with an agreement by the Portfolio
to repurchase a similar security at a later date at an agreed-upon price. The
securities that are repurchased will bear the same interest rate and stated ma-
turity as those sold, but pools of mortgages collateralizing those securities
may have different prepayment histories than those sold. During the period be-
tween the sale and repurchase, the Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in additional instruments for the Portfolio, and the income
from these investments will generate income for the Portfolio. If such income
does not exceed the income, capital appreciation and gain or loss that would
have been realized on the securities sold as part of the dollar roll, the use
of this technique will diminish the investment performance of the Portfolio
compared with what the performance would have been without the use of dollar
rolls. At the time that the Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
Government securities or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. The Portfolio's dollar rolls,
together with its reverse repurchase agreements and other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
The market value of the Balanced Portfolio's investments in fixed income secu-
rities will change in response to changes in interest rates and the relative
financial strength of each issuer. During periods of falling interest rates,
the values of long-term fixed income securities generally rise. Conversely,
during periods of rising interest rates the values of such securities generally
decline. Changes in the financial strength of an issuer or changes in the rat-
ings of any particular security may also affect the value of these investments.
33
<PAGE>
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Mid-Cap Value Equity and Mid-Cap
Growth Equity Portfolios will not exceed 100%. The past portfolio turnover
rates of the other Portfolios are set forth above under "What Are The Portfo-
lios' Financial Highlights?" A Portfolio's annual portfolio turnover rate will
not be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover rates (i.e., over 100%) will generally result in
higher transaction costs to a Portfolio and may result in the realization of
short-term capital gains that are taxable to shareholders as ordinary income.
34
<PAGE>
What Are The Portfolios' Fundamental Investment Limitations?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
such change. The investment objective of the Index Master Portfolio may not be
changed without the approval of shareholders of that Portfolio. No assurance
can be provided that a Portfolio will achieve its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of a Portfolio's total assets may be invested without regard
to this 5% limitation;
(2) subject to the foregoing 25% exception (other than with respect to the In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets
(33% of net assets in the case of the Index Master Portfolio) at the time
of such borrowing.
These investment limitations are applied at the time investment securities are
purchased. Notwithstanding the investment limitations, the Index Equity Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions as that Portfolio.
35
<PAGE>
Who Manages The Fund?
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund and of The DFA Investment
Trust Company (in which the assets of the Fund's Index Equity
Portfolio are invested) are managed under the direction of
their separate Boards of Trustees. The following persons cur-
rently 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, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--President of Gates, Wilmerding,
Carper & Rawlings, Inc.
The Statement of Additional Information furnishes additional
information about the trustees and officers of both the Fund
and The DFA Investment Trust Company.
ADVISER AND
SUB-ADVISERS The Adviser to Compass Capital Funds is PNC Asset Management
Group, Inc. ("PAMG"), except with respect to the Index Equity
Portfolio. Each of the Portfolios within the Compass Capital
Fund famil (except the Index Equity Portfolio) is managed by a
specialized portfolio manager who is a member of one of PAMG's
portfolio management subsidiaries.
The Portfolios (other than the Index Equity Portfolio) and
their investment sub-advisers and portfolio managers are as
follows:
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
- ------------------------- ----------- ------------------------------------
<S> <C> <C>
Large Cap Value Equity PCM(/1/) Benedict E. Capaldi; Vice President
of PCM since 1995; prior to joining
PCM, Senior Vice President and
portfolio manager with Radnor
Capital Management, President of
Chestnut Hill Advisors, Inc. and
Managing Director of Brandywine
Asset Management, Inc.; Portfolio
manager since 1995.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
---------------------------- ------------------------ ------------------------------------
<C> <S> <C>
Large Cap Growth Equity PEAC(/2/) Robert K. Urquhart; investment
manager with PEAC since 1995; prior
to joining PEAC, Chief Investment
Officer and partner of Cole
Financial Group, Inc., a partner of
Seacliff Holdings, Inc. and of RCM
Capital Management; Portfolio
manager since 1995.
Small Cap Value Equity PCM(/1/) Christian K. Stadlinger; Vice
President of PCM since July 1996;
prior to joining PCM, Portfolio
Manager and Research Analyst with
Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity PEAC(/2/) William J. Wykle; investment manager
with PEAC since 1995; investment
manager with PNC Bank, National
Association since 1986; Portfolio
manager since its inception.
Mid-Cap Value Equity PCM(/1/) Benedit E. Capaldi (see above);
Portfolio co-manager since its
inception.
Daniel B. Eagan; portfolio manager
with PCM since 1995; director of
investment strategy at PAMG during
1995; Portfolio co-manager since its
inception.
Mid-Cap Growth Equity PEAC(/2/) William J. Wykle (see above);
Portfolio co-manager since its
inception.
William C. McVail; investment
manager with PEAC since 1994; prior
to joining PEAC, equity and fixed
income analyst with PNC Bank; since
its inception.
International Equity CastleInternational(/4/) Gordon Anderson; Managing and
Investment Director since 1996;
prior to joining
CastleInternational, Investment
Director of Dunedin Fund Managers
Ltd.; Portfolio manager since 1996.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
COMPASS CAPITAL PORTFOLIO SUB-ADVISER PORTFOLIO MANAGER
---------------------------- ------------------------ ------------------------------------
<C> <S> <C>
International Emerging CastleInternational(/4/) Euan Rae; Senior Investment Manager
Markets since 1996; prior to joining
CastleInternational, Head of
Emerging Markets at Dunedin Fund
Managers Ltd., and Investment
Manager with Edinburgh Fund
Managers; Portfolio manager since
1996.
Select Equity PCM(/1/) Daniel B. Eagan (see above);
Portfolio manager since 1995.
Balanced PCM and R. Andrew Damm; senior investment
BlackRock(/1/)(/3/) strategist with PAMG since 1995;
portfolio manager with PNC Bank from
1988 to 1995; Portfolio co-manager
since 1996.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-
manager since 1995.
Keith T. Anderson; Managing Director
and co-chair of Portfolio Management
Group and Investment Strategy
Committee of BlackRock since 1988;
Portfolio co-manager since 1995.
</TABLE>
(1) Provident Capital Management, Inc. ("PCM") has its primary offices at 1600
Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1600 Market
Street, 27th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary offices
at 345 Park Avenue, New York, New York 10154.
(4) CastleInternational Asset Management Limited ("CastleInternational") has
its primary offices at 7 Castle Street, Edinburgh, Scotland, EH2 3AH.
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp.,
a multi-bank holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-advisers are entitled to fees, com-
puted daily on a portfolio-by-portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are the Expenses of the Portfolios?" PAMG
and the sub-advisers intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are paid
by PAMG and do not represent an extra charge to the Portfo-
lios.
38
<PAGE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO EXCEPT
THE INDEX EQUITY, MID-CAP VALUE EQUITY, MID-CAP GROWTH EQUITY
AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .550% .400%
$1 billion -- $2 billion .500 .350
$2 billion -- $3 billion .475 .325
greater than $3 billion .450 .300
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE EQUITY
AND MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .800% .650%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .500
greater than $3 billion .625 .475
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL EQUITY
PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</TABLE>
39
<PAGE>
Although the advisory fee rate payable by the International
Emerging Markets Portfolio is higher than the rate payable by
mutual funds investing in domestic securities, the Fund be-
lieves it is comparable to the rates paid by many other funds
with similar investment objectives and policies and is appro-
priate for the Portfolio in light of its investment objective
and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a per-
centage of average daily net assets) after voluntary fee waiv-
ers: Large Cap Value Equity Portfolio, .49%; Large Cap Growth
Equity Portfolio, .49%; Small Cap Value Equity Portfolio,
.54%; Small Cap Growth Equity Portfolio, .54%; International
Equity Portfolio, .68%; International Emerging Markets Portfo-
lio, 1.15%; Select Equity Portfolio, .49%; and Balanced
Portfolio, .49%. For the period from October 1, 1995 through
June 1, 1996, the Index Equity Portfolio paid investment advi-
sory fees to its former investment adviser at the annual rate
of % of its average daily net assets.
The Portfolios' sub-advisers strive to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed to registered broker/dealers
who have entered into dealer agreements with Compass Capital's
distributor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as invest-
PORTFOLIO ment adviser to the Index Master Portfolio.
DFA was organized in May 1981 and is engaged in the business
of providing investment management services to institutional
investors. DFA's assets under management totalled approxi-
mately $18.5 billion at October 31, 1996. David G. Booth and
Rex A. Sinquefield, both of whom are trustees and officers of
The DFA Investment Trust Company and directors, officers and
shareholders of DFA, may be deemed controlling persons of DFA.
Investment decisions for the Index Master Portfolio are made
by the Investment Committee of DFA, which meets on a regular
basis and also as needed to consider investment issues. The
Investment Committee is composed of certain officers and di-
rectors of DFA who are elected annually. DFA provides the In-
dex Master Portfolio with a trading department and selects
brokers and dealers to effect securities transactions.
For the investment advisory services provided to the Index
Master Portfolio under the advisory agreement, DFA is entitled
to receive a fee at
40
<PAGE>
the annual rate of .025% of the Index Master Portfolio's average
daily net assets. For the Index Master Portfolio's fiscal year
ended November 30, 1996, DFA received a monthly fee for its in-
vestment advisory services which, on an annual basis, equaled
.025% of the Index Master Portfolio's net assets.
ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-
pass Distributors, Inc. ("CDI") (the "Administrators") serve as
the Fund's co-administrators. CCG and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
sidiary of Provident Distributors, Inc. ("PDI"). A majority of
the outstanding stock of PDI is owned by its officers and the
remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets, and PFPC and
CDI are entitled to receive a combined fee, computed daily and
payable monthly, at an annual rate of .20% of the first $500
million of each Portfolio's average daily net assets, .18% of
the next $500 million of each Portfolio's average daily net as-
sets, .16% of the next $1 billion of each Portfolio's average
daily net assets and .15% of each Portfolio's average daily net
assets in excess of $2 billion. From time to time the Adminis-
trators may waive some or all of their administration fees from
a Portfolio. PFPC serves as the administrative services, divi-
dend disbursing and transfer agent to the Index Master Port-
folio, for which PFPC is entitled to compensation at the annual
rate of .015% of the Index Master Portfolio's net assets.
For information about the operating expenses the Portfolios paid
for the most recent fiscal year, see "What Are The Expenses Of
The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"), In-
PLAN vestor Shares of the Portfolios bear the expense of payments
("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank, for distribution
and sales support services. The
41
<PAGE>
distribution fees may be used to compensate the Distributor
for distribution services and to compensate the Distributor
and PNC Bank affiliates for sales support services provided in
connection with the offering and sale of Investor Shares. The
distribution fees may also be used to reimburse the Distribu-
tor and PNC Bank affiliates for related expenses, including
payments to brokers, dealers, financial institutions and in-
dustry professionals ("Service Organizations") for sales sup-
port services and related expenses. Distribution fees payable
under the Plan will not exceed .10% (annualized) of the aver-
age daily net asset value of each Portfolio's outstanding In-
vestor A Shares and .75% (annualized) of the average daily net
asset value of each Portfolio's outstanding Investor B and In-
vestor C Shares. Payments under the Plan are not tied directly
to out-of-pocket expenses and therefore may be used by the re-
cipients as they choose (for example, to defray their overhead
expenses). The Plan also permits the Distributor, PAMG, the
Administrators and other companies that receive fees from the
Fund to make payments relating to distribution and sales sup-
port activities out of their past profits or other sources
available to them.
Under the Plan, the Fund intends to enter into service ar-
rangements with Service Organizations (including PNC Bank and
its affiliates) with respect to each class of Investor Shares
pursuant to which Service Organizations will render certain
support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder
servicing fee of up to .25% (annualized) of the average daily
net asset value of Investor Shares owned by their customers,
Service Organizations may provide one or more of the following
services: responding to customer inquiries relating to the
services performed by the Service Organization and to customer
inquiries concerning their investments in Investor Shares; as-
sisting customers in designating and changing dividend op-
tions, account designations and addresses; and providing other
similar shareholder liaison services. In consideration for a
separate shareholder processing fee of up to .15% (annualized)
of the average daily net asset value of Investor 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 nec-
essary for sub-accounting; and providing other similar servic-
es.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of
Investor Shares
42
<PAGE>
should read this Prospectus in light of the terms and fees gov-
erning their accounts with Service Organizations.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided by
Service Organizations under their service agreements will not be
prohibited under these laws. Under state securities laws, banks
and financial institutions that receive payments from the Fund
may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to the investment adviser and
the Administrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servicing
and processing fees, distribution fees, fees and 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 informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders, ex-
penses relating to shareholder reports, shareholder meetings and
proxy solicitations, insurance premiums, the expense of indepen-
dent pricing services, and other expenses which are not ex-
pressly 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 direc-
tion of the Board of Trustees in a manner the Board determines
to be fair and equitable.
43
<PAGE>
What Pricing Options Are Available To Investors?
- --------------------------------------------------------------------------------
The Equity Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes. These options are described below:
A SHARES (FRONT-END LOAD)
One time, front-end sales charge at time of purchase
No charges or fees at any time for redeeming shares
Lower ongoing expenses
Free exchanges with other A Shares in the Compass Capital
Funds family
A Shares may make sense for investors with a long-term invest-
ment horizon who prefer to pay a one-time front-end sales
charge and have reduced ongoing fees.
B SHARES (BACK-END LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) if shares are re-
deemed, declining over 6 years from a high of 4.50%
Free exchanges with other B Shares in the Compass Capital
Funds family
Automatically convert to A Shares eight years from purchase
B Shares may make sense for investors who prefer to pay for
professional investment advice on an ongoing basis (asset-
based sales charge) rather than with a traditional, one-time
front-end sales charge.
C SHARES (LEVEL LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) of 1.00% if shares
are redeemed within 12 months of purchase
Free exchanges with other C Shares in the Compass Capital
Funds family
C Shares may make sense for shorter term (relative to both A
and B Shares) investors who prefer to pay for professional in-
vestment 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 redemp-
tions within 6 years of purchase.
44
<PAGE>
THE PRICING OPTIONS FOR EACH PORTFOLIO ARE DESCRIBED IN THE TABLES BELOW:
Large Cap Value Equity , Large Cap Growth Equity, Small Cap Value Equity,
Small Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap Growth Equity, Select
Equity and Balanced Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.50% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
International Equity and International Emerging Markets Portfolios:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 5.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
Index Equity Portfolio
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 3.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
*The Portfolios do not expect to incur any 12b-1 fees with respect to 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?"
45
<PAGE>
What Are The Key Considerations In Selecting A Pricing Option?
- --------------------------------------------------------------------------------
In deciding which class of Investor Shares to purchase, investors should con-
sider the following:
Intended Holding Period. Over time, the cumulative distribution fees on a Port-
folio's Investor B Shares and Investor C Shares will exceed the expense of the
maximum initial sales charge on Investor A Shares. For example, if net asset
value remains constant, the Investor B Shares' and Investor C 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 Portfo-
lio). Thereafter, Investor B Shares and Investor C Shares would bear higher ag-
gregate expenses. Investor B and Investor C shareholders, however, enjoy the
benefit of permitting all their dollars to work from the time the investments
are made. Any positive investment return on the additional invested amount
would partially or wholly offset the higher annual expenses borne by Investor B
Shares and Investor C Shares.
Because the Portfolios' future returns cannot be predicted, however, there can
be no assurance that such a positive return will be achieved.
At the end of eight years after the date of purchase, Investor B Shares will
convert automatically to Investor A Shares, based on the relative net asset
values of shares of each class. Investor B Shares acquired through reinvestment
of dividends or distributions are also converted at the earlier of these
dates--eight years after the reinvestment date or the date of conversion of the
most recently purchased Investor B Shares that were not acquired through rein-
vestment. Investor C Shares have no conversion feature.
Unless a sales charge waiver applies, Investor B shareholders pay a contingent
deferred sales charge if they redeem during the first six years after purchase,
and Investor C shareholders pay a contingent deferred sales charge if they re-
deem during the first twelve months after purchase. Investors expecting to re-
deem during these periods should consider the cost of the applicable contingent
deferred sales charge in addition to the aggregate annual Investor B or In-
vestor C distribution fees, as compared with the cost of the initial sales
charges applicable to the Investor A Shares.
Investor B Shares of the Portfolios purchased on or before January 12, 1996 are
subject to a CDSC of 4.50% of the lesser of the original purchase price or the
net asset value of Investor B Shares at the time of redemption. This deferred
sales charge is reduced for shares held more than one year. Investor B Shares
of a Portfolio purchased on or before January 12, 1996 convert to Investor A
Shares of the Portfolio at the end of six years after purchase. For more infor-
mation about Investor B Shares purchased on or before January 12, 1996 and the
deferred sales charge payable on their redemption, call PFPC at (800) 441-7762.
Reduced Sales Charges. Because of reductions in the front-end sales charge for
purchases of Investor A Shares aggregating $25,000 or more, it may be advanta-
geous for investors purchas-
46
<PAGE>
ing large quantities of Investor Shares to purchase Investor A Shares. In any
event, the Fund will not accept any purchase order for $1,000,000 or more of
Investor B Shares or Investor C 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 en-
tire purchase price to be immediately invested in a Portfolio. The contingent
deferred sales charge may be waived upon redemption of certain Investor B
Shares and Investor C Shares.
47
<PAGE>
How Are Shares Purchased?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor Shares through a
broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$100 minimum for subsequent investments. Purchases through the Automatic In-
vestment Plan described below are subject to a lower initial purchase minimum.
In addition, the minimum initial investment for employees of the Fund, the
Fund's investment adviser, sub-advisers, Distributor or transfer agent or em-
ployees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
When placing purchase orders, investors should specify whether the order is for
Investor A, Investor B or Investor C Shares of a Portfolio. All share purchase
orders that fail to specify a class will automatically be invested in Investor
A Shares.
PURCHASES THROUGH BROKERS. Shares may be purchased through brokers which have
entered into dealer agreements with the Distributor. Purchase orders received
by a broker and transmitted to the transfer agent before the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on a
Business Day will be effected at the net asset value determined that day, plus
any applicable sales charge. Payment for an order may be made by the broker in
Federal funds or other funds immediately available to the Portfolios' custodian
no later than 4:00 p.m. (Eastern time) on the third Business Day following re-
ceipt of the purchase order.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described above,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to which shares are purchased must also appear on the check or Federal Reserve
Draft. Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, specify
the class of Investor Shares and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together
48
<PAGE>
with payment, before the close of regular trading hours on the New York Stock
Exchange (currently 4:00 p.m. Eastern time) on any Business Day (as defined be-
low) are priced at the applicable net asset value next determined on that day,
plus any applicable sales charge.
OTHER PURCHASE INFORMATION. Shares of each Portfolio of the Fund are sold on a
continuous basis by CDI as the Distributor. CDI maintains its principal offices
at 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Purchases
may be effected on weekdays on which both the New York Stock Exchange and the
Federal Reserve Bank of Philadelphia are open for business (a "Business Day").
Payment for orders which are not received or accepted will be returned after
prompt inquiry. The issuance of shares is recorded on the books of the Fund. No
certificates will be issued for shares. Payments for shares of a Portfolio may,
in the discretion of the Fund's investment adviser, be made in the form of se-
curities that are permissible investments for that Portfolio. Compass Capital
reserves the right to reject any purchase order or to modify or waive the mini-
mum initial or subsequent investment requirement.
49
<PAGE>
How Are Shares Redeemed?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. Shareholders may also place redemption requests through a broker or
other institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C
SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B
Shares or Investor C Shares in the same Portfolio, the Investor A Shares will
be redeemed first unless the shareholder indicates otherwise. If a redeeming
shareholder owns both Investor B Shares and Investor C Shares in the same Port-
folio, the redemption order will be processed to minimize the amount of the
contingent deferred sales charge that will be charged 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.
50
<PAGE>
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 required minimum initial investment as the re-
sult of a redemption or an exchange request. A shareholder will be notified in
writing that the value of the shareholder's account in a Portfolio is less than
the required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of shares will be
reduced by the amount of any applicable contingent deferred sales charge. Un-
less another payment option is used as described above, payment for redeemed
shares is normally made by check mailed within seven days after acceptance by
PFPC of the request and any other necessary documents in proper order. Payment
may, however, be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, the Fund's transfer agent may delay the payment of redemption pro-
ceeds, 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.
51
<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, Investor B and Investor C Shares of each Port-
folio 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 val-
ues. Exchanges 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 and Investor C Shares will not be subject to a CDSC,
which will continue to be measured from the date of the original purchase and
will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide this option, a Telephone Exchange Authorization Form must be filed with
PFPC. This form is available from PFPC. Once this election has been made, the
shareholder may simply contact PFPC by telephone at (800) 441-7762 (in Delaware
call collect (302) 791-1194) to request the exchange. During periods of sub-
stantial economic or market change, telephone exchanges may be difficult to
complete and shareholders may have to submit exchange requests to PFPC in writ-
ing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
52
<PAGE>
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. Before making an exchange request, shareholders should consult a tax or
other financial adviser and should consider the investment objective, policies
and restrictions of the investment portfolio into which the shareholder is mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.
The Fund reserves the right to reject any telephone exchange request. Telephone
exchanges may be subject to limitations as to amount or frequency, and to other
restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may
arrange for periodic investments in that Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts. Upon commencement of the SWP, the account must have a cur-
rent value of $10,000 or more in a Portfolio. Shareholders may elect to receive
automatic cash payments of $100 or more either monthly, every other month,
quarterly, three times a year, semi-annually, or annually. Automatic withdraw-
als are normally processed on the 25th day of the applicable month or, if such
day is not a Business Day, on the next Business Day and are paid promptly
thereafter. An investor may utilize the SWP by completing the SWP Application
Form which may be obtained from PFPC.
53
<PAGE>
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested and may not
hold share certificates. Shareholders may change or cancel the SWP at any time,
upon written notice to PFPC. Purchases of additional Investor A Shares of the
Fund concurrently with withdrawals may be disadvantageous to investors because
of the sales charges involved and, therefore, are discouraged. No contingent
deferred sales charge will be assessed on redemptions of Investor B or 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 or 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 as-
set value on the redemption date. SWP redemptions of Investor B or Investor C
Shares in excess of this limit are still subject to the applicable CDSC.
54
<PAGE>
What Is The Schedule Of Sales Charges And Exemptions?
- --------------------------------------------------------------------------------
INVESTOR A Investor A Shares are subject to a front-end sales charge deter-
SHARES mined in accordance with the following schedules:
ALL PORTFOLIOS EXCEPT INTERNATIONAL PORTFOLIOS AND INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES PLACEMENT FEES
CHARGE AS SALES TO DEALERS
% OF CHARGE AS (AS % OF
AMOUNT OF TRANSACTION OFFERING % OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.00%
$25,000 but less than $50,000 4.25 4.44 3.75
$50,000 but less than $100,000 4.00 4.17 3.50
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
INTERNATIONAL EQUITY AND INTERNATIONAL EMERGING MARKETS PORTFOLIOS
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES PLACEMENT FEES
CHARGE AS SALES TO DEALERS
% OF CHARGE AS (AS % OF
AMOUNT OF TRANSACTION OFFERING % OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000 but less than $50,000 4.75 4.99 4.25
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 4.00 4.17 3.50
$250,000 but less than $500,000 3.00 3.09 2.50
$500,000 but less than $1,000,000 2.00 2.04 1.50
$1,000,000 and over 0.00* 0.00* 1.00**
</TABLE>
* There is no initial sales charge on purchases of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 1.00% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
55
<PAGE>
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES PLACEMENT FEES
CHARGE AS SALES TO DEALERS
% OF CHARGE AS (AS % OF
AMOUNT OF TRANSACTION OFFERING % OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE)
<S> <C> <C> <C>
Less than $25,000 3.00% 3.09% 2.50%
$25,000 but less than $50,000 2.75 2.83 2.25
$50,000 but less than $100,000 2.50 2.56 2.00
$100,000 but less than $250,000 2.00 2.04 1.75
$250,000 but less than $500,000 1.50 1.52 1.25
$500,000 but less than $1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
</TABLE>
* There is no initial sales charge on purchases of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 0.75% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
56
<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) employees and retirees
(and their spouses and minor children); (c) registered representatives of bro-
kers 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 organizations which operate
under Section 501(c)(3) of the Internal Revenue Code; (c) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio,
provided that the aggregate amount invested pursuant to this exemption equals
at least $250,000; and (d) persons participating in a "wrap account" or similar
program under which they pay advisory fees to a broker-dealer or other finan-
cial institution. Investors who qualify for any of these exemptions from the
sales charge must purchase Investor A Shares.
QUALIFIED PLANS. The sales charge (as a percentage of the offering price) pay-
able by qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate in purchases of Investor A Shares of the
Portfolios aggregating less than $500,000 will be 1.00%. No sales charge will
apply to purchases by Qualified Plans of Investor A Shares aggregating $500,000
and above. The sales charge payable by Qualified Plans having less than 20 em-
ployees eligible to participate in purchases of Investor A Shares of the Port-
folios aggregating less than $500,000 will be 2.50% (1.50% with respect to
shares of the Index Equity Portfolio). The above schedule will apply to pur-
chases by such Qualified Plans of Investor A Shares aggregating $500,000 and
above.
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the sales
charge price. Upon notice to the investor's broker or the transfer agent, pur-
chases of Investor A Shares made at any one time by the following persons may
be considered when calculating the sales charge: (a) an individual, his or her
spouse, and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized
for the purpose of buying redeemable securities of a registered investment com-
pany, and if the purchase is made through a central administrator, or through a
single dealer, or by other means which result in economy of sales effort or ex-
pense. An organized group does not include a group of
57
<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 or the total amount of an investor's initial in-
vestment in such shares, less redemptions (whichever is greater) may be com-
bined with the amount of the investor's current purchase in determining the ap-
plicable sales charge. In order to receive the cumulative quantity reduction,
previous purchases of Investor A Shares must be called to the attention of PFPC
by the investor at the time of the current purchase.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a Portfolio (or
Investor A Shares of another non-money market portfolio of the Fund), a share-
holder has a one-time right, to be exercised within 45 days, to reinvest the
redemption proceeds without any sales charges. PFPC must be notified of the re-
investment in writing by the purchaser, or by his or her broker, at the time
purchase is made in order to eliminate a sales charge. An investor should con-
sult a tax adviser concerning the tax consequences of use of the reinvestment
privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Investor A Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of any other investment company
which were sold with a sales charge or commission. This does not include shares
of an affiliated mutual fund which were or would be subject to a contingent de-
ferred sales charge upon redemption. Such purchases must be made within 60 days
of the redemption, and the Fund must be notified by the investor in writing, or
by his or her financial institution, at the time the purchase of Investor A
Shares is made.
LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a Letter of Intent stating the investor's intention to invest
during the next 13 months a specified amount in Investor A Shares which, if
made at one time, would qualify for a reduced sales charge. The Letter of In-
tent may be signed at any time within 90 days after the first investment to be
included in the Letter of Intent. The initial investment must meet the minimum
initial investment requirement and represent at least 5% of the total intended
investment. The investor must instruct PFPC upon making subsequent purchases
that such purchases are subject to a Letter of Intent. All dividends and capi-
tal gains of a Portfolio that are invested in additional Investor A Shares of
the same Portfolio are applied to the Letter of Intent.
During the term of a Letter of Intent, the Fund's transfer agent will hold In-
vestor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full
58
<PAGE>
amount indicated in the Letter of Intent is not purchased. The escrowed In-
vestor A Shares will be released when the full amount indicated has been pur-
chased. Any redemptions made during the 13-month period will be subtracted from
the amount of purchases in determining whether the Letter of Intent has been
completed.
If the full amount indicated is not purchased within the 13-month period, the
investor will be required to pay an amount equal to the difference between the
sales charge actually paid and the sales charge the investor would have had to
pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the ex-
piration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.
PURCHASES OF INVESTOR B SHARES. Investor B Shares are subject to a deferred
sales charge at the rates set forth in the chart below if they are redeemed
within six years of purchase. The deferred sales charge on Investor B Shares is
based on the lesser of the offering price or the net asset value of the In-
vestor B Shares on the redemption date. Dealers will receive commissions equal
to 4.0% of Investor B Shares sold by them plus ongoing fees under the Fund's
Distribution and Service Plan and described under "Who Manages the Fund?" These
commissions and payments may be different than the reallowances or placement
fees paid to dealers in connection with sales of Investor A and Investor C
Shares.
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
More than seven, but less than eight 0.00
</TABLE>
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase. Dealers will receive commissions equal to 1.0% of
the Investor C Shares sold by them plus ongoing fees under the Fund's Distribu-
tion and Service Plan and described under "Who Manages the Fund?" These commis-
sions and payments, may be different than the reallowances, placement fees and
commissions paid to dealers in connection with sales of Investor A Shares and
Investor B Shares.
59
<PAGE>
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE--INVESTOR B AND INVESTOR C
SHARES. The contingent deferred sales charge on Investor B Shares and Investor
C Shares is not charged in connection with: (1) exchanges described in "What
Are The Shareholder Features Of The Fund?--Exchange Privilege"; (2) redemptions
made in connection with minimum required distributions from IRA, 403(b)(7) and
Qualified Plan accounts due to the shareholder reaching age 70 1/2; (3) redemp-
tions in connection with a shareholder's death or disability (as defined in the
Internal Revenue Code) subsequent to the purchase of Investor B Shares or In-
vestor C Shares; (4) involuntary redemptions of Investor B Shares or Investor C
Shares in accounts with low balances as described in "How Are Shares Re-
deemed?"; and (5) redemptions made pursuant to the Systematic Withdrawal Plan,
subject to the limitations set forth above under "What Are The Shareholder Fea-
tures Of The Fund?--Systematic Withdrawal Plan." In addition, no contingent de-
ferred sales charge is charged on Investor B Shares or Investor C Shares ac-
quired through the reinvestment of dividends or distributions.
When an investor redeems Investor B Shares or Investor C Shares, the redemption
order is processed to minimize the amount of the contingent deferred sales
charge that will be charged. Investor B Shares and Investor C Shares are re-
deemed first from those shares that are not subject to the deferred sales load
(i.e., shares that were acquired through reinvestment of dividends or distribu-
tions) and after that from the shares that have been held the longest.
60
<PAGE>
How Is Net Asset Value Calculated?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio as of the close of regular trading hours on the NYSE (currently
4:00 p.m. Eastern Time) on each Business Day by dividing the value of all secu-
rities and other assets owned by a Portfolio (including, for the Index Equity
Portfolio, all of its shares in the Index Master Portfolio) that are allocated
to a particular class of shares, less the liabilities charged to that class, by
the number of shares of the class that are outstanding. The net asset value per
share of the Index Master Portfolio is calculated as of the close of the NYSE
by dividing the total market value of its investments and other assets, less
any liabilities, by the total outstanding shares of the Index Master Portfolio.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees or, in the case of the Index Master Portfolio,
The DFA Investment Trust Company's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless a Portfolio's sub-adviser under the super-
vision of the Board of Trustees determines such method does not represent fair
value.
61
<PAGE>
How Frequently Are Dividends And Distributions Made To Investors?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund will distribute substantially all of its net invest-
ment income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to in-
vestors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the
end of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by each Portfolio of the Fund at least annu-
ally. The period for which dividends are payable and the time for payment are
subject to change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional shares of the same class on which the distributions are paid, unless a
shareholder elects to receive distributions in cash. This election, or any rev-
ocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses of
the Index Master Portfolio. This net income, less the Index Equity Portfolio's
expenses incurred in operations, is the Index Equity Portfolio's net investment
income from which dividends are distributed as described above. The Index Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
62
<PAGE>
How Are Fund Distributions Taxed?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Generally, shareholders may
include sales charges paid on the purchase of shares in their tax basis for the
purposes of determining gain or loss on a redemption, transfer or exchange of
such shares. However, if a shareholder exchanges the shares for shares of an-
other Portfolio within 90 days of purchase and is able to reduce the sales
charges applicable to the new shares (by virtue of the Fund's exchange privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged shares for the purpose of determining gain or
loss but may be included (subject to the same limitation) in the tax basis of
the new shares.
63
<PAGE>
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities may be subject to foreign withholding taxes or other taxes. So long as
more than 50% of the value of a Portfolio's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Port-
folio may elect, for U.S. Federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid by its shareholders. It is possible that the Interna-
tional Equity and International Emerging Markets Portfolios will make this
election in certain years. If a Portfolio makes the election, the amount of
such foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and each shareholder will be entitled either (a) to credit a proportion-
ate amount of such taxes against a shareholder's U.S. Federal income tax lia-
bilities, or (b) if a shareholder itemizes deductions, to deduct such propor-
tionate amounts from U.S. Federal taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. The application of state and local income taxes to investments in
the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
64
<PAGE>
How Is The Fund Organized?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty investment portfolios. Each
Portfolio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates to Investor A Shares, Investor B Shares and Investor C 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 performance of each class of Investor Shares
may be different. The Fund offers various services and privileges in connection
with its Investor Shares that are not generally offered in connection with its
Institutional and Service Shares, including an automatic investment plan and an
automatic withdrawal plan. For further information regarding the Fund's Insti-
tutional and Service Share Classes, contact PFPC at (800) 441-7762.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December , 1996, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of institutional and individual in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The Index Equity Portfolio
purchases shares of the Index Master Portfolio at net asset value. The
65
<PAGE>
net asset value of the Index Equity Portfolio responds to increases and de-
creases in the value of the Index Master Portfolio's securities and to the ex-
penses of the Index Master Portfolio allocable to the Index Equity Portfolio
(as well as its own expenses). The Index Equity Portfolio may withdraw its in-
vestment in the Index Master Portfolio at any time upon 30 days notice to the
Index Master Portfolio if the Board of Trustees of the Fund determines that it
is in the best interests of the Index Equity Portfolio to do so. Upon withdraw-
al, the Board of Trustees would consider what action might be taken, including
the investment of all of the assets of the Index Equity Portfolio in another
pooled investment entity having the same investment objective as the Index Eq-
uity Portfolio or the hiring of an investment adviser to manage the Index Eq-
uity Portfolio's assets in accordance with the investment policies described
above with respect to the Index Equity Portfolio.
The Index Master Portfolio is a separate series of The DFA Investment Trust
Company (the "Trust"), which is a business trust created under the laws of the
State of Delaware. The Index Equity Portfolio and other institutional investors
that may invest in the Index Master Portfolio from time to time (e.g. other in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
Master Portfolio have the same limitation of personal liability as shareholders
of a Delaware corporation. Accordingly, Fund management believes that neither
the Index Equity Portfolio nor its shareholders will be adversely affected by
reason of the Index Equity Portfolio's investing in the Index Master Portfolio.
The shares of the Index Master Portfolio are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns may differ from those of the Index Equity Portfolio. While investment in
the Index Master Portfolio by other institutional investors offers potential
benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act and (iii) on such other matters as the trustees of
the Trust may consider necessary or desirable. In addition, approval of the
shareholders of the Trust is required to adopt any amendments to the Agreement
and Declaration of Trust of the Trust which would adversely affect to a mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Portfolio's
shareholders will also be asked to vote on any proposal to change a fundamental
policy
66
<PAGE>
(i.e. a policy that may be changed only with the approval of shareholders) of
the Index Master Portfolio.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity Portfolio, if required under the 1940 Act or other applicable law, would
hold a meeting of its shareholders and would cast its votes proportionately as
instructed by Index Equity Portfolio shareholders. In such cases, shareholders
of the Index Equity Portfolio, in effect, would have the same voting rights
they would have as direct shareholders of the Index Master Portfolio.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees fails to approve a similar change in the investment objective of the Index
Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its
investment in the Index Master Portfolio and either seek to invest its assets
in another registered investment company with the same investment objective as
the Index Equity Portfolio, which might not be possible, or retain an invest-
ment adviser to manage the Index Equity Portfolio's assets in accordance with
its own investment objective, possibly at increased cost. A withdrawal by the
Index Equity Portfolio of its investment in the Index Master Portfolio could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Index Equity Portfolio. Should such a distribution occur,
the Index Equity Portfolio could incur brokerage fees or other transaction
costs in converting such securities to cash in order to pay redemptions. In ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity of the Portfolio.
The conversion of the Index Equity Portfolio into a feeder fund of the Index
Master Portfolio was approved by shareholders of the Index Equity Portfolio at
a meeting held on November 30, 1995. The policy of the Index Equity Portfolio,
and other similar investment companies, to invest their investable assets in
funds such as the Index Master Portfolio is a relatively recent development in
the mutual fund industry and, consequently, there is a lack of substantial ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Index Master Portfolio, please
contact DFA at (310) 395-8005 or contact your broker.
67
<PAGE>
How Is Performance Calculated?
- --------------------------------------------------------------------------------
Performance information for each class of Investor Shares of the Portfolios may
be quoted in advertisements and communications to shareholders. Total return
will be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Investor Shares of a Portfolio over the measuring pe-
riod. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to a class of
shares are reinvested in shares of the same class, and also reflect the maximum
sales load charged by the Portfolio with respect to a class of shares. When,
however, a Portfolio compares the total return of a share class to that of
other funds or relevant indices, total return may also be computed without re-
flecting the sales load.
The yield of a class of shares of the Balanced Portfolio is computed by divid-
ing the net income allocated to that class during a 30-day (or one month) pe-
riod by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis.
The performance of a share class may be compared to the performance of other
mutual funds with similar investment objectives and to relevant indices, as
well as to ratings or rankings prepared by independent services or other finan-
cial or industry publications that monitor the performance of mutual funds. For
example, the performance of a class of shares may be compared to data prepared
by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. and Wei-
senberger Investment Company Service, and to the performance of the Dow Jones
Industrial Average, the "stocks, bonds and inflation Index" published annually
by Ibbotson Associates, the Lipper International Fund Index, the Lehman Govern-
ment Corporate Bond Index and the Financial Times World Stock Index, as well as
the benchmarks attached to this Prospectus. Performance information may also
include evaluations of the Portfolios and their share classes published by na-
tionally recognized ranking services, and information as reported in financial
publications such as Business Week, Fortune, Institutional Investor, Money Mag-
azine, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of a class of shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Investor Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for In-
vestor Shares of a Portfolio cannot necessarily be used to compare an invest-
68
<PAGE>
ment in such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in In-
vestor Shares will not be included in the Portfolio performance calculations.
69
<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 (888) 4COMPASS.
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.
70
<PAGE>
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Large Cap Value Equity Russell 1000 Value Index An index composed of those Russell 1000
securities with less-than-average growth
orientation. Securities in this index
generally have low price-to-book and price-
earnings ratios, higher dividend yields and
lower forecasted growth values than more
growth-oriented securities in the Russell
1000 Growth Index.
Large Cap Growth Equity Russell 1000 Growth The Russell 1000 Growth Index contains
Index those Russell 1000 securities with a
greater-than-average growth orientation.
Companies in this index tend to exhibit
higher price-to-book and price-earnings
ratios, lower dividend yields and higher
forecasted growth values than the Russell
1000 Value Index.
Small Cap Value Equity Russell 2000 Index An index of the smallest 2000 companies in
the Russell 3000 Index, as ranked by total
market capitalization. The Russell 2000
Index is widely regarded in the industry to
accurately capture the universe of small
cap stocks.
Small Cap Growth Equity Russell 2000 Growth An index composed of those Russell 2000
Index securities with a greater-than-average
growth orientation. Securities in this
index generally have higher price-to-book
and price-earnings ratios than those in the
Russell 2000 Value Index.
Mid-Cap Value Equity Russell Midcap Value The Russell Midcap Value Index consists of
Index the bottom 800 securities of the Russell
1000 Index with less-than-average growth
orientation as ranked by total market
capitalization.
Mid-Cap Growth Equity Russell Midcap Growth The Russell Midcap Growth Index consists of
Index the bottom 800 securities of the Russell
1000 Index with greater-than-average growth
orientation as ranked by total market
capitalization.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of
20 European and Pacific Basin countries.
The Index represents the evolution of an
unmanaged portfolio consisting of all
domestically listed stocks.
International Emerging MSCI Emerging Markets The Morgan Stanley Capital International
Markets Free Index (MSCI) Emerging Markets Free Index (EMF) is
a market capitalization weighted index
composed of companies representative of the
market structure of 22 Emerging Market
countries in Europe, Latin America, Africa
and the Pacific Basin. The MSCI EMF Index
excludes closed markets and those shares in
otherwise free markets which are not
purchasable by foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common
stocks, most of which are listed on the New
York Stock Exchange. The Index is heavily
weighted toward stocks with large market
capitalizations and represents
approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad Investment An unmanaged index of 3500 bonds. The Broad
Grade Index Investment Grade Index is market
capitalization weighted and includes
Treasury, Government sponsored mortgages
and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
71
<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.
-----------------
LARGE CAP VALUE EQUITY PORTFOLIO
LARGE CAP GROWTH EQUITY PORTFOLIO
SMALL CAP VALUE EQUITY PORTFOLIO
SMALL CAP GROWTH EQUITY PORTFOLIO
MID-CAP VALUE EQUITY PORTFOLIO
MID-CAP GROWTH EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL EMERGING MARKETS PORTFOLIO
SELECT EQUITY PORTFOLIO
INDEX EQUITY PORTFOLIO
BALANCED PORTFOLIO
THE EQUITY
PORTFOLIOS
INVESTOR SHARES
Prospectus
<PAGE>
COMPASS CAPITAL FUNDS /SM/
(INSTITUTIONAL SHARES OF THE OF THE
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III)
CROSS REFERENCE SHEET
FORM N-1A ITEM LOCATION
- -------------- ---------
PART A PROSPECTUS
1. Cover..................................... page Cover Page
2. Synopsis.................................. Expense Table
3. Condensed Financial Information........... Financial Highlights
4. General Description of Registrant......... Cover Page; Investment
Policies; Description of
Shares
5. Management of the Fund.................... Management
5A. Management's Discussion of Fund........... Financial Highlights
Performance
6. Capital Stock and Other Securities........ Cover Page; Dividends and
Distributions; Description of
Shares
7. Purchase of Securities Being Offered...... Purchase and Redemption of
Shares; Dividends and
Distributions Net Asset
Value
8. Redemption or Repurchase.................. Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings................. Inapplicable
<PAGE>
THE MULTI-SECTOR MORTGAGE
SECURITIES PORTFOLIO III
Compass Capital Funds/sm/ (the "Fund") consists of 31 investment
portfolios. This Prospectus relates to shares ("Institutional Shares" or
"Shares") representing interests in the Multi-Sector Mortgage Securities
Portfolio III (the "Portfolio"). The Portfolio seeks to provide a total rate of
return before fees and expenses over rolling twelve-month periods that exceeds
the total rate of return of the Salomon Broad Investment Grade Index over the
same periods by at least 1.60% on an annualized basis. The securities in which
the Portfolio may invest include, but are not limited to, Commercial and
Residential Mortgage-Backed Securities, collateralized mortgage obligations,
real estate mortgage investment conduits, adjustable rate mortgages and U.S.
Treasury and agency securities. The Portfolio will maintain a dollar-weighted
average credit quality of at least BBB/Baa2, with U.S. Government securities
being assigned a AAA rating.
INVESTMENTS IN THE PORTFOLIO MAY INCLUDE SECURITIES HAVING A CREDIT QUALITY
BELOW INVESTMENT GRADE. SUCH SECURITIES, ALSO CALLED "JUNK BONDS," ARE
CONSIDERED TO BE SPECULATIVE AND MAY BE SUBJECT TO SPECIAL RISKS, INCLUDING A
GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. SEE "DESCRIPTION
OF SECURITIES -- LOWER RATED SECURITIES" AND "RISK FACTORS".
Institutional Shares of the Portfolio ("Shares") are sold at net asset
value to institutional investors ("Institutions").
This Prospectus contains information that a prospective investor needs to
know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated __________________, as revised from time
to time, has been filed with the Securities and Exchange Commission (the "SEC").
The current Statement of Additional Information may be obtained free of charge
from the Fund by calling (800) 422-6538. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE NOT
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
PROSPECTUS
- -------------------------
-2-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has
registered shares in 31 investment portfolios, of which only the Portfolio is
described in this Prospectus.
PORTFOLIO MANAGEMENT
BlackRock Financial Management Inc. ("BlackRock" or the "Adviser")
serves as investment adviser to the Portfolio. The investment adviser is an
indirect wholly-owned subsidiary of PNC Bank Corp.
THE ADMINISTRATORS
Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Compass
Distributors, Inc. ("CDI") serve as the Fund's administrators (collectively, the
"Administrators").
THE DISTRIBUTOR
Compass Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
-3-
<PAGE>
EXPENSE TABLE
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees/(a)/...................................... .25%
Other expenses (after expense reimbursements)/(b)/...... .12%
----
Total Portfolio operating expenses/(b)/ ................ .37%
====
_______________
(a) BlackRock reserves the right in its sole discretion to reduce the
advisory fee charged to the Portfolio.
(b) BlackRock has agreed to cap the "Other expenses" for the Portfolio at
this level. Without fee waivers and expense reimbursements, "Other
expenses" would be .26% and "Total Portfolio Operating expenses" would
be .51%.
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) 5% annual return, and
(2) redemption at the end of each time period:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
Multi-Sector Mortgage Securities
Portfolio III............... $4 $12 $21 $47
The foregoing Expense Table and Example are intended to assist
investors in understanding the Portfolio's estimated annual operating expenses
with respect to Institutional Shares based on the level of such expenses during
its most recent fiscal period, adjusted to reflect current fees and expenses.
Investors bear these expenses either directly or indirectly. See "Financial
Highlights--Background," "Management," "Purchase and Redemption of Shares" and
"Description of Shares" for a more complete description of shareholder
transaction expenses and operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-4-
<PAGE>
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The following are some of these considerations. The
Portfolio may invest in both Commercial Mortgage-Backed Securities and
Residential Mortgage-Backed Securities. The Portfolio may invest in lower
credit quality securities, which are commonly referred to as "junk bonds." The
Portfolio is classified as non-diversified under the Investment Company Act of
1940 (the "1940 Act"). The Portfolio (subject to limitations described herein)
may use various other investment management techniques that also involve special
considerations including purchasing illiquid securities, engaging in hedging
transactions, selling listed and over-the-counter covered call options, making
forward commitments, entering into repurchase agreements, purchasing securities
on a when-issued basis, entering into interest rate swaps and purchasing or
selling interest rate caps and floors. For further discussion of these
practices and the associated risks and special considerations, see "Description
of Securities," "Other Investment Practices" and "Risk Factors."
-5-
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Portfolio commenced investment operations on October 6, 1994 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
April 26, 1996, the assets and liabilities of the Predecessor Portfolio were
transferred to the Portfolio, which had no prior operating history. The
Predecessor Portfolio also received investment advisory services from BlackRock.
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 accountant.
Additional information about the performance of the Portfolio is contained in
the Portfolio's annual report. Both the Statement of Additional Information and
the Portfolio's annual report may be obtained from the Fund free of charge by
calling the number on the front cover of this Prospectus. During the period
shown, the Portfolio offered one class of shares to institutional investors.
THE MULTI-SECTOR
MORTGAGE SECURITIES
Portfolio III
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Nine Months October 6, 1994/(a)/
Ended Ended Through
September 30, 1996 March 31, 1996 June 30, 1995
------------------- --------------- ---------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $1,019.41 $1,068.11 $1,000.00
Net investment income (b) 38.33 61.37 55.81
Net realized and unrealized gain (loss)
on investments......................... (3.33) (9.06) 68.11
Net increase ---------- --------- ---------
from investment operations.............
35.00 52.31 123.92
Dividends from net investment income ---------- --------- ---------
Distributions from net realized (38.33) (61.37) (55.81)
capital gains..........................
Total dividends and distributions -- (39.64) --
--------- ---------
Net asset value, end of period (38.33) (101.01)
--------- --------- ---------
$1,016.08 $1,019.41 (55.81)
TOTAL INVESTMENT RETURN (c) ========= ========= ---------
RATIOS TO AVERAGE NET ASSETS: $1,068.11
Expenses (b)(d) =========
Net investment income (b)(d) 3.53% 5.02%
SUPPLEMENTAL DATA: 12.78%
Average net assets (in thousands) 0.37% 0.37%
Portfolio turnover 7.60% 7.77% .037%
Net assets, end of period (in thousands) 7.54%
$ 119,550 $115,362
24% 119% $ 103,332
$ 121,738 $117,569 215%
$ 112,810
</TABLE>
-6-
<PAGE>
(a) Commencement of investment operations.
(b) The Adviser waived fees amounting to $85,659, $3,652 and $56,269 for the
periods ended September 30, 1996, March 31, 1996 and June 30, 1995,
respectively. Net investment income would have been $37.38, $61.37 and
$55.28 on a per share basis for the periods ended September 30, 1996, March
31, 1996 and June 30, 1995, respectively, in the absence of fee waivers.
The ratio of net operating expenses to average net assets would have been
0.51%, 0.37% and 0.45% for the periods ended September 30, 1996, March 31,
1996 and June 30, 1995, respectively, in the absence of fee waivers. The
net investment ratios would have been 7.45%, 7.76% and 7.46%, for the
periods ended September 30, 1996, March 31, 1996 and June 30, 1995,
respectively, in the absence of fee waivers.
(c) 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.
(d) Annualized.
The information above represents audited operating performance based on an
average share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data, for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements.
-7-
<PAGE>
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
The following describes briefly the investment objective and policies of
the Portfolio. Certain instruments and techniques discussed in this section are
described in greater detail later in this Prospectus and in the Statement of
Additional Information ("SAI").
THE ADVISER'S ANALYSIS OF OPPORTUNITIES IN THE COMMERCIAL AND RESIDENTIAL
MORTGAGE-BACKED SECURITIES MARKETS
Commercial and non-agency Residential Mortgage-Backed Securities are among
the highest yielding, call protected, domestic, fixed-income securities across
all rating categories. Under current market conditions, the Adviser believes
that investments in non-agency mortgage securities (which include Commercial and
non-agency Residential Mortgage-Backed Securities) provide attractive investment
opportunities. This is due to several factors, including the developing nature
of the Commercial and non-agency Residential Mortgage-Backed Securities markets,
the restructuring of the real estate loans underlying non-agency mortgage
securities, the infusion of capital to the real estate market and the Adviser's
expectation of no further significant deterioration of real estate property
values.
The construction boom of the early 1980's resulted in the oversupply of
developed commercial and residential real estate. This oversupply led to high
vacancy rates and, coupled with declining rental rates, led to a decline in real
estate values in the late 1980's and early 1990's. Real estate loans originated
in the early and mid-1980's were issued during a period of higher real estate
values. The subsequent rise in delinquencies and losses for lenders has led to
new mortgage origination standards which incorporate less optimistic assumptions
concerning rent growth and occupancy. Mortgages originated during this period
of higher values may be restructured or renegotiated to reflect current market
conditions. The resulting non-agency mortgage securities have underlying loans
with LTV ratios that the Adviser believes more accurately reflect current market
values and allow the Adviser to better assess credit exposure.
Many sophisticated investors have recently become active participants in
the commercial real estate market, which has brought new equity into these types
of investments. The increased issuance of real estate investment trusts
("REITs") has been another source of new equity. The Adviser believes that this
infusion of equity, combined with more conservative real estate valuations, as
well as the dislocation of traditional
-8-
<PAGE>
lenders provides a strong foundation for the continued issuance of Commercial
and non-agency Residential Mortgage-Backed Securities.
The Adviser expects that a recovery of the real estate market in general
would have a positive effect on investments in non-agency Mortgage-Backed
Securities. Market indicators are beginning to show positive trends, with
declines in commercial mortgage delinquencies and defaults. Additionally, the
second quarter of 1993 brought the first positive quarterly total return on real
estate investments in two years, as measured by the Russell-NCREIF Index, which
tracks the performance of U.S. commercial real estate.
The Resolution Trust Corporation (the "RTC") entered the non-agency
Mortgage-Backed Securities market as a significant participant by securitizing
non-agency mortgage loans in June of 1991, packaging certain mortgages it
acquired as receiver of failed savings and loans. The RTC, in addition to other
entities, has securitized commercial and non-agency residential mortgages,
aggregating in excess of $22 billion of Commercial Mortgage-Backed Securities
and $200 billion of Residential Mortgage-Backed Securities created from January,
1987 to December, 1992. As a result of the significant decline in real estate
values in the U.S. in the late 1980's and early 1990's and in conjunction with
their efforts to improve the creditworthiness of financial institutions,
regulators such as the National Association of Insurance Commissioners (the
"NAIC") and the Bank for International Settlements (the "BIS") set more
stringent capital requirements for assets including real estate holdings. These
requirements have led traditional real estate leaders largely to withdraw from
lending to real estate borrowers and to seek a secondary market outlet for these
mortgage loans and for real estate borrowers to seek financing from non-
traditional lenders. The Adviser believes that, as a result, banks and
insurance companies will increasingly take advantage of the secondary market to
dispose of real estate holdings and borrowers will utilize the capital markets
as a major source of financing.
The Adviser believes that the establishment by rating agencies of
standardized rating criteria has helped further the development of the secondary
market for commercial and non-agency residential Mortgage-Backed Securities.
Unlike the securitization of traditional residential mortgages, which are
eligible for principal and interest guarantees from government agencies such as
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), the securitization of commercial and non-agency residential mortgages
may require other forms of credit enhancement, including the senior/subordinated
security structure, reserve funds and third-party letters of credit. The
senior/subordinated structure was
-9-
<PAGE>
developed in the 1980's to create a senior security which would be highly rated
and attractive to a wide range of investors. The subordinated security, which
was designed to absorb credit losses on the underlying mortgages and therefore
reduce the exposure of senior securities from such losses, was generally either
retained by the issuer or sold to a sophisticated investor in a negotiated
transaction. In the current environment, the subordinated securities are
further segmented into a hierarchy of loss positions. This allows many
different classes of securities to be created, with varying degrees of credit
exposure, prepayment exposure and potential total return.
Based on investor demand for certain securities (which depends in part on a
combination of rating, yield spread and maturity) the issuer of a
senior/subordinated structure typically works closely with the rating agencies
to determine the credit support levels required to achieve the desired rating
for each security class. The specific structure created dictates the priority
for the allocation of available cash flows on the underlying mortgages. The
senior classes generally receive the first available cash flows of both interest
and principal, while the subordinated classes typically receive only interest
until the senior and higher ranked subordinated classes are paid down. Any
principal losses experienced on the underlying properties are generally absorbed
first by the equity holder and then by the cash reserve fund and letters of
credit, if any are present in the structure, and then by the "first loss"
subordinated security holder to the extent of its principal balance and then by
the next subordinated classes, in order of their respective position in the
structure.
The Adviser believes that the development of the secondary market for
Commercial and non-agency Residential Mortgage-Backed Securities has created
significant opportunities for investing in the lower-rated and non-rated classes
of these securities. Furthermore, the Adviser believes that there is sufficient
liquidity in this secondary market for the Portfolio to accomplish its
investment objectives. The Adviser believes that many of the lower-rated and
non-rated Commercial Mortgage-Backed Securities are subject to less prepayment
risk than is the case with Residential Mortgage-Backed Securities because of
structural features of the underlying mortgage loans and the fact that they are
entitled to repayment only after more senior classes are paid. Such securities
therefore offer an opportunity for attractive yields, which the Adviser believes
more than compensates investors for assuming the credit risk associated with
such securities. In addition, the Adviser believes that the Commercial and non-
agency Residential Mortgage-Backed Securities market will expand and yield
spreads to Treasuries will decline, leading to an opportunity for price
appreciation. The Adviser believes this sector of the Mortgage-Backed
Securities market is likely to realize expansion similar to that which the
agency
-10-
<PAGE>
residential Mortgage-Backed Securities market experienced in the late 1980's,
where the earlier investors benefitted greatly as the market improved and
expanded.
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide a total rate of
return before fees and expenses over rolling twelve-month periods that exceeds
the total return of the Salomon Broad Investment Grade Index over the same
periods by at least 1.60% on an annualized basis. The Portfolio will not invest
in Asset-Backed Securities, bank or corporate debt securities other than money
market instruments, or non-rated securities (other than for U.S Government
securities), and will maintain a dollar-weighted average credit quality of at
least BBB by Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Inc. ("D&P") or Fitch Investors Service ("Fitch") or Baa2 by
Moody's Investors Service, Inc. ("Moody's"), with U.S. Government securities
being assigned a AAA rating. The Portfolio will maintain a targeted duration
within 20% shorter or longer than the then current duration of the Salomon Broad
Investment Grade Index. Duration is a measure of the expected life of a fixed
income security on a present value basis and is indicative of a security's price
"volatility" or "risk" associated with changes in interest rates. The Portfolio
seeks to meet its objective by investing in a range of agency and non-agency
Mortgage-Backed Securities, including primarily senior and subordinated tranches
of residential, commercial, multi-family and agricultural mortgage securities.
The securities in which the Portfolio may invest include, but are not limited
to, collateralized mortgage obligations, real estate mortgage investment
conduits, adjustable rate mortgages and U.S. Treasury and agency securities.
The Portfolio will limit to 20% of net assets its investments in U.S. Government
securities that are not also Mortgage-Backed Securities. The Portfolio may
invest in lower rated securities. Such securities are commonly referred to as
"junk bonds" and have a higher risk of default of principal and interest.
During temporary defensive periods and in order to keep cash on hand fully
invested, the Portfolio may invest in money market instruments.
In determining which Mortgage-Backed Securities the Portfolio will
purchase, the Adviser will consider, among other factors, the following:
characteristics of the underlying mortgage loan, including LTV and debt service
coverage ratio, loan seasoning, and refinancing risk; characteristics of the
underlying property, including diversity of the loan pool, occupancy and
leasing, and competitiveness in the pertinent market; economic, environmental
and local considerations; deal structure, including historical performance of
the originator, subordination percentages and reserve fund balances; and
structural participants such as administrators and servicers.
-11-
<PAGE>
In addition to examining the relative value of the investments, the
Adviser's disciplined approach to investments for the Portfolio will include
considerable interaction with rating agencies, extensive review of due diligence
by underwriters and rating agencies, confirmation of debt service coverage
ratios and stress testing of security cash flows. The Adviser also will select
investments which will vary the Portfolio by underlying property types,
geographic regions and industry exposure. In this regard, the Portfolio will
not purchase any commercial Mortgage-Backed Security ("CMBS") if, giving effect
thereto, (i) the net assets of the Portfolio constituting CMBS that are directly
or indirectly secured by or payable out of cash flow from the same pool of
collateral would increase and would account for more than 10% of the Portfolio's
net assets, or (ii) the net assets of the Portfolio attributable to CMBS backed
by the same pool of collateral would increase and the Portfolio would own more
than 25% of the currently outstanding principal amount of CMBS that are directly
or indirectly secured by or payable out of cash flow from the same pool of
collateral. In addition, the Portfolio will not, except during any three-month
period after any month in which its net assets have increased by more than 30%,
purchase any CMBS if, giving effect thereto, (i) the net assets of the Portfolio
constituting CMBS that are directly or indirectly secured by or payable out of
cash flow from properties located within a single state of the U.S. would
increase and would account for more than 25% of the Portfolio's net assets or
(ii) the net assets of the Portfolio constituting CMBS that are directly or
indirectly secured by or payable out of cash flow from office properties would
increase and would account for more than 33%, or from hotel and motel properties
would increase and would account for more than 20%, or from any one of multi-
family, cooperative, industrial and warehouse, retail and shopping mall, mobile
home park, nursing home and senior living center or hospital properties would
increase and would account for more than 75% of the Portfolio's net assets, or
(iii) the net assets of the Portfolio constituting particular issuances of CMBS
that are directly or indirectly secured by or payable out of cash flow from
single properties would increase and would account for more than 50% of the
Portfolio's net assets. For the foregoing purpose, a CMBS will be considered to
be secured by or payable out of the cash flow from a property only in the
proportion that the outstanding principal amount of the mortgage loan relating
to such property and backing such security bears to the sum of the outstanding
principal amount of all mortgage loans backing such security. If the
Portfolio's asset composition in any of the foregoing categories subsequently
exceeds 110% of the related percentage limitation for any reason, the Portfolio
will take such action as may be necessary so that within 60 days after the
occurrence of such excess the relevant percentage limitation is again satisfied.
The Portfolio will not invest in any issuance of Mortgage-Backed Securities more
than 5% of the principal
-12-
<PAGE>
amount of the collateral of which at the time of issuance is single-family
residential and agricultural properties in the aggregate.
INVESTMENT RESTRICTIONS
The Portfolio has also adopted a number of fundamental investment
restrictions which may not be changed without the approval of the Portfolio's
outstanding voting securities. The SAI sets forth these restrictions in full.
In addition, the Portfolio's investment objective is fundamental and may not be
changed without such shareholder approval.
The Portfolio has also adopted several non-fundamental portfolio investment
limitations. The Portfolio will not modify any of its non-fundamental portfolio
investment limitations without providing at least 60 days prior written notice
of such modification to its shareholders.
DESCRIPTION OF SECURITIES
The following describes certain types of securities in which the Portfolio
may invest:
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial Mortgage-Backed Securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multi-family properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, senior
living centers and agricultural property. The commercial mortgage loans that
underlie Commercial Mortgage-Backed Securities have certain distinct
characteristics. Commercial mortgage loans are generally not amortizing or not
fully amortizing. At their maturity date, repayment of the remaining principal
balance or "balloon" is due and is repaid through the attainment of an
additional loan or sale of the property. Unlike most single family residential
mortgages, commercial real property loans often contain provisions which
substantially reduce the likelihood that such securities will be prepaid. The
provisions generally impose significant prepayment penalties on loans and, in
some cases there may be prohibitions on principal prepayments for several years
following origination. This difference in prepayment exposure is significant
due to extraordinarily high levels of refinancing of traditional residential
mortgages experienced over the past year as mortgage rates have reached a 25
year low. Assets underlying Commercial Mortgage-Backed Securities may relate to
only a few properties or to a single property. See "Risk Factors."
-13-
<PAGE>
Commercial Mortgage-Backed Securities have been issued in public and
private transactions by a variety of public and private issuers. Non-
governmental entities that have issued or sponsored Commercial Mortgage-Backed
Securities offerings include owners of commercial properties, originators of and
investors in mortgage loans, savings and loan associations, mortgage banks,
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. The Portfolio may from time to time purchase
Commercial Mortgage-Backed Securities directly from issuers in negotiated
transactions or from a holder of such Commercial Mortgage-Backed Securities in
the secondary market.
Commercial Mortgage-Backed Securities generally are structured to protect
the senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which
may be included in the Portfolio, by taking the first loss if there are defaults
on the underlying commercial mortgage loans. Other protection, which may
benefit all of the classes, including the subordinated classes in which the
Portfolio intends to invest, may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization, over-
collateralization and the equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class
of a given Commercial Mortgage-Backed Security, issuers are able to issue senior
investment grade securities and lower rated or non-rated subordinated securities
tailored to meet the needs of sophisticated institutional investors. In
general, subordinated classes of Commercial Mortgage-Backed Securities are
entitled to receive repayment of principal only after all required principal
payments have been made to more senior classes and have subordinate rights as to
receipt of interest distributions. Such subordinated classes are subject to a
substantially greater risk of nonpayment than are senior classes of Commercial
Mortgage-Backed Securities. Even within a class of subordinate securities, most
Commercial Mortgage-Backed Securities are structured with a hierarchy of levels
(or "loss positions"). Loss positions are the order in which non-recoverable
losses of principal are applied to the securities within a given structure. For
instance, a first loss subordinate security will absorb any principal losses
before any higher loss position subordinate security. This type of structure
allows a number of classes of securities to be created with varying degrees of
credit exposure, prepayment exposure and potential total return.
Subordinated classes of Commercial Mortgage-Backed Securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different
-14-
<PAGE>
priorities for cash flow and loss absorption. As previously discussed, from a
credit perspective, they are structured to absorb any credit-related losses
prior to the senior class. The principal cash flow characteristics of
subordinated classes are designed to be among the most stable in the Mortgage-
Backed Securities market, the probability of prepayment being much lower than
with traditional Residential Mortgage-Backed Securities. This characteristic is
primarily due to the structural feature that directs the application of
principal payments first to the senior classes until they are retired before the
subordinated classes receive any prepayments. While this serves to enhance the
credit protection of the senior classes, it produces subordinated classes with
more stable average lives. Subject to the applicable provisions of the 1940
Act, there are no limitations on the classes of Commercial Mortgage-Backed
Securities in which the Portfolio may invest. Accordingly, in certain
circumstances, the Portfolio may recover proportionally less of its investment
in a Commercial Mortgage-Backed Security than the holders of more senior classes
of the same Commercial Mortgage-Backed Security.
The rating assigned to a given issue and class of Commercial Mortgage-
Backed Securities is a product of many factors, including the structure of the
security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing companies.
The rating of any Commercial Mortgage-Backed Security is determined to a
substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the LTV ratio of
the pooled properties. The amount of the securities issued in any one rating
category is determined by the rating agencies after a rigorous credit rating
process which includes analysis of the issuer, servicer and property manager, as
well as verification of the LTV and debt service coverage ratios. LTV ratios
may be particularly important in the case of commercial mortgages because most
commercial mortgage loans provide that the lender's sole remedy in the event of
a default is against the mortgaged property, and the lender is not permitted to
pursue remedies with respect to other assets of the borrower. Accordingly,
loan-to-value ratios may, in certain circumstances, determine the amount
realized by the holder of the Commercial Mortgaged-Backed Security.
RESIDENTIAL MORTGAGE-BACKED SECURITIES
The Portfolio also expects to invest in Residential Mortgage-Backed
Securities that are Mortgage-Backed Securities representing participation
interests in pools of single-family residential mortgage loans originated by
private mortgage originators. Traditionally, Residential Mortgage-Backed
-15-
<PAGE>
Securities were issued by governmental agencies such as Fannie Mae, Freddie Mac
and Ginnie Mae. The Portfolio intends to invest in those securities issued by
nongovernmental agencies as well as governmental agencies. Nongovernmental
entities that have issued or sponsored Residential Mortgage-Backed Securities
offerings include savings and loan associations, mortgage banks, insurance
companies, investment banks and special purpose subsidiaries of the foregoing.
Residential Mortgage-Backed Securities, similar to Commercial Mortgage-Backed
Securities, have been issued using a variety of structures, including multi-
class structures featuring senior and subordinated classes.
While single-family residential loans do not typically have prepayment
penalties or restrictions, as commercial mortgage loans often do, Residential
Mortgage-Backed Securities are often structured so that subordinated classes may
be locked out of prepayments for a period of time. However, in a period of
extremely rapid prepayments, during which senior classes may be retired faster
than expected, the subordinated classes may receive unscheduled payments of
principal and would have average lives that, while longer than the average lives
of the senior classes, would be shorter than originally expected.
The types of agency and non-agency Commercial and Residential Mortgage-
Backed Securities in which the Portfolio may invest shall include, but not be
limited to, the following securities:
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio may invest in Mortgage-Backed Securities
issued by agencies or instrumentalities of the U.S. Government including GNMA,
FNMA and FHLMC. The U.S. Government or the issuing agency guarantees the
payment of interest and principal on these securities. However, the guarantees
do not extend to the securities' yield or value, nor do the guarantees extend to
the yield or value of the Portfolio's shares. These securities are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the security,
net of certain fees. See "Mortgage-Backed Securities" in the SAI.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage pass-
through securities and are issued by originators of and investors in mortgage
loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. These securities usually are
backed either by GNMA, FNMA or FHLMC certificates or by a pool of fixed rate or
adjustable rate mortgage loans. Securities which are backed by a pool of fixed
rate or adjustable
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rate mortgage loans generally are structured with one or more types of credit
enhancement. See "Types of Credit Enhancement" in the SAI.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates ("ARMs"). ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index. See "Adjustable Rate Mortgage
Securities" in the SAI.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but also
may be collateralized by whole loans or private mortgage pass-through securities
(collectively, "Mortgage Assets"). Multi-class pass-through securities are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multi-class pass-
through certificates. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class pass-
through securities. CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of CMOs or multi-class pass-
through securities may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). See "Collateralized Mortgage Obligations and Multi-Class
Pass-Through Securities" in the SAI.
MISCELLANEOUS. The Portfolio may from time to time purchase in the
secondary market certain mortgage pass-through securities packaged and master
serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage
Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-
related securities containing loans or mortgages originated by PNC Bank or its
affiliates. It is possible that under some circumstances, PNC Mortgage
Securities Corp. or its affiliates could have interests that are in conflict
with the holders of these mortgage-backed securities, and such holders could
have rights against PNC Mortgage Securities Corp. or its affiliates.
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LOWER RATED SECURITIES. The Mortgage-Backed Securities in which the
Portfolio may invest may be lower rated (i.e., have a credit quality below
investment grade) subordinated classes. Investments in such lower rated
securities are subject to special risks, including a greater risk of loss of
principal and non-payment of interest. An investor should carefully consider the
following factors before purchasing shares of the Portfolio. The Portfolio (i)
will not invest in securities (other than U.S. Government securities) that are
not rated at least B by S&P, D&P or Fitch or B2 by Moody's at the time of
investment; (ii) will not invest in securities (other than U.S. Government
securities) not rated by at least one of the foregoing organizations at the time
of investment; (iii) will not invest more than 12.5% of its assets in securities
that are rated below BB-/Ba3 by any of the foregoing organizations; and (iv)
will not invest more than 25% of its assets in securities that are rated below
BBB-/Baa3 by any of the foregoing organizations. In the case of short-term money
market instruments and short-term commingled funds the applicable rating
requirement will be A2/P2. Split rated securities will be accounted for at the
lower rating. If any security held in its portfolio is downgraded such that the
Portfolio would not be able at that time to make an investment in such security,
the Portfolio will sell such security within 30 days after such downgrade. The
Portfolio will maintain a dollar-weighted average credit quality of at least A-
/A3, with U.S. Government securities assigned a AA rating. In order to calculate
the average credit quality of the Portfolio, the Portfolio will assign
sequential numbers to each of the 20 rating categories from AA to D, multiply
the value of each instrument by the rating equivalent number assigned to its
lowest rating, sum all of such products, divide the aggregate by the net asset
value of the Portfolio and convert the number back to its equivalent rating
symbol.
Generally, lower rated securities offer a higher return potential than
higher rated securities but involve greater volatility of price and greater risk
of loss of income and principal, including the possibility of default or
bankruptcy of the issuers of such securities. Lower rated securities will
likely have large uncertainties or major risk exposure to adverse conditions and
are predominately speculative. The occurrence of adverse conditions and
uncertainties would likely reduce the value of securities held by the Portfolio,
with a commensurate effect on the value of the Portfolio's shares. While the
market values of lower rated securities tend to react less to fluctuations in
interest rate levels than do those of higher rated securities, the market values
of certain of these securities also tend to be more sensitive to changes in
economic conditions than higher rated securities. In addition, lower rated
securities generally present a higher degree of credit risk. The Portfolio may
incur additional expenses to the extent
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that it is required to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings.
Securities which are rated BB by S&P, D&P and Fitch and Ba by Moody's have
speculative characteristics with respect to capacity to pay interest and repay
principal. Securities which are rated B generally lack characteristics of a
desirable investment and assurance of interest and principal payments over any
long period of time may be small. A general description of the bond ratings of
Moody's, S&P, D&P and Fitch is set forth in Appendix A to the Prospectus.
In general, the ratings of nationally recognized statistical rating
organizations represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and subjective,
and are not absolute standards of quality and do not evaluate the market value
risk of the securities. It is possible that an agency might not change its
rating of a particular issue to reflect subsequent events. These ratings will
be used by the Portfolio as initial criteria for the selection of portfolio
securities, but the Portfolio also will rely upon the independent advice of the
Adviser to evaluate potential investments.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Portfolio will invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio may invest in securities issued by agencies of
the U.S. Government or instrumentalities of the U.S. Government, including, but
not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the "full
faith and credit" of the United States. In the case of securities not backed by
the "full faith and credit" of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Such securities include obligations issued by FNMA and FHLMC, each
of which may borrow from the U.S. Treasury to meet its obligations, although the
U.S. Treasury is under no obligation to lend to FNMA or FHLMC. GNMA, FNMA and
FHLMC investments by the Portfolio may also include pass-through securities,
CMOs and certain other Mortgage-Backed Securities.
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BANK AND CORPORATE DEBT SECURITIES
The Portfolio may not invest in bank or corporate debt securities except
that it may invest in money market instruments for temporary defensive purposes
and in order to keep cash on hand fully invested. Such instruments include but
are not limited to notes, certificates of deposit, bankers' acceptances and
commercial paper.
FLOATING RATE AND INDEX OBLIGATIONS
The Portfolio may invest in debt securities with interest payments or
maturity values that are not fixed, but float in conjunction with an underlying
index or price. These securities may be backed by U.S. Government or corporate
issuers, or by collateral such as mortgages. In certain cases, a change in the
underlying index or price may have a leveraging effect on the periodic coupon
payments, creating larger possible swings in the prices of such securities than
would be expected when taking into account their maturities alone. The indices
and prices upon which such securities can be based include interest rates,
currency rates and commodities prices. However, the Portfolio will not invest
in any instrument whose value is computed based on a multiple of the change in
price or value of an asset or an index of or relating to assets in which the
Portfolio could not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. This reset mechanism may be formula based, or reflect the passing
through of floating interest payments on an underlying collateral pool. The
coupon is usually reset daily, weekly, monthly, quarterly or semi-annually, but
other schedules are possible. Floating rate obligations generally exhibit a low
price volatility for a given stated maturity or average life because their
coupons adjust with changes in interest rates. If their underlying index is not
an interest rate, or the reset mechanism lags the movement of rates in the
current market, greater price volatility may be experienced.
Index securities pay a fixed rate of interest, but have a maturity value
that varies by formula, so that when the obligation matures a gain or loss is
realized. The risk of index obligations depends on the volatility of the
underlying index, the coupon payment and the maturity of the obligation.
ILLIQUID SECURITIES
Illiquid securities are subject to legal or contractual restrictions on
disposition or lack an established secondary trading market. The sale of
restricted and illiquid securities often requires more time and results in
higher brokerage charges
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or dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. Restricted securities may sell at a price lower than similar securities
that are not subject to restrictions on resale. The Portfolio may purchase
certain restricted securities up to 15% of its net assets eligible for sale to
qualified institutional buyers as contemplated by Rule 144A under the Securities
Act of 1933 and may treat such securities as being liquid if the Adviser
determines, pursuant to procedures adopted by the Trust's Board of Trustees,
that a sufficient secondary market does exist for such securities. See the SAI
for a further discussion of illiquid securities.
OTHER INVESTMENT PRACTICES.
DURATION MANAGEMENT AND OTHER MANAGEMENT TECHNIQUES
As a basic element of its overall investment strategy the Portfolio intends
to use a variety of other investment management techniques and instruments. A
more complete description of such techniques is contained in the SAI. The
Portfolio may purchase and sell futures contracts, enter into various interest
rate transactions such as swaps, caps and floors and may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial indices and futures contracts (collectively, "Additional Investment
Management Techniques"). These Additional Investment Management Techniques may
be used for duration management and other risk management to attempt to protect
against possible changes in the market value of the Portfolio resulting from
trends in the debt securities markets and changes in interest rates, to protect
the Portfolio's unrealized gains in the value of its securities holdings, to
facilitate the sale of such securities for investment purposes and to establish
a position in the securities markets as a temporary substitute for purchasing
particular securities. There is no particular strategy that requires use of one
technique rather than another as the decision to use any particular strategy or
instrument is a function of market conditions and the composition of the
portfolio. See Appendix B "General Characteristics and Risks of Additional
Investment Management Techniques."
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Portfolio's position. In addition,
certain instruments and markets may not be liquid in all circumstances. As a
result, in volatile markets, the Portfolio may not be able to close out a
transaction without
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incurring losses substantially greater than the initial deposit. Although the
contemplated use of these instruments predominantly for hedging should tend to
minimize the risk of loss due to a decline in the value of the position, at the
same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Portfolio to
successfully utilizes Additional Investment Management Techniques will depend on
the Adviser's ability to predict pertinent market movements and sufficient
correlations, which cannot be assured. Finally, the daily deposit requirements
in futures contracts that the Portfolio has sold create an ongoing greater
potential financial risk than do options transactions, where the exposure is
limited to the cost of the initial premium. Losses due to the use of Additional
Investment Management Techniques will reduce net asset value.
In selecting counterparties for OTC hedging and risk management
transactions, the Portfolio will adhere to the following minimum ratings: (i)
with respect to an OTC derivative instrument with a remaining nominal maturity
of six months or less, a Moody's Derivative Counterparty Rating of A3; (ii) with
respect to an OTC derivative instrument with a remaining maturity of more than
six months, a Moody's Derivative Counterparty Rating of AA3. If the
counterparty does not have a Moody's counterparty rating, then either the
Moody's or S&P long-term securities rating of A3/A- (with respect to category
(i) above) or Aa3/AA-(with respect to category (ii) above) may be used as a
substitute. In addition, all such counterparties must have a minimum short-term
rating of A-1 by Moody's and P-1 by S&P. If a counterparty drops below the
minimum ratings, then the Portfolio will seek to unwind existing agreements with
such counterparty in a cost-effective manner and will be prohibited from
entering into new agreements with the counterparty so long as the counterparty's
rating is below the relevant minimum.
The principal risks relating to the use of futures contracts and other
Additional Investment Management Techniques are: (a) less than perfect
correlation between the prices of the instrument and the market value of the
securities in the Portfolio's holdings; (b) possible lack of a liquid secondary
market for closing out a position in such instruments; (c) losses resulting from
interest rate or other market movements not anticipated by the Adviser; and (d)
the obligation to meet additional variation margin or other payment
requirements, all of which could result in the Portfolio being in a worse
position than if such techniques had not been used. See Appendix B "General
Characteristics and Risks of Additional Investment Management Techniques" and
the Statement of Additional Information for further information.
The Portfolio may also purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward
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commitment" basis. When such transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the commitment is made,
but delivery and payment for the securities take place at a later date outside
the normal course of settlement for securities of that type. When-issued
securities and forward commitments may be sold prior to the settlement date, but
the Portfolio will enter into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. If the Portfolio disposes of the right to acquire a when-issued security
prior to its acquisition or disposes of its right to deliver or receive against
a forward commitment, it can incur a gain or loss. At the time the Portfolio
enters into a transaction on a when-issued or forward commitment basis, it will
segregate with its custodian cash or other liquid high grade debt securities
with a value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure that
their marked to market value will at all times equal or exceed the corresponding
obligations of the Portfolio. There is always a risk that the securities may not
be delivered and that the Portfolio may incur a loss. Settlements in the
ordinary course, which typically occur monthly for mortgage-related securities,
are not treated by the Portfolio as when-issued or forward commitment
transactions and accordingly are not subject to the foregoing restrictions.
REPURCHASE AGREEMENTS
The Portfolio may invest temporarily, without limitation, in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Portfolio from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed upon date. These
agreements may be made with respect to any of the securities in which the
Portfolio is authorized to invest. Repurchase agreements may be characterized
as loans secured by the underlying securities and will be entered into in
accordance with the requirements of the SEC. The Portfolio will not enter into
any repurchase agreement with respect to securities other than U.S. Government
securities and mortgage-backed securities. The value of the collateral for such
repurchase agreement marked-to-market at the end of each business day will be at
least 102% of the amount of the repurchase agreement. The Portfolio will not
enter into any repurchase agreement the term of which exceeds 90 days.
RISK FACTORS
COMMERCIAL MORTGAGE-BACKED SECURITIES AND RESIDENTIAL MORTGAGE-BACKED
SECURITIES. Investments in Commercial Mortgage-Backed Securities involve the
credit risks of delinquency and default. Delinquency refers to interruptions in
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the payment of interest and principal. Default refers to the potential for
unrecoverable principal loss from the sale of foreclosed property. These risks
include the risks inherent in the commercial mortgage loans which support such
Commercial Mortgage-Backed Securities and the risks associated with direct
ownership of real estate. This may be especially true in the case of Commercial
Mortgage-Backed Securities secured by, or evidencing an interest in, a
relatively small or less diverse pool of commercial mortgage loans. The factors
contributing to these risks include the effects of general and local economic
conditions on real estate values, the conditions of specific industry segments,
the ability of tenants to make lease payments and the ability of a property to
attract and retain tenants, which in turn may be affected by local conditions
such as oversupply of space or a reduction of available space, the ability of
the owner to provide adequate maintenance and insurance, energy costs,
government regulations with respect to environmental, zoning, rent control and
other matters, and real estate and other taxes.
While the credit quality of the Commercial Mortgage-Backed Securities in
which the Portfolio may invest will reflect the perceived likelihood of future
cash flows to meet operating expenses and cash flow requirements, the underlying
commercial properties may not be able to continue to generate income to meet
their operating expenses and cash flow requirements (mainly debt service, lease
payments, capital expenditures, taxes, maintenance, insurance and tenant
improvements) as a result of any of the factors mentioned above. Consequently,
the obligors under commercial mortgages may be unable to make payments of
interest in a timely fashion, increasing the risk of default on a related
Commercial Mortgage-Backed Security. In addition, the repayment of the
commercial mortgage loans underlying Commercial Mortgage-Backed Securities will
typically depend upon the future availability of financing and the stability of
real estate property values.
The commercial mortgage loans that underlie Commercial Mortgage-Backed
Securities have certain distinct characteristics. Commercial mortgage loans are
generally not amortizing or not fully amortizing. At their maturity date,
repayment of the remaining principal balance or "balloon" is due and is repaid
through the attainment of an additional loan or sale of the property. Most
commercial mortgage loans are nonrecourse obligations of the borrower, meaning
that the sole remedy of the lender in the event of a default is to foreclose
upon the collateral. As a result, in the event of default by a borrower,
recourse may be had only against the specified property pledged to secure the
loan and not against the borrower's other assets. If borrowers are not able or
willing to refinance or dispose of the property to pay the principal balance due
at maturity, payments on the subordinated classes of the related Commercial
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Mortgage-Backed Security are likely to be adversely affected. The ultimate
extent of the loss, if any, to the subordinated classes may only be determined
after the foreclosure of the mortgage encumbering the property and, if the
mortgagee takes title to the property, upon liquidation of the property. Factors
such as the title of the property, its physical condition and financial
performance, as well as governmental disclosure requirements with respect to the
condition of the property, may make a third party unwilling to purchase the
property at a foreclosure sale or for a price sufficient to satisfy the
obligations with respect to the related Commercial Mortgage-Backed Securities.
The condition of a property may deteriorate during foreclosure proceedings.
Certain obligors on underlying mortgages may become subject to bankruptcy
proceedings, in which case the amount and timing of amounts due under the
related Commercial Mortgage-Backed Securities may be materially adversely
affected.
In general, any losses on a given Commercial Mortgage-Backed Security will
be absorbed first by the equity holder, then by a cash reserve fund or letter of
credit, if any, and then by the "first loss" subordinated security to the extent
of its principal balance. Because the Portfolio intends to invest in
subordinated classes of Commercial Mortgage-Backed Securities, there can be no
assurances that in the event of default and the exhaustion of equity support,
the reserve fund and any debt classes junior to those in which the Portfolio
invests, the Portfolio will be able to recover all of its investment in the
securities it purchases. In addition, if the underlying mortgage portfolio has
been overvalued by the originator, or if mortgage values subsequently decline,
the Portfolio may hold the "first loss" position in certain Commercial Mortgage-
Backed Securities ahead of the more senior debt holders, which may result in
significant losses. Many of the lower-rated Commercial Mortgage-Backed
Securities are subject to less prepayment risk than in the case of Residential
Mortgage-Backed Securities because of structural features of the underlying
mortgage loans and the fact that they are entitled to repayment only after more
senior classes are paid.
Investments in Residential Mortgage-Backed Securities involve the credit
risks that affect interest and principal cash flows similar to the credit risks
of Commercial Mortgage-Backed Securities discussed above, as well as the
prepayment risks associated with the possibility that prepayments of principal
generally may be made at any time without penalty. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors. Changes in the rate of prepayments on a
Residential Mortgage-Backed Security may change the yield to maturity of the
security and amounts available for reinvestment from such securities by the
Portfolio are likely to be greater during periods of relatively low or declining
interest rates and therefore are
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likely to be reinvested at lower interest rates than during a period of
relatively high interest rates. This prepayment effect has been particularly
pronounced during the past three years as borrowers have refinanced higher
interest rate mortgages into lower interest rate mortgages available in the
marketplace. Because the Portfolio expects to invest in subordinated Residential
Mortgage-Backed Securities, the prioritization of cash flows from mortgages
under the Residential Mortgage-Backed Securities in favor of the senior classes
generally reduces this prepayment risk.
INVESTING IN LOWER CREDIT QUALITY SECURITIES. An investor should recognize
that the lower-rated Commercial and Residential Mortgage-Backed Securities in
which the Portfolio may invest have speculative characteristics. The prices of
lower credit quality securities, which are commonly referred to as "junk bonds,"
have been found to be less sensitive to interest rate changes than more highly
rated investments, but more sensitive to adverse economic downturns or
individual issuer developments. Securities rated lower than B by S&P and
Moody's, including bonds rated as low as D by S&P or C by Moody's, can be
regarded as having extremely poor prospects of ever attaining any real
investment standing and may be in default with payment of interest and/or
repayment of principal in arrears. A projection of an economic downturn or the
advent of a recession, for example, could cause a decline in the price of lower
credit quality securities because the advent of a recession could lessen the
ability of obligors of mortgages underlying Commercial Mortgage-Backed
Securities and Residential Mortgage-Backed Securities to make principal and
interest payments. In such event, existing credit supports and any first loss
positions may be insufficient to protect against loss of principal.
NON-DIVERSIFIED STATUS. The Portfolio has registered as a "non-
diversified" investment company which enables it to invest more than 5% of its
assets in the obligations of any single issuer, subject only to the
diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As a result of its ability to concentrate its
investments in the obligations of a smaller number of issuers, the Portfolio may
be more susceptible than a more widely diversified fund to any single economic,
political or regulatory occurrence.
ILLIQUID SECURITIES. Liquidity of a security relates to the ability to
easily dispose of securities and the price to be obtained, and does not
necessarily relate to the credit risk or likelihood of receipt of cash at
maturity. Illiquid securities may trade at a discount from comparable, more
liquid investments. The Commercial Mortgage-Backed Securities which the
Portfolio intends to acquire may be less marketable and in some instances
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will be considered illiquid by the Portfolio under applicable standards because
of the absence of registration under the federal securities laws, contractual
restrictions on transfer or the small size of the issue (relative to the issues
of comparable interests).
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PORTFOLIO TURNOVER
The Portfolio has no fixed policy with respect to portfolio turnover. The
Portfolio does not expect to trade in securities for short-term gain. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Portfolio will pay commissions in
connection with its options and futures transactions, the other securities in
which the Portfolio invests are generally traded on a "net" basis with dealers
acting as principals for their own account without a stated commission.
Nevertheless, high portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs which will be borne directly
by the Portfolio. It is expected that the annual portfolio turnover rate for
the Portfolio will not exceed 400%, excluding securities having a maturity of
one year or less. Higher portfolio turnover results in increased Portfolio
expenses, including brokerage commissions, dealer mark-ups and other transaction
commissions, costs on the sale of securities and on reinvestment in other
securities. BlackRock will monitor the tax status of the Portfolio under the
Internal Revenue Code during any period in which the annual turnover rate of the
Portfolio exceeds 100%. To the extent that increased portfolio turnover results
in sales at a profit of securities held less than three months, the Portfolio's
ability to qualify as a "regulated investment company" under the Internal
Revenue Code may be affected. See "Portfolio Transactions" in the Statement of
Additional Information.
MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
ADVISER
BlackRock (formerly BlackRock Financial Management L.P.) was organized in
1988. On February 28, 1995, BlackRock Financial Management L.P. sold its
business to PNC Bank, National Association ("PNC Bank"). The principal business
address of BlackRock is 345 Park Avenue, New York, NY 10154.
As adviser, BlackRock, is responsible for the day-to-day management of the
Portfolio, and generally makes all purchase and
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sale decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Keith Anderson and Mark S. Warner are the persons primarily responsible for
the day-to-day management of the Portfolio's investments.
Keith Anderson is a Managing Director at BlackRock Financial Management,
and co-head of the Portfolio Management Group. In addition, Mr. Anderson co-
chairs the Investment Strategy Committee and he is a member of the firm's
Management Committee. Mr. Anderson has primary responsibility for managing
client portfolios and for acting as a specialist in the government and mortgage
sectors. His areas of expertise include Treasuries, agencies, futures, options,
swaps and a wide range of traditional and non-traditional mortgage securities.
Prior to founding BlackRock in 1988, Mr. Anderson was a Vice President in
Fixed Income Research at The First Boston Corporation. Mr. Anderson joined
First Boston in 1987 as a mortgage securities and derivative products strategist
working with institutional money managers. From 1983 to 1987, Mr. Anderson was
a Vice President and Portfolio Manager at Criterion Investment Management
Company where he had primary responsibility for a $2.8 billion fixed income
portfolio and was an integral part of the firm's portfolio management team.
Mr. Anderson has published numerous articles on fixed income strategies,
including two articles in The Handbook of Fixed Income Options: "Scenario
-------------------------------------
Analysis and the Use of Options in Total Return Portfolio Management" and
"Measuring, Interpreting, and Applying Volatility within the Fixed Income
Market." Mr. Anderson received a Bachelor of Science in Economics and Finance
from Nichols College in 1981 and an M.B.A. from Rice University in 1983.
Mark S. Warner, CFA, is a Vice President of BlackRock with primary
responsibility for managing client portfolios. Mr. Warner specializes in
investing in the commercial mortgage and non-agency residential mortgage
sectors. Mr. Warner has been a co-manager of the Portfolio since July 1996.
Prior to joining BlackRock in 1993, Mr. Warner was a director in the
Capital Markets Unit of the Prudential Mortgage Capital Company. Mr. Warner
joined the Prudential Mortgage Capital Company in 1987, and was initially
responsible for asset/liability strategies for the $7 billion participating
annuity segment. Mr. Warner joined Prudential's Commercial Real Estate Division
in 1989, where he was responsible for the sale of commercial whole loans,
purchases of private placement mortgage-backed securities and securitization
opportunities within the
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Prudential's $25 billion non-residential portfolio. Between 1989 and 1993, Mr.
Warner successfully structured and executed securitization of approximately $2
billion of non-residential mortgages. Mr. Warner previously worked in the fixed
income department at PaineWebber.
Mr. Warner earned a B.A. degree in political science from Columbia
University in 1983 and an M.B.A. degree in finance and marketing from Columbia
Business School in 1987. Mr. Warner received his Chartered Financial Analyst
designation in 1993.
For the services provided and expenses assumed by it, BlackRock is entitled
to receive from the Portfolio a fee computed daily and payable monthly at an
annualized rate of .25% of the Portfolio's average daily net assets. From time
to time BlackRock may waive all or any portion of its advisory fee for and may
reimburse expenses of the Portfolio. The Adviser has advised the Fund that it
will cap the Portfolio's expenses (other than advisory fees) at no more than
.12% of average net assets per year. See "Introduction--Expense Table."
For the six month period ended September 30, 1996, the Portfolio paid
investment advisory fees at the annual rate of .25% of the Portfolio's average
daily net assets.
ADMINISTRATORS
CCG, whose principal business address is 345 Park Avenue, New York, New
York 10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and CDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the 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 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 the 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 the Portfolio's average daily
net assets, .18% of the next $500 million of the Portfolio's average daily net
assets, .16% of the next $1 billion of the Portfolio's average daily net assets
and .15% of the Portfolio's average daily net assets in excess of $2 billion.
From time to time the Administrators may
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<PAGE>
waive all or any portion of the administration fees for the Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to BlackRock and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with BlackRock
or the Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, certain fees and expenses in registering and
qualifying the Portfolio and its 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, the expense of reports to
shareholders, shareholders' meetings and proxy solicitations, fidelity bond and
trustees and officers liability insurance premiums, the expense of using
independent pricing services and other expenses which are not expressly assumed
by BlackRock or the Administrators under their respective agreements with the
Fund. Any general expenses of the Fund that are not readily identifiable as
belonging 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.
If the total expenses borne by the Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations,
BlackRock 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. See "Introduction--Example," "Management--Adviser"
and "Management--Administrators" for discussions of expense reimbursements and
fee waivers.
PORTFOLIO TRANSACTIONS
The Portfolio's adviser may consider a number of factors in determining
which brokers to use in purchasing or selling portfolio securities. These
factors, which are more fully discussed in the Statement of Additional
Information, include, but are not limited to, research services, sales of shares
of the Fund, the reasonableness of commissions and quality of services and
execution. Brokerage transactions for the Portfolio may be
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<PAGE>
directed through registered broker/dealers ("Authorized Dealers") who have
entered into dealer agreements with the Distributor, subject to the requirements
of best execution.
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 company as agent for and upon the
order of customers. PNC Bank, BlackRock, CCG, PFPC 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.
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 Institutional Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Institutional
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 investor.
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund by
the distributor, Compass Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with 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
distribution and sales support activities out of their past profits or other
sources
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<PAGE>
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 without a sales load on a continuous basis
to Institutions at the net asset value per share of the Portfolio next computed
after an order and payment are received in proper form by PFPC. Dividends will
commence accruing on that day. Shares may be purchased on any Business Day. A
"Business Day" is any weekday that the New York Stock Exchange (the "NYSE") and
the Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be transmitted by telephoning PFPC at (800) 441-7379. The
Fund may in its discretion reject any order for Shares.
Payment for Shares may be made only in Federal funds or other funds
immediately available to the Fund's custodian. Normally, payments for Shares
should be received by PFPC no later than 12:00 Noon (Eastern Time). The minimum
initial investment by an Institution is $50 million. There is no minimum
subsequent investment.
REDEMPTION OF SHARES
Redemption orders may be transmitted to PFPC by telephone at (800) 441-
7379. Shares are redeemed at the net asset value per share of the Portfolio
next determined after PFPC's receipt of the redemption request in proper order,
and dividends will not accrue after the day on which the redemption is
effectuated. 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.
The date on which a redemption request is received will be the date
specified if the redemption request specifies a particular date in the future
for its effectiveness. The Fund expects to pay all redemption requests made
with at least thirty (30) days' advance notice in cash. Redemption requests in
excess of $250,000 by any single shareholder from the Portfolio within any
three-month period may be paid in kind unless the Fund has received at least
thirty (30) days' advance notice and will be paid in kind if the redeeming
shareholder so requests and such payment will not adversely affect other
shareholders. Shareholders who receive redemptions in kind will incur
additional expense and delay in disposing of such securities and
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<PAGE>
the value of such securities may decline during the disposition period.
If a proper redemption request is received prior to 12:00 noon (Eastern
time) on any Business Day payment of the redemption price will ordinarily be
wired to the shareholder's bank on the first business day subsequent to the 30-
day advance notice redemption request in the case of the Portfolio. If the
request is received after 12:00 noon (Eastern time) payment will ordinarily be
wired to the shareholder's bank within two Business Days subsequent to the 30-
day advance notice redemption request. Redemption proceeds will be sent by wire
only to the bank named on the shareholder's application form. A shareholder may
change the wire instructions on the application form by writing to PFPC with an
appropriate signature guarantee.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may also
redeem Shares involuntarily or make payment for redemption in securities or
other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
NET ASSET VALUE
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The net asset value for the Portfolio is calculated as of the close of
trading 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, subtracting the
liabilities and dividing by the total number of Shares outstanding. The net
asset value per Share of the Portfolio is determined independently of the Fund's
other portfolios.
The value of securities held by the Portfolio is based upon market
quotations or, if market quotations are not readily available, the securities
are valued at fair value as determined in good faith by or under the direction
of the Fund's Board of Trustees.
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<PAGE>
The Portfolio may use a pricing service, bank or broker/dealer experienced
in such matters to value the Portfolio's securities. A more detailed discussion
of net asset value and security valuation is contained in the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
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The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Institutional Shares is reduced by accrued expenses directly
attributable to the Portfolio and the general expenses of the Fund prorated to
the Portfolio on the basis of its relative net assets. All distributions are
reinvested at net asset value in the form of additional full and fractional
Shares of the Portfolio unless an Institution 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 Portfolio is declared daily. All such dividends are
paid within ten days after the end of each month and within seven days after
redemption of all of a shareholder's Shares in the Portfolio. Net realized
capital gains (including net short-term capital gains), if any, will be
distributed by the Portfolio at least annually.
TAXES
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The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolio and its shareholders and is
not intended as a substitute for careful tax planning. Accordingly, investors
in the Portfolio should consult their tax advisers with specific reference to
their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as
the Portfolio qualifies for this tax treatment, it generally will be relieved of
Federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will pay income or capital gains taxes on amounts so
distributed (except distributions that are treated as a return of capital),
regardless of whether such distributions are paid in cash or reinvested in
additional Shares.
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<PAGE>
Distributions paid out of the "net capital gain" (the excess of net long-
term capital gain over net short-term capital loss), if any, of the Portfolio
will be taxed to shareholders as long-term capital gain, regardless of the
length of time a shareholder has held his Shares and whether such gain was
reflected in the price paid for the Shares. All other distributions, to the
extent they are taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by the 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, provided the dividends are paid during
January of the following year.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in the Portfolio.
Shareholders are also urged to consult their tax advisers concerning the
application of state and local income taxes to investments in the Fund which may
differ from the Federal income tax consequences described above. Shareholders
who are nonresident alien individuals, foreign trusts or estates, foreign
corporations or foreign partnerships may be subject to different U.S. Federal
income tax treatment and should consult their tax advisers.
DESCRIPTION OF SHARES
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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
company. On January 12, 1996, the Fund changed its name from "The PNC Fund" to
"Compass Capital Funds." The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more classes
of shares. Pursuant to such authority, the Board of Trustees has authorized the
issuance of an unlimited number of shares in 31 investment portfolios. This
Prospectus describes the Institutional Shares of the Multi-Sector Mortgage
Securities Portfolio III, which is classified as a non-diversified company under
the 1940 Act. For information regarding other portfolios of the Fund, contact
the Distributor by phone at (800) 998-7633 or at the address listed in "Purchase
and Redemption of Shares--Distributor."
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Each share of the Portfolio has a par value of $.001, represents an equal
proportionate interest in the Portfolio and is entitled to such dividends and
distributions earned on the Portfolio's assets as are declared in the discretion
of the Board of Trustees. The Fund's shareholders are entitled to one vote for
each full share held and proportionate fractional votes for fractional shares
held, and will vote in the aggregate and not by class, except where otherwise
required by law or as determined by the Board of Trustees. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
On December ___, 1996, PNC Bank held of record approximately ___% of the
Fund's outstanding shares, as trustee on behalf of individual and institutional
investors, and may be deemed a controlling person of the Fund under the 1940
Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
OTHER INFORMATION
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REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements and
annual financial statements audited by independent accountants. Shareholder
inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950, Wilmington,
Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call collect (302)
791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolio
may be quoted in advertisements or in communications to Institutions. Total
return will be calculated on an average annual total return basis for various
periods. Average annual total return reflects the average annual percentage
change in value of an investment in Shares of the Portfolio over the measuring
period. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that
dividends and capital gain distributions made by the Portfolio during the period
relating to Shares are reinvested in Shares.
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<PAGE>
The yield of Shares of the Portfolio is computed based on the net income of
the Portfolio allocated to such Shares during a 30-day (or one month) period,
which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such 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.
Performance data of Shares of the Portfolio may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
In addition, certain indexes may be used to illustrate historic performance of
select asset classes. For example, the total return and/or yield of Shares of
the Portfolio 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 Salomon Broad Investment Grade Index,
the T-Bill Index and the "stocks, bonds and inflation index" published annually
by Ibbotson Associates. Performance information may also include evaluations of
the Portfolio and their Shares published by nationally recognized ranking
services and information as reported by financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio 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.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in the portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by
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brokers or other institutions directly to their customer accounts in connection
with investments in Shares will not be included in the Portfolio's calculations
of yield and total return.
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<PAGE>
APPENDIX A
The following summarizes the ratings used for debt securities:
DESCRIPTION OF MOODY'S BOND RATINGS:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aa" 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 "Aa" 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.
A-1
<PAGE>
(P)...- When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
DESCRIPTION OF S&P BOND RATINGS:
"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 AA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
A-2
<PAGE>
CCC -- Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC -- The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C -- The rating "C" typically is applied to debt subordinated to
senior debt that 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 - The rating "CI" is reserved for income bonds on which no interest
is being paid.
D -- Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Standard & Poor's letter ratings may be modified by the addition of a
plus or minus sign, which is used to show relative standing within the major
rating categories, except in the AA, CC, C, CI and D categories.
DESCRIPTION OF DUFF & PHELPS' BOND RATINGS:
AAA - Bonds rated AA are of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA -- Bonds rated AA have high credit quality with strong protection
factors. Risk is modest.
A -- Bonds rated A have average but adequate protection factors. Risk
factors are greater and more variable in times of economic stress than AA or AA.
BBB -- Bonds rated BBB exhibit below average protection factors, but
still considered sufficient for prudent investment. Considerable variability in
risk is present during economic cycles.
BB -- Bonds rated BB are below investment grade, but deemed likely to
meet obligations when due.
A-3
<PAGE>
B -- Bonds rated B are below investment grade and possessing risk that
obligations will not be met when due.
CCC -- Bonds rated CCC are well below investment grade. They may be
in default or have considerable uncertainty as to timely payment of principal,
interest or preferred dividends.
DD -- Bonds rated DD are defaulted debt obligations.
Duff & Phelps' letter ratings may be modified by the addition of a
plus or minus sign, which is used to show relative standing within the major
rating categories, except in the AA, CCC and DD categories.
DESCRIPTION OF FITCH BOND RATINGS:
AAA -- Bonds rated AA are considered investment grade and of the
highest quality. The ability to pay interest and principal is exceptionally
strong and unlikely to be affected by reasonably foreseeable events.
AA -- Bonds rated AA are considered investment grade and very high
credit quality.
A -- Bonds rated A are considered investment grade and of high credit
quality. The ability to pay interest and principal is strong, but may be
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB -- Bonds rated BBB are considered investment grade and
satisfactory credit quality. The likelihood that these bonds will fall below
investment grade, however, is higher than for bonds with higher ratings.
BB -- Bonds rated BB are considered speculative. The ability to pay
interest and principal may be affected over time by adverse economic changes.
B -- Bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the issuer's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC -- Bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default.
CC -- Bonds rated CC are minimally protected. Default seems probable
over time.
C -- Bonds rated C are in imminent default in payments of interest or
principal.
A-4
<PAGE>
DDD, DD and D -- Bonds rated in any of these categories are in default
on interest and/or principal payments.
Fitch's letter ratings may be modified by the addition of a plus or
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
A-5
<PAGE>
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF
ADDITIONAL INVESTMENT MANAGEMENT TECHNIQUES
In order to manage the risk of its securities portfolio, including
duration management, or to enhance income or gain as described above, the
Portfolio will engage in Additional Investment Management Techniques. The
Portfolio will engage in such activities in the Adviser's discretion, and may
not necessarily be engaging in such activities when movements in interest rates
that could affect the value of the assets of the Portfolio occur. The
Portfolio's ability to pursue certain of these strategies may be limited by
applicable regulations of the CFTC and the federal income tax requirements
applicable to regulated investment companies.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Portfolio may purchase and sell put and call options on securities
and indices. A put option gives the purchaser of the option the right to sell
and the writer the obligation to buy the underlying security at the exercise
price during the option period. The Portfolio may also purchase and sell
options on stock indices ("index options"). Index options are similar to
options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option if
the level of the stock index upon which the option is based is greater, in the
case of a call, or less, in the case of a put, than the exercise price of the
option. The purchase of a put option on a debt security could protect the
Portfolio's holdings in a security or a number of securities against a
substantial decline in the market value. A call option gives the purchaser of
the option the right to buy and the seller the obligation to sell the underlying
security or index at the exercise price during the option period or for a
specified period prior to a fixed date. The purchase of a call option on a
security could protect the Portfolio against an increase in the price of a
security that it intended to purchase in the future. In the case of either put
or call options that it has purchased, if the option expires without being sold
or exercised, the Portfolio will experience a loss in the amount of the option
premium plus any related commissions. When the Portfolio sells put and call
options, it receives a premium as the seller of the option. The premium that
the Portfolio receives for selling the option will serve as a partial hedge, in
the amount of the option premium, against changes in the value of the securities
in its portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium
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received on the sale of the option. The Portfolio is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC Options") which
are privately negotiated with the counterparty. Listed options are issued by
the Options Clearing Corporation ("OCC") which guarantees the performance of the
obligations of the parties to such options.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the existence
of a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges 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 on that exchange
that had been listed by the OCC as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms. OTC
options are purchased from or sold to dealers, financial institutions or other
counterparties which have entered into direct agreements with the Portfolio.
With OTC options, such variables as expiration date, exercise price and premium
will be agreed upon between the Portfolio and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails to
make or take delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that option as
written, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction. As the Portfolio must rely on the
credit quality of the counterparty rather than the guarantee of the OCC, it will
only enter into OTC options with counterparties with the highest long-term
credit ratings, and with primary United States government securities dealers
recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
CHARACTERISTICS. The Portfolio may sell financial futures contracts
or purchase put and call options on such futures as a hedge against anticipated
interest rate changes or other market movements. The sale of a futures contract
creates an obligation by the Portfolio, as seller, to deliver the
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specific type of financial instrument called for in the contract at a specified
future time for a specified price. Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put).
MARGIN REQUIREMENTS. At the time a futures contract is purchased or
sold, the Portfolio must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Portfolio
will pay may range from approximately 1% to approximately 5% of the value of the
securities or commodities underlying the contract. In certain circumstances,
however, such as periods of high volatility, the Portfolio may be required by an
exchange to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the future by
regulatory action. An outstanding futures contract is valued daily and the
payment in cash of "variation margin" may be required, a process known as
"marking to the market." Transactions in listed options and futures are usually
settled by entering into an offsetting transaction, and are subject to the risk
that the position may not be able to be closed if no offsetting transaction can
be arranged.
LIMITATIONS ON USE OF FUTURES AND OPTIONS ON FUTURES. The Portfolio's
use of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and regulations
of the CFTC. Under such regulations the Portfolio currently may enter into such
transactions without limit for bona fide hedging purposes, including risk
management and duration management and other portfolio strategies.
The Portfolio will not enter into a futures contract or related option
if, immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Portfolio's
liquidation value, i.e. net assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. Also,
when required, a segregated account of cash or cash equivalents will be
maintained and marked to market in an amount equal to the market value of the
contract. The Portfolio reserves the right to comply with such different
standard as may be established from time to time by CFTC rules and regulations
with respect to the purchase or sale of futures contracts or options thereon.
SEGREGATION AND COVER REQUIREMENTS. Futures contracts, interest rate
swaps, caps, floors and collars and listed options on securities, indices and
futures contracts sold by the Portfolio are subject to segregation and coverage
requirements of either the CFTC or the SEC, with the result that, if the
Portfolio does not hold the security or futures contract underlying the
instrument, the Portfolio will be required to
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segregate on an ongoing basis with its custodian, cash, U.S. government
securities, or other liquid debt obligations in an amount at least equal to the
Portfolio's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation requirement
can result in the Portfolio maintaining securities positions it would otherwise
liquidate, segregating assets at a time when it might be disadvantageous to do
so or otherwise restrict portfolio management.
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The Multi-Sector
NO PERSON HAS BEEN AUTHORIZED TO Mortgage
GIVE ANY INFORMATION OR MAKE ANY Securities
REPRESENTATIONS NOT CONTAINED IN THIS Portfolio III
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 Institutional
REPRESENTATIONS MUST NOT BE RELIED Class
UPON AS HAVING BEEN AUTHORIZED BY THE
FUND OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
Prospectus
___________________
TABLE OF CONTENTS
Page
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Introduction.............................. _________________
Financial Highlights......................
Investment Policies.......................
Management................................
Purchase and Redemption of Shares.........
Net Asset Value...........................
Dividends and Distributions...............
Taxes.....................................
Description of Shares.....................
Other Information.........................
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
New York, New York
CO-ADMINISTRATOR
Compass Capital Group, Inc.
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Compass Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(FORMERLY, THE PNC(R) FUND)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to shares representing interests in the Money Market, Municipal Money
Market, U.S. Treasury Money Market (formerly, the Government Money Market
Portfolio), Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market, New
Jersey Municipal Money Market, Large Cap Value Equity (formerly, the Value
Equity Portfolio), Large Cap Growth Equity (formerly, the Value Equity
Portfolio), Index Equity, Small Cap Value Equity, Mid-Cap Value Equity,
International Equity, International Emerging Markets, Balanced, Small Cap Growth
Equity, Mid-Cap Growth Equity, Select Equity (formerly, the Core Equity
Portfolio), Managed Income, Tax-Free Income, Intermediate Government Bond
(formerly, the Intermediate Government Portfolio), Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Low Duration Bond (formerly, the Short Government
Bond Portfolio), Intermediate Bond (formerly, the Intermediate-Term Bond
Portfolio), Government Income, International Bond (formerly, the International
Fixed Income Portfolio), New Jersey Tax-Free Income and Core Bond Portfolios
(collectively, the "Portfolios") of Compass Capital Funds (the "Fund"). The
Money Market, Municipal Money Market, U.S. Treasury Money Market, Ohio Municipal
Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal
Money Market, Virginia Municipal Money Market and New Jersey Municipal Money
Market Portfolios are called "Money Market Portfolios," and the other Portfolios
are called "Non-Money Market Portfolios." This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with the
Prospectuses of the Fund relating to the Portfolios dated _________________, 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 __________________. 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....................................
Special Considerations for State-Specific
Portfolios............................................
Trustees and Officers..................................
Investment Advisory, Administration,
Distribution and Servicing Arrangements...............
Portfolio Transactions.................................
Purchase and Redemption Information....................
Valuation of Portfolio Securities......................
Performance Information................................
Taxes..................................................
Additional Information Concerning Shares...............
Miscellaneous..........................................
Financial Statements...................................
Appendix A............................................. A-1
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUSES IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUSES AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUSES DO NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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<PAGE>
INVESTMENT POLICIES
The following supplements information contained in the Prospectuses
concerning the Portfolios' investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.
The Index Equity Portfolio invests all of its investable assets in The U.S.
Large Company Series (the "Index Master Portfolio") of The DFA Investment Trust
Company (the "Trust"). Accordingly, the following discussion relates to: (i)
the investment policies of all the Portfolios including the Index Equity
Portfolio; and (ii) where indicated the investment policies of the Index Master
Portfolio.
ADDITIONAL INFORMATION ON INVESTMENT STRATEGY
The Large Cap Value Equity, Large Cap Growth Equity, Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios will invest primarily in securities of
established companies. For this purpose, an established company is one which,
together with its predecessors, has at least three years of continuous operating
history.
The Low Duration Bond Portfolio will seek to maintain a duration for its
portfolio in a range of +/-20% of the current duration of the Merrill Lynch 1-3
Year Treasury Index. The Government Income Portfolio will seek to maintain an
interest rate sensitivity within a range comparable to that of 7 to 10 year U.S.
Treasury bonds.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio (including the Index Master
Portfolio) other than the Municipal Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios
(the "Municipal Money Market Portfolios") may invest in reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held
by a Portfolio pursuant to a Portfolio's agreement to repurchase the securities
at an agreed upon price, date and interest rate. Such agreements are considered
to be borrowings under the Investment Company Act of 1940 (the "1940 Act").
While reverse repurchase transactions are outstanding, a Portfolio will maintain
in a segregated account liquid assets in an amount at least equal to the market
value of the securities, plus accrued interest, subject to the agreement.
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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
particular variable and floating rate instruments could make it difficult for a
Portfolio to dispose of a variable or floating rate note if the issuer defaulted
on its payment obligation or during periods that the Portfolio is not entitled
to exercise its demand rights, and the Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments. In determining
average-weighted portfolio maturity, an instrument will be deemed to have a
maturity equal to either the period remaining until the next interest rate
adjustment or the time the Portfolio involved can recover payment of principal
as specified in the instrument, depending on the type of instrument involved.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. Each Portfolio may purchase bank obligations, such as
certificates of deposit, bankers' acceptances and time deposits, including
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions having total assets at the time of purchase in excess of $1
billion. The assets of a bank or savings institution will be deemed to include
the assets of its domestic and foreign branches for purposes of each Portfolio's
investment policies. Investments in short-term bank obligations may include
obligations of foreign banks and domestic branches of foreign banks, and also
foreign branches of domestic banks.
The Index Master Portfolio may purchase obligations of U.S. banks and
savings and loan associations and dollar-denominated obligations of U.S.
subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Index
Master Portfolio if the bank has assets in excess of $1 billion.
MORTGAGE-RELATED SECURITIES. There are a number of important differences
among the agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities and among the securities that they issue. Mortgage-
related securities guaranteed by the Government National Mortgage Association
("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and
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<PAGE>
such guarantee is backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by the Federal National
Mortgage Association ("FNMA") include FNMA guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA, are not backed by or entitled to the full faith and credit of the
United States and are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of principal and
interest by FNMA. Mortgage-related securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality
of the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
The Managed Income, Intermediate Government, Low Duration Bond,
Intermediate Bond, Government Income, International Bond, Core Bond, Tax-Free
Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-
Free Income Portfolios (the "Bond Portfolios") and the Balanced Portfolio may
invest in multiple class pass-through securities, including collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduit
("REMIC") pass-through or participation certificates ("REMIC Certificates").
These multiple class securities may be issued by U.S. Government agencies or
instrumentalities, including FNMA and FHLMC, or by trusts formed by private
originators of, or investors in, mortgage loans. In general, CMOs and REMICs
are debt obligations of a legal entity that are collateralized by, and multiple
class pass-through securities represent direct ownership interests in, a pool of
mortgage loans or mortgage pass-through securities (the "Mortgage Assets"), the
payments on which are used to make payments on the CMOs or multiple pass-through
securities. Investors may purchase beneficial interests in CMOs and REMICs,
which are known as "regular" interests or "residual" interests. The residual in
a
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<PAGE>
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 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
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<PAGE>
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.
FNMA REMIC Certificates are issued and guaranteed as to timely distribution
of principal and interest by FNMA. In addition, FNMA will be obligated to
distribute on a timely basis to holders of FNMA REMIC Certificates required
installments of principal and interest and to distribute the principal balance
of each class of REMIC Certificates in full, whether or not sufficient funds are
otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain Pcs, referred to as "Gold Pcs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage-related securities. Like other fixed-income securities,
when interest rates rise the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.
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<PAGE>
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Portfolios may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, the Farmers Home Administration, the Export-Import Bank of the
United States, the Small Business Administration, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the
Maritime Administration, the International Bank for Reconstruction and
Development (the "World Bank"), the Asian-American Development Bank and the
Inter-American Development Bank.
The Index Master Portfolio may purchase (i) debt securities issued by
the U.S. Treasury which are direct obligations of the U.S. Government, including
bills, notes and bonds, and (ii) obligations issued or guaranteed by U.S.
Government-sponsored instrumentalities and federal agencies, including FNMA,
Federal Home Loan Bank and the Federal Housing Administration.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Portfolios may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development.
LEASE OBLIGATIONS. The Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the Sub-
Adviser will consider, among other factors, the following: (i) whether the lease
can be cancelled; (ii) the degree of assurance that assets represented by the
lease could be sold; (iii) the strength of the lessee's general credit (e.g.,
its debt, administrative, economic, and financial characteristics); (iv) the
likelihood that the municipality would discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
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The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios will
only invest in lease obligations with puts that (i) may be exercised at par on
not more than seven days notice, and (ii) are issued by institutions deemed by
the sub-adviser to present minimal credit risks. Such obligations will be
considered liquid. However, a number of puts are not exercisable at the time
the put would otherwise be exercised if the municipal borrower is not
contractually obligated to make payments (e.g., an event of nonappropriation
with a "nonappropriation" lease obligation). Under such circumstances, the
lease obligation while previously considered liquid would become illiquid, and a
Portfolio might lose its entire investment in such obligation.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a
reduction of income to a Portfolio, and could result in a reduction in the value
of the municipal lease experiencing non-payment and a potential decrease in the
net asset value of a Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, a Portfolio could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and a Portfolio
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund might take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase a Portfolio's
operating expenses and adversely affect the net asset value of a Portfolio.
When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and a Portfolio would not have the right to take
possession of the assets. Any income derived from a Portfolio's ownership or
operation of such assets may not be tax-exempt. In addition, a Portfolio's
intention to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended, may limit the extent to which a Portfolio may
exercise its rights by taking possession of such assets, because as a regulated
investment company a Portfolio is subject to certain limitations on its
investments and on the nature of its income.
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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 require that the value of this collateral, after transaction costs
(including loss of interest) reasonably expected to be incurred on a default, be
equal to or greater than the repurchase price (including accrued premium)
provided in the repurchase agreement. The accrued premium is the amount
specified in the repurchase agreement or the daily
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amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. The Portfolio's adviser or sub-
adviser will mark-to-market daily the value of the securities. Securities
subject to repurchase agreements will be held by the Fund's custodian (or sub-
custodian) in the Federal Reserve/Treasury book-entry system or by another
authorized securities depository. Repurchase agreements are considered to be
loans by the Portfolios under the 1940 Act.
The Index Master Portfolio may enter into repurchase agreements, but will
not enter into a repurchase agreement with a duration of more than seven days
if, as a result, more than 10% of the value of its total assets would be so
invested. The Index Master Portfolio will also only invest in repurchase
agreements with a bank if the bank has at least $1 billion in assets and is
approved by the Investment Committee of DFA. DFA will monitor the market value
of transferred securities plus any accrued interest thereon so that the value of
such securities will at least equal the repurchase price. The securities
underlying the repurchase agreements will be limited to U. S. Government and
agency obligations described under "U.S. Government Obligations" above.
INVESTMENT GRADE DEBT OBLIGATIONS. Each of the Money Market Portfolios may
invest in securities in the two highest rating categories of NRSROs. The Non-
Money Market Portfolios, except the Index Master Portfolio and the Low Duration
Bond, Intermediate Government Bond and Government Income Portfolios, may invest
in "investment grade securities," which are securities rated in the four highest
rating categories of an NRSRO. The Low Duration Bond, Intermediate Government
Bond and Government Income Portfolios may invest in debt securities rated Aaa by
Moody's or AAA by S&P. 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."
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WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolios may enter
into "when-issued" and "forward" commitments, including "TBA" (to be announced)
purchase commitments, to purchase or sell securities at a fixed price at a
future date. When a Portfolio agrees to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Portfolio may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Portfolio's commitments. It may be expected that the market value of a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of its total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, a Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. Each equity Portfolio (except
the Index Master Portfolio) and the Balanced Portfolio may participate in rights
offerings and may purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that a Portfolio could lose the purchase
value of a
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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, taken at market value, in warrants not listed on
the New York or American Stock Exchanges. Warrants acquired by a Portfolio in
units or attached to other securities are not subject to this restriction.
FOREIGN CURRENCY TRANSACTIONS. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Portfolio to establish a rate of exchange for a future point in time. A
Portfolio may use forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the "ECU" used in the
European Community) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A Portfolio may
enter into forward foreign currency exchange contracts when deemed advisable by
its adviser or sub-adviser under two circumstances. First, when entering into a
contract for the purchase or sale of a security, a Portfolio may enter into a
forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. In
addition, while forward contracts may offer protection from losses resulting
from declines in the value of a particular foreign currency, they also limit
potential gains which might result from increases in the value of such currency.
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A Portfolio will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
A separate account of a Portfolio consisting of liquid assets equal to the
amount of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above, will
be established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Portfolio.
OPTIONS. Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in the underlying securities themselves. A Portfolio will
write call options only if they are "covered." In the case of a call option on
a security, the option is "covered" if a Portfolio owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Portfolio maintains with its
custodian liquid assets equal to the contract value. A call option is also
covered if a Portfolio holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by the Portfolio in
liquid assets in a segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is recorded
as an asset of the Portfolio. When a Portfolio writes an option, an amount
equal to the net premium (the premium less the commission) received by the
Portfolio is included in the liability section of the Portfolio's statement of
assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded
option is the last sale price or, in the absence of a sale, the mean between the
last bid and asked prices. If an option purchased by a Portfolio expires
unexercised the Portfolio realizes a loss equal to the premium paid. If the
Portfolio enters into a closing sale transaction on an option purchased by it,
the Portfolio will realize a gain if
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the premium received by the Portfolio on the closing transaction is more than
the premium paid to purchase the option, or a loss if it is less. If an option
written by a Portfolio expires on the stipulated expiration date or if the
Portfolio enters into a closing purchase transaction, it will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option written by a Portfolio is exercised, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Non-Money Market Portfolio
(including the Index Master Portfolio) may invest in futures contracts and
options thereon (interest rate futures contracts or index futures contracts, as
applicable). Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
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
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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 a sub-adviser's
ability to correctly predict movements in the direction of the market. For
example, if a Portfolio has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. In addition, in some
situations, if a Portfolio has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio also involves the risk
of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses,
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because the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
STAND-BY COMMITMENTS. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Portfolio at any time before the maturity of
the underlying Municipal Obligations and may be sold, transferred or assigned
only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Portfolio may pay
for such a stand-by commitment either separately in cash or by paying a higher
price for Municipal Obligations which are acquired subject to the commitment for
Municipal Obligations (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for
outstanding stand-by commitments for Municipal Obligations held by a Portfolio
will not exceed 1/2 of 1% of the value of such Portfolio's total assets
calculated immediately after each stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in a sub-adviser's opinion, present minimal credit risks.
A Portfolio will acquire stand-by commitments solely to facilitate portfolio
liquidity and not to exercise its rights thereunder for trading purposes.
Stand-by commitments will be valued at zero in determining net asset value.
Accordingly, where a Portfolio pays directly or indirectly for a stand-by
commitment, its cost will be reflected as an unrealized loss for the period
during which the commitment is held by such Portfolio and will be reflected as a
realized gain or loss when the commitment is exercised or expires.
TAX-EXEMPT DERIVATIVES. The Municipal Money Market Portfolios and the Tax-
Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and New Jersey
Tax-Free Income Portfolios (collectively, the "Money and Non-Money Market
Municipal Portfolios") may hold tax-exempt derivatives which may
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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 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
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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 Index Master Portfolio's total assets. In connection with such
loans, the Index Master Portfolio will receive collateral consisting of cash or
U.S. Government securities, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. In
addition, the Index Master Portfolio will be able to terminate the loan at any
time, will receive reasonable interest on the loan, as well as amounts equal to
any dividends, interest or other distributions on the loaned securities. In the
event of the bankruptcy of the borrower, the Trust could experience delay in
recovering the loaned securities. Management of the Trust believes that this
risk can be controlled through careful monitoring procedures.
YIELDS AND RATINGS. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"),
Fitch Investor Services, Inc. ("Fitch") and S&P represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. Subsequent to its purchase by a Portfolio, a rated security may
cease to be rated. A Portfolio's adviser or sub-adviser will consider such an
event in determining whether the Portfolio should continue to hold the security.
INTEREST RATE TRANSACTIONS AND CURRENCY SWAPS. The Bond Portfolios may
enter into interest rate swaps, caps and floors on either an asset-based or
liability-based basis, depending on whether a Portfolio is hedging its assets or
its liabilities. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of floating rate payments for fixed rate payments). The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
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rate cap. The International Bond Portfolio may also enter into currency swaps,
which involve the exchange of the rights of a Portfolio and another party to
make or receive payments in specified currencies.
A Portfolio will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate or currency
swap on a daily basis and will deliver an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess to a custodian
that satisfies the requirements of the 1940 Act. If the other party to an
interest rate swap defaults, a Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
received. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. A Portfolio will not enter into any interest rate or currency swap
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party is rated either "A" or "A-1" or better by S&P, Duff & Phelps or
Fitch, or "A" or "P-1" or better by Moody's.
A Portfolio will enter into currency or interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by the Portfolio's
adviser or sub-adviser. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations and, accordingly, they are less liquid than swaps.
INVESTMENT COMPANIES. Each Portfolio, other than the Index Equity
Portfolio, currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be
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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 FOR STATE-SPECIFIC PORTFOLIOS
The following information regarding the State-Specific Portfolios is
derived from official statements of certain 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.
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.
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Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio Obligations or in those obligations of
particular Ohio issuers. It is possible that the investment may be in
particular Ohio Obligations, or in those of particular issuers, as to which
those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
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
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related to national economic conditions, with the ending FY balance reduced
during less favorable and increased during more favorable economic periods. The
State has well-established procedures for, and has timely taken, necessary
actions to ensure resource/expenditure balances during less favorable economic
periods. Those procedures included general and selected reductions in
appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
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,
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1995 with a GRF ending fund balance of $928 million, of which $535.2 million was
transferred into the BSF (which had an October 7, 1996 balance of over $828
million).
The GRF appropriations act for the current 1995-96 biennium was passed on
June 28, 1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance with
the appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, was
transferred to the BSF and other funds, including school assistance funds and,
in anticipation of 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 October 7, 1996, $854 million (excluding certain highway bonds
payable primarily from highway use receipts) 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 ($34.9
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 ($774.7 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 ($44.2 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
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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.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.8 billion of
which were outstanding or sold and awaiting delivery at October 7, 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.)
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 approximately
120 districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, is pending
questioning the constitutionality of Ohio's system of school funding. The trial
court concluded that aspects of the system (including basic operating
assistance) are unconstitutional, and
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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 (including
$29.5 million for one), and $87.2 million for 20 districts in fiscal year 1996
(including $42.1 million for one).
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 and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception for
municipalities 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. The 1996 school district provision has been applied to two
districts.
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
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value of those Portfolios and their portfolio securities. This section briefly
describes current economic trends in Pennsylvania.
Pennsylvania has historically been dependent on heavy industry, although
recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic
growth in Pennsylvania are in the service sector, including trade, medical and
health services, education and financial institutions. Agriculture continues to
be an important component of the Commonwealth's economic structure, with nearly
one-third of the Commonwealth's total land area devoted to cropland, pasture and
farm woodlands.
The population of Pennsylvania experienced a slight increase in the period
1980 through 1990, and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1980 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 50% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 120 funds
have been established for purposes of recording receipts and disbursements of
the Commonwealth, of which the General Fund is the largest. Most of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. The major tax sources for the General Fund are the sales tax, the
personal income tax and the corporate net income tax. Major expenditures of the
Commonwealth include funding for education, public health and welfare,
transportation, and economic development.
The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund (the principal operating fund of the
Commonwealth) and for certain special revenue funds which together represent the
majority of expenditures of the Commonwealth. Although a negative balance was
experienced applying generally accepted accounting principles ("GAAP") in the
General Fund for fiscal 1990 and 1991, tax increases and spending decreases 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.
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Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suits relating to the following matters: (a) the ACLU has filed suit
in Federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia, because of that
----- ----
settlement. After its earlier denial was reversed by the Third Circuit Court of
Appeals, the district 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
30, 1996. The audited balance of the City's General Fund as of June 30, 1995 was
$80.5 million.
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The Authority's power to issue further bonds to finance capital projects or
deficit expired on December 31, 1994. The Authority may continue to issue debt
to finance a cash flow deficit until December 31, 1996, and its ability to
refund outstanding bonds is unrestricted. The Authority had $1,146.2 million in
special revenue bonds outstanding as of December 31, 1996.
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 three major operating funds: the General
Fund, the Highway Fund and the Highway Trust Fund. 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
(currently being phased out). 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. An additional $269.9 million was available from a
reserved fund balance. Of this aggregate amount, $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 after certain other restrictions. Fiscal year 1996
ended with a positive General Fund balance of approximately $573.4 million. An
additional $153.1 million was available from a reserved fund balance. Of this
aggregate amount, $77.3 million was reserved in the Savings Reserve (bringing
the total reserve to $500.9 million) and $130.0 million was reserved in the
Reserve for Repair and Renovation of State Facilities (bringing the total
reserve to $151.3 million after prior withdrawals). An additional $47.1 million
was transferred to a newly-created Clean Water Management Trust Fund, $39.5
million was reserved in a Capital Improvement Reserve, and $26.2 was transferred
to newly-created Federal Retiree Refund and Administration Accounts, leaving an
unrestricted General Fund balance at June 30, 1996 of approximately $406.1
million.
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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 foregoing results
for fiscal year 1996 are based upon unaudited financial information supplied by
the Office of State Budge and Management. Modified accrual basis results were
not available as of the date this section was prepared.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along
with $157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of North Carolina's intangible personal property
tax and 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.
In the 1996 Special Session, the General Assembly reviewed and adjusted the
fiscal 1997 budget to take into account a General Fund surplus of over $700
million for the 1996 fiscal year. The General Assembly agreed to spend
approximately $415.4 million on new or expanded programs, apply approximately
$143 million to tax cuts and refunds, and reserve approximately $100 million in
various savings and other reserve accounts. Funding for education and salaries
for teachers and other state employees was increased. The tax cuts included a
reduction in North Carolina's corporate income tax, sales tax on food, and
inheritance tax, among other tax cuts. Legislators also significantly expanded
North Carolina's industrial development policies, including the adoption of four
new tax credits designed to make North Carolina more competitive in industrial
recruitment. Overall, changes were made, or new credits added, in the following
areas: investment tax credit, business tax credit, worker training tax credit,
jobs creation tax credit, and research and development tax credit. The tax cuts
will reduce North Carolina revenues by approximately $68.4 million for fiscal
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1997 and by approximately $337 million when all cuts are phased in by 2001. The
General Assembly also created a Clean Water Management Trust Fund, which will be
used to finance projects to clean up or prevent surface water pollution. The
Fund will receive 6.5%; of the General Fund's unspent credit balance each year.
The initial allocation to this Fund from the fiscal 1996 credit balance was
$47.1 million.
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 June 1996, North Carolina ranked
eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in August 1996 to be 4.1% of the labor force, as
compared with an unemployment rate of 5.1% 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
-----------------
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
-----
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.
Following Davis, federal retirees filed a class action suit in federal
-----
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in
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1990. The complaints alleged that the amount in controversy exceeded $140
million. The North Carolina Department of Revenue estimate of refunds and
interest liability is $280.89 million as of June 30, 1994. In 1991, the North
Carolina Supreme Court ruled in favor of the State in the state court action,
concluding that Davis could only be applied prospectively and that the 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, which petition was denied. 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. Despite these
victories in court, the General Assembly in its 1996 Special Session adopted
legislation allowing for a refund of taxes for federal retirees. Effective for
tax years beginning on or after January 1, 1996, federal retirees are entitled
to a North Carolina income tax credit for taxes paid on their pension benefits
during tax years 1985 through 1988. In the alternative, a partial refund may be
claimed in lieu of a credit for eligible taxpayers.
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
------
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 was challenged by the plaintiff on grounds
that it violated 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 was a North Carolina
corporation that did all or part of its business outside the State. The
plaintiff sought 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
North Carolina Supreme Court reversed the decision of the Court of Appeals,
upholding the tax on intangible personal property. The United States Supreme
Court reversed, ruled in the plaintiff's favor that the tax was discriminatory,
and ordered the case back to the State Court for a ruling on the appropriate
remedy. It is anticipated that the State Court will order the State to pay
refunds aggregating between $130 million and $140 million, including interest,
although other alternative remedies are possible. In April 1995, the North
Carolina General Assembly repealed the State's
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intangible personal property tax, effective for taxable years beginning on or
after January 1, 1995.
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 during January
1997.
In its 1996 Short Session, the North Carolina General Assembly approved
additional North Carolina general obligation bonds in the amount of $950 million
for highways and $1.8 billion for schools. These bonds were approved by the
voters of the State in November, 1996.
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 official 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 Virginia's average annual
tax revenues derived from taxes on income and retail sales for the three
preceding fiscal years.
General Fund revenues are principally comprised of direct taxes. In recent
fiscal years, most of the total tax revenues have been derived from five major
taxes imposed by Virginia on individual and fiduciary income, sales and use,
corporate income, public service 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 Virginia.
The committee reviews the outstanding debt of all agencies, institutions, boards
and authorities of Virginia for which Virginia 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 Virginia that is backed by the Virginia'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
Virginia 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 Virginia; and to redeem a previous debt
obligation of Virginia. Total indebtedness issued pursuant to this Section may
not exceed 30 percent of an amount equal to 1.15 times the annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the creation
of general obligation debt for capital projects. Such debt is required to be
authorized by an affirmative vote of a majority of each house of the General
Assembly and approved in a statewide election. The outstanding amount of such
debt is limited to an amount equal to 1.15 times the average annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the three preceding fiscal years less the total amount of
bonds outstanding. The amount of 9(b) debt that may be authorized in any single
fiscal year is limited to 25 percent of the limit on all 9(b) debt less the
amount of 9(b) debt authorized in the current and prior three fiscal years.
Section 9(c) provides that the General Assembly may authorize the creation
of general obligation debt for revenue-producing capital projects (so-called
"double-barrel" debt). Such debt is required to be authorized by an affirmative
vote of two-thirds of each house of the General Assembly and approved by the
Governor. The Governor must certify before the enactment of the authorizing
legislation and again before the issuance of the debt that the net revenues
pledged are expected to be sufficient to pay principal of and interest on the
debt. The outstanding amount of 9(c) debt is limited to an amount equal to 1.15
times
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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 Virginia or any of its
institutions, agencies or authorities if the full faith and credit of Virginia
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 is a substantial issuer 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 Virginia. Should the need arise, Virginia may consider
funding deficiencies in the respective debt service reserves for such moral
obligation debt. To date, none of these authorities has advised Virginia that
any such deficiencies exist.
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Local government in the Commonwealth is comprised of 95 counties, 40
incorporated cities, and 190 incorporated towns. Virginia is unique among the
several states in that cities and counties are independent, and their land areas
do not overlap. The largest expenditures by local governments in Virginia 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 in five annual installments to Federal
retirees in a settlement of the retirees' claims as a result of Davis. In 1995
and 1996, the General Assembly passed legislation allowing more retirees to
participate in the settlement. As of April 15, 1996, the estimated total cost
to Virginia for the settlement was approximately $316.2 million.
On September 15, 1995, the Virginia Supreme Court rendered its decision in
Harper, reversing the judgment of the trial court, entering final judgment in
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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 is approximately $394.9 million,
of which approximately $203.2 million has been paid, leaving $191.7 million
payable in respect of the settlement - approximately $63.2 million in fiscal
year 1997, $62.5 million on March 31, 1998, and (subject to appropriation) $66
million on March 31, 1999.
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 New Jersey Municipal Money Market Portfolio generally intends
to invest its assets primarily in New Jersey Municipal Obligations rated within
the two highest rating categories of an NRSRO, and the New Jersey Tax-Free
Income Portfolio intends to invest its assets primarily in New Jersey Municipal
Obligations rated within the four 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.
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ADDITIONAL INVESTMENT LIMITATIONS.
Each Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Portfolio only by a
vote of the holders of a majority of such Portfolio's outstanding shares (as
defined below under "Miscellaneous"). The Index Master Portfolio's fundamental
investment limitations are described separately.
MONEY MARKET PORTFOLIOS:
1) Each of the Money Market, Municipal Money Market and 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
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in the securities of one or more issuers conducting their principal business
activities in the same industry. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the obligations of
issuers in the banking industry, or in obligations, such as repurchase
agreements, secured by such obligations (unless the Portfolio is in a temporary
defensive position) or which would cause, at the time of purchase, more than 25%
of the value of its total assets to be invested in the obligations of issuers in
any other industry. In applying the investment limitations stated in this
paragraph, (i) there is no limitation with respect to the purchase of (a)
instruments issued (as defined in Investment Limitation number 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (b) instruments issued by domestic
banks (which may include U.S. branches of foreign banks) and (c) repurchase
agreements secured by the instruments described in clauses (a) and (b); (ii)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (iii) utilities will be divided according to
their services, for example, gas, gas transmission, electric and gas, electric
and telephone will be each considered a separate industry.
4) Each of the Ohio Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia Municipal Money Market
and New Jersey Municipal Money Market Portfolios will invest at least 80% of its
net assets in AMT Paper and instruments the interest on which is exempt from
regular Federal income tax, except during defensive periods or during periods of
unusual market conditions.
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
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total assets would (taken at current value) be invested in the securities of
such issuer, or more than 10% of the issuer's outstanding voting securities
would be owned by the Portfolio or the Fund, except that up to 25% of the value
of the Portfolio's total assets may (taken at current value) be invested without
regard to these limitations. For purposes of this limitation, a security is
considered to be issued by the entity (or entities) whose assets and revenues
back the security. A guarantee of a security shall not be deemed to be a
security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
Each of the Non-Money Market Portfolios may not:
2) Purchase any securities which would cause 25% or more of the value of
the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued (as defined in Investment Limitation No. 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and (ii) repurchase agreements
secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
Each Non-Money Market Portfolio (other than the Managed Income,
Intermediate Government Bond, Low Duration Bond, Intermediate Bond, Government
Income, International Bond, Core Bond and Balanced Portfolios) may not:
3) Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Portfolio's investment practices are not deemed to
be pledged for purposes of this limitation.
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None of the Managed Income, Intermediate Government Bond, Low Duration
Bond, Intermediate Bond, Government Income, Core Bond, International Bond and
Balanced Portfolios may:
4) Issue senior securities, borrow money or pledge its assets, except
that a Portfolio may borrow from banks or enter into reverse repurchase
agreements or dollar rolls in amounts aggregating not more than 33 1/3% of the
value of its total assets (calculated when the loan is made) to take advantage
of 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.
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6. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in futures contracts and related options or
a Portfolio's sale of securities short against the box, and (b) a Portfolio may
obtain short-term credit as may be necessary for the clearance of 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. Purchase or sell commodities except that each Portfolio may, to
the extent appropriate to its investment policies, purchase securities of
companies engaging in whole or in part in such activities, may engage in
currency transactions and may enter into futures contracts and related options.
10. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in shares of
an open-end management investment company with substantially the same investment
objective, policies and limitations as the Portfolio.
Although the foregoing investment limitations would permit the Money Market
Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months (except to the extent a portfolio security may be
subject to a "demand feature" or "put" as permitted under SEC regulations for
money market funds). Prior to making any such investments, a Money Market
Portfolio would notify its shareholders and add appropriate descriptions
concerning the instruments and transactions to its Prospectus.
INDEX MASTER PORTFOLIO:
The investment limitations of the Index Master Portfolio, the Portfolio in
which the Index Equity Portfolio invests all of its investable assets, are
separate from those of the Index Equity Portfolio. The Index Master Portfolio
may not:
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1. Invest in commodities or real estate, including limited partnership
interests therein, although it may purchase and sell securities of companies
which deal in real estate and securities which are secured by interests in real
estate, and may purchase or sell financial futures contracts and options
thereon;
2. Make loans of cash, except through the acquisition of repurchase
agreements and obligations customarily purchased by institutional investors;
3. As to 75% of the total assets of the Index Master Portfolio, invest in
the securities of any issuer (except obligations of the U.S. Government and its
instrumentalities) if, as a result, more than 5% of the Index Master Portfolio's
total assets, at market, would be invested in the securities of such issuer;
4. Purchase or retain securities of an issuer if those officers and
trustees of the Trust or officers and directors of the Trust's investment
adviser owning more than 1/2 of 1% of such securities together own more than 5%
of such securities;
5. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 5% of the Index Master
Portfolio's gross assets valued at the lower of market or cost; provided that it
may borrow amounts not exceeding 33% of its net assets from banks and pledge not
more than 33% of such assets to secure such loans;
6. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value, except as described
in (5) above;
7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;
8. Engage in the business of underwriting securities issued by others;
9. Invest for the purpose of exercising control over management of any
company;
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;
-48-
<PAGE>
12. Acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of its total assets would
be invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;
15. Purchase securities on margin or sell short; or
16. Acquire more than 10% of the voting securities of any issuer.
Although (2) above prohibits cash loans, the Index Master Portfolio is
authorized to lend portfolio securities. With respect to (7) above, pursuant to
Rule 144A under the 1993 Act, the Index Master Portfolio may purchase certain
unregistered (i.e. restricted) securities upon a determination that a liquid
institutional market exists for the securities. If it is decided that a liquid
market does exist, the securities will not be subject to the 10% limitation on
holdings of illiquid securities stated in (7) above. While maintaining
oversight, the Board of Trustees of the Trust has delegated the day-to-day
function of making liquidity determinations to 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.
-49-
<PAGE>
TRUSTEES AND OFFICERS
THE FUND
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President
Bell Atlantic Corporation and Chief Financial
1717 Arch Street Officer since February
47th Floor West 1995, Vice President and
Philadelphia, PA 19103 Chief Financial Officer
Age: from January 1991 -
February 1995, Bell
Atlantic Corporation (a
diversified telecommuni-
cations company);
Chairman, President and
Chief Executive Officer
from August 1989 -
January 1991, Bell
Atlantic Enterprises
International, Inc.;
Director, Group Iusacell,
S.A. de C.V. since June
1994; Director, American
Waterworks, Inc. since
May 1990; Trustee, The
Carl E. & Emily I. Weller
Foundation since October
1991.
Raymond J. Clark/1/ Trustee, Treasurer of Princeton
Office of the Treasurer President and University since 1987;
Princeton University Treasurer Trustee, The Compass
3 New South Building Capital Group of Funds
P.O. Box 35 from 1987 to 1996;
Princeton, New Jersey 08540 Trustee, United-Way
Age: 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
</TABLE>
- --------------------------
/1/ This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-50-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
<S> <C> <C>
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: Chief Financial Officer from
1991 to 1994, Senior Vice
President - Finance and
Treasurer from 1990 to 1991,
USX Corporation (a diversified
company principally engaged in
energy and steel businesses);
Director, ACE Limited;
Trustee, Allegheny General
Hospital and Allegheny
Accounting & Finance and
Health, Education and Research
Foundation; Director,
Marinette Marine Corporation;
Director, Pittsburgh Baseball,
Inc.; and Director and
Chairman of the Board, RMI
Titanium Company.
Anthony M. Santomero Vice Chairman Deputy Dean from
The Wharton School of the Board 1990 to 1994, Richard
University of Pennsylvania K. Mellon Professor
Room 2344 of Finance since April
Steinberg Hall-Dietrich Hall 1984, Director, Wharton
Philadelphia, PA 19104-6367 Financial Institutions
Age: Center, since July 1995, and
Dean's Advisory Council Member
since July 1984, The Wharton
School, University of
Pennsylvania; Associate
Editor, Journal of Banking and
Finance since June 1978;
Associate Editor, Journal of
</TABLE>
-51-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
<S> <C> <C>
Economics and Business since
October 1979; Associate
Editor, Journal of Money,
Credit and Banking since
January 1980; Research
Associate, New York University
Center for Japan-U.S. Business
and Economic Studies since
July 1989; Editorial Advisory
Board, Open Economics Review
since November 1990; Director,
The Zweig Fund and The Zweig
Total Return Fund; Director of
Municipal Fund for California
Investors, Inc. and Municipal
Fund for New York Investors,
Inc.
David R. Wilmerding, Jr. Chairman of President, Gates,
One Aldwyn Center the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: (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
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ------------------------
<S> <C> <C>
companies advised by PIMC and
its affiliates.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age:
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" or "Distributor")
$10,000 annually and $275 per Portfolio for each full meeting of the Board that
they attend. The Fund pays the Chairman and Vice Chairman of the Board an
additional $10,000 and $5,000 per year, respectively, for their service in such
capacities. Trustees who are not affiliated with PAMG or the Distributor are
reimbursed for any expenses incurred in attending meetings of the Board of
Trustees or any committee thereof. No officer, director or employee of PAMG,
PNC Institutional Management Corporation ("PIMC"), Provident Capital Management,
Inc. ("PCM"), BlackRock Financial Management, Inc. ("BlackRock"), PNC Equity
Advisors Company ("PEAC"), Morgan Grenfell Investment Services Limited ("Morgan
Grenfell"), CastleInternational Asset Management Limited
("CastleInternational"), PFPC Inc. ("PFPC"), Compass Capital Group, Inc.
("CCG"), CDI (collectively with PFPC and CCG, the "Administrators"), or PNC
Bank, National Association ("PNC Bank" or the "Custodian") currently receives
any compensation from the Fund. Drinker Biddle & Reath, of which Mr. Jones is a
partner, receives legal fees as counsel to the Fund. As of the date of this
Statement of Additional Information, the trustees and officers of the Fund, as a
group, owned less than 1% of the outstanding shares of each Portfolio.
-53-
<PAGE>
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1996:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ESTIMATED AND FUND
COMPENSATION ACCRUED AS ANNUAL COMPLEX/1/
NAME OF PERSON, FROM PART OF FUND BENEFITS UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT TRUSTEES
- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Philip E. Coldwell,/*/ $ 1,875 N/A N/A (4)/2/ $41,325
Trustee
Robert R. Fortune,/*/ $ 1,875 N/A N/A (6)/2/ $61,325
Trustee
Rodney D. Johnson,/*/ $ 1,875 N/A N/A (6)/2/ $53,325
Trustee
G. Willing Pepper,/*/ $ 3,125 N/A N/A (7)/2/ $92,575
Former Chairman of
the Board
Anthony M. $38,025 N/A N/A (6)/2/ $58,500
Santomero, Trustee
David R. Wilmerding, $43,025 N/A N/A (7)/2/ $64,750
Jr., Trustee
William O. $31,150 N/A N/A (1)/2/ $31,150
Albertini, Trustee**
Raymond J. Clark, $31,150 N/A N/A (1)/2/ $31,150
Trustee**
Robert M. Hernandez, $31,150 N/A N/A (1)/2/ $31,150
Trustee**
</TABLE>
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
* Messrs. Coldwell, Fortune, Johnson and Pepper resigned as
trustees of the Fund on January 4, 1996
** Messrs. Albertini, Clark and Hernandez were elected as trustees
by the shareholders of the Fund on January 4, 1996.
-----------------
1. A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment
adviser or have an investment adviser that is an affiliated
person of the investment adviser of any of the other investment
companies.
2. Total number of investment company board trustees served on
within the Fund Complex.
-54-
<PAGE>
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: 50 Dimensional Fund Advisors Ltd.,
of which he is Chairman and
Director
George M. Trustee Leo Melamed Professor of Finance,
Constantinides Graduate School of Business,
Chicago, IL University of Chicago. Director,
Age: 49 DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
John P. Gould Trustee Steven G. Rothmeier Distinguished
Chicago, IL Service Professor of Economics,
Age: 58 Graduate School of Business,
University of Chicago. Trustee,
First Prairie Funds (registered
investment companies). Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc. and Harbor
Investment Advisors. Executive
Vice President, Lexacon Inc.
(economics, law, strategy, and
finance consulting).
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
TRUSTEES POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ---------------
<S> <C> <C>
Roger G. Professor in Practice of Finance,
Ibbotson Trustee Yale School of Management.
New Haven, CT Director, DFA Investment
Age: 53 Dimensions Group Inc.,
Dimensional Investment Group
Inc., Dimensional Emerging
Markets Fund Inc., Hospital Fund,
Inc. (investment management
services) and BIRR Portfolio
Analysis, Inc. (software
products). Chairman and
President, Ibbotson Associates,
Inc., Chicago, IL (software,
data, publishing and consulting).
Merton H. Trustee Robert R. McCormick Distinguished
Miller Service Professor Emeritus,
Chicago, IL Graduate School of Business,
Age: 73 University of Chicago. Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
Public Director, Chicago
Mercantile Exchange.
Myron S. Trustee Limited Partner, Long-Term
Scholes Capital Management L.P. (money
Greenwich, CT manager). Frank E. Buck
Age: 55 Professor of Finance, Graduate
School of Business and Professor
of Law, Law School, Senior
Research Fellow, Hoover
Institution, (all) Stanford
University (on leave). Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc., Benham Capital
Management Group of Investment
Companies and Smith Breedon Group
of Investment Companies.
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
TRUSTEES POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ---------------
<S> <C> <C>
Rex A. Trustee, Chairman Chairman, Chief Investment
Sinquefield* and Chief Officer and Director of all DFA
Santa Monica, Investment Officer Entities, except Dimensional Fund
CA Advisors Ltd., of which he is
Age: 52 Chairman, Chief Executive Officer
and Director.
</TABLE>
*Interested
Trustees of the
Trust.
_____________
-57-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
OFFICERS POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ---------------------------
<S> <C> <C>
Arthur Barlow Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 42
Truman Clark Vice President Vice President of all DFA
Santa Monica, Entities. Consultant until
CA October 1995 and Principal and
Age: 55 Manager of Product Development,
Wells Fargo Nikko Investment
Advisors from 1990-1994.
Maureen Connors Vice President
Santa Monica, Vice President of all DFA
CA Entities.
Age: 61
Robert Deere Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 40
Irene R. Vice President, Vice President and Secretary of
Diamant Secretary all DFA Entities, except
Santa Monica, Dimensional Fund Advisors Ltd.,
CA for which she is Vice President.
Age: 46
Eugene Fama, Vice President Vice President of all DFA
Jr. Entities.
Santa Monica,
CA
Age: 36
David Plecha Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 36
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
OFFICERS POSITION WITH TRUST LAST FIVE YEARS
- -------- ------------------- ---------------------------
<S> <C> <C>
George Sands Vice President Vice President of all DFA
Santa Monica, Entities. Managing Director,
CA Assets Strategy Consulting, Los
Age: 40 Angeles, CA from 1991 to 1992 and
previously Vice President of
Wilshire Associates, Santa
Monica, CA.
Michael T. Vice President, Vice President, Chief Financial
Scardina Chief Financial Officer, Controller and Treasurer
Santa Monica, Officer, Controller of all DFA Entities.
CA and Treasurer
Age: 42
Cem Severoglu Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 33
Jeanne C. Executive Vice Executive Vice President of all
Sinquefield, President DFA Entities.
Ph.D.
Santa Monica,
CA
Age: 51
</TABLE>
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust entitled
to receive compensation, the compensation received from the Trust during the
fiscal year ended November 30, 1996 and the total compensation received from all
four registered investment companies for which Dimensional Fund Advisors Inc.
("DFA") served as investment adviser during that same fiscal year.
-59-
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ESTIMATED AND FUND
COMPENSATION ACCRUED AS ANNUAL 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. $5,000 N/A N/A $30,000
Constantinides,
Trustee
John P. Gould, $5,000 N/A N/A $30,000
Trustee
Roger G. Ibbotson, $5,000 N/A N/A $30,000
Trustee
Merton H. Miller, $5,000 N/A N/A $30,000
Trustee
Myron S. Scholes, $5,000 N/A N/A $30,000
Trustee
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Fund's Declaration of Trust provides that shareholders
shall not be subject to any personal liability in connection with the assets of
the Fund for the acts or obligations of the Fund, and that every note, bond,
contract, order or other undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his being or having
been a shareholder and not because of his acts or omissions or some other
reason. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund, and shall satisfy any judgment thereon.
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,
- -----------------------
/1/ A Trust Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
-60-
<PAGE>
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust property or the conduct of any
business of the Fund; and that no trustee shall be personally liable to any
person for any action or failure to act except by reason of his own bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties as a
trustee. With the exception stated, the Declaration of Trust provides that a
trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his being or having been a trustee, and that the Fund will indemnify
officers, representatives and employees of the Fund to the same extent that
trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS. The advisory and sub-advisory
services provided by PAMG, PIMC, BlackRock, PCM, PEAC, Morgan Grenfell,
CastleInternational and, with respect to the Index Master Portfolio, Dimensional
Fund Advisors Inc. ("DFA") and the fees received by each of them for such
services are described in the Prospectuses. As stated in the Prospectuses, PAMG
and the Administrators may from time to time voluntarily waive its advisory fees
with respect to a Portfolio and may voluntarily reimburse the Portfolios for
expenses. In addition, if the total expenses borne by any Portfolio in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, PAMG and the Administrators will bear the amount of such
excess to the extent required by such regulations in proportion to the fees
otherwise payable to them for such year. Such amount, if any, will be estimated
and accrued daily and paid on a monthly basis. As of the date of this Statement
of Additional Information, to the knowledge of the Fund, there were no state
expense limitations more restrictive than the following: 2 1/2% of the first
$30 million of average annual net assets, 2% of the next $70 million of average
annual net assets, and 1/2% of average annual net assets in excess of $100
million.
PAMG renders advisory services to each of the Portfolios, except the Index
Equity Portfolio, pursuant to an Investment Advisory Agreement. From the
commencement of operations of each Portfolio (other than the Index Equity, New
Jersey Municipal Money Market, New Jersey Tax-Free Income, Core Bond, Low
Duration Bond and International Bond Portfolios) until January 4, 1996 (June 1,
1996 in the case of the Index Equity Portfolio), PIMC served as adviser.
-61-
<PAGE>
From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolios of the
International Bond, New Jersey Tax-Free Income and New Jersey Municipal Money
Market Portfolios. From January 1, 1996 through January 12, 1996 (February 12,
1996 with respect to the predecessor portfolio of the International Bond
Portfolio): (i) PAMG and Morgan Grenfell served as investment adviser and sub-
adviser, respectively, to the predecessor portfolio to the International Bond
Portfolio; (ii) PIMC served as investment adviser to the predecessor portfolio
to the New Jersey Municipal Money Market Portfolio; and (iii) BlackRock served
as investment adviser to the predecessor portfolio to the New Jersey Tax-Free
Income Portfolio pursuant to interim advisory and sub-advisory agreements
approved by the shareholders of the Compass Capital Group of Funds. From
December 9, 1992 to January 13, 1996, BlackRock served as investment adviser to
the predecessor portfolio of the Core Bond Portfolio. From July 17, 1992 to
January 13, 1996, BlackRock served as investment adviser to the predecessor
portfolio of the Low Duration Bond Portfolio.
PCM renders sub-advisory services to the Balanced, Large Cap Value Equity,
Small Cap Value Equity and Select Equity Portfolios pursuant to Sub-Advisory
Agreements. CastleInternational renders sub-advisory services to the
International Equity and International Emerging Markets Portfolios pursuant to a
Sub-Advisory Agreement. PIMC renders sub-advisory services to the Money Market,
U.S. Treasury Money Market, Municipal Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios
pursuant to Sub-Advisory Agreements. BlackRock renders sub-advisory services to
the Balanced, Managed Income, Intermediate Government Bond, Tax-Free Income,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Low Duration Bond,
Intermediate Bond, New Jersey Tax-Free Income, Core Bond and Government Income
Portfolios pursuant to Sub-Advisory Agreements. PEAC renders sub-advisory
services to the Large Cap Growth Equity and Small Cap Growth Equity Portfolios
pursuant to Sub-Advisory Agreements. Morgan Grenfell renders sub-advisory
services to the International Bond Portfolio pursuant to a Sub-Advisory
Agreement. DFA renders advisory services to the Index Master Portfolio, the
registered investment company in which the Index Equity Portfolio invests all of
its assets, pursuant to an Investment Management Agreement. The Investment
Advisory Agreement with PAMG, the Investment Management Agreement with DFA and
the above-referenced Sub-Advisory Agreements are collectively referred to as the
"Advisory Contracts."
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.
-62-
<PAGE>
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 Large Cap 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 Large Cap Growth Equity
Portfolios. From December 1, 1992 (commencement of operations) to March 29,
1995, PNC Bank served as sub-adviser to the Ohio Tax-Free Income and
Pennsylvania Tax-Free Income Portfolios. From September 13, 1993 (commencement
of operations) to March 29, 1995, PNC Bank served as sub-adviser to the Select
Equity Portfolio. From September 14, 1993 (commencement of operations) to March
29, 1995, PNC Bank served as sub-adviser to the Small Cap Growth Equity
Portfolio. From September 17, 1993 (commencement of operations) to March 29,
1995, PNC Bank served as sub-adviser to the Intermediate Bond Portfolio. From
May 14, 1990 (commencement of operations) to July 1, 1995, PNC Bank served as
sub-adviser to the Tax-Free Income Portfolio. PCM served as sub-adviser to the
International Equity and International Emerging Markets Portfolios from
commencement of operations (April 27, 1992 in the case of the International
Equity Portfolio; June 17, 1994 in the case of the International Emerging
Markets Portfolio) to April 19, 1996.
PNC Bank served as sub-adviser for the Money Market Portfolio from October
4, 1989 (commencement of operations) to January 4, 1996; for the Municipal Money
Market Portfolio from September 10, 1993 to January 4, 1996; for the U.S.
Treasury Money Market Portfolio from November 1, 1989 (commencement of
operations) to January 4, 1996; for the Ohio Municipal Money Market Portfolio
from June 1, 1993 (commencement of operations) to January 4, 1996; for the
Pennsylvania Municipal Money Market Portfolio from June 1, 1993 (commencement of
operations) to January 4, 1996; for the North Carolina Municipal Money Market
Portfolio from May 4, 1993 (commencement of operations) to January 4, 1996; for
the Virginia Municipal Money Market Portfolio from July 25, 1994 (commencement
of operations) to January 4, 1996; and for the New Jersey Municipal Money Market
Portfolio from January 13, 1996 to June 6, 1996. From April 4, 1990
(commencement of operations) to January 4, 1996, PNC Bank served as sub-adviser
to the Balanced Portfolio. From March 1, 1993 to January 4, 1996, PEAC served
as sub-adviser to the Select Equity Portfolio. From March 29, 1995 to June 1,
1996, PEAC served as sub-adviser to the Index Equity Portfolio.
-63-
<PAGE>
Under the relevant Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock,
Morgan Grenfell and CastleInternational are not liable for any error of judgment
or mistake of law or for any loss suffered by the Fund or a Portfolio in
connection with the performance of the Advisory Contracts. Under the Advisory
Contracts, PAMG, PIMC, PCM, PEAC, BlackRock, Morgan Grenfell,
CastleInternational and DFA are liable for a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard of their respective duties and
obligations thereunder. Each of the Advisory Contracts (except the Advisory
Contract relating to the Index Master Portfolio) is terminable as to a Portfolio
by vote of the Fund's Board of Trustees or by the holders of a majority of the
outstanding voting securities of the relevant Portfolio, at any time without
penalty, on 60 days' written notice to PAMG, PIMC, PCM, PEAC, Morgan Grenfell,
BlackRock or CastleInternational, as the case may be. PAMG, PIMC, PCM, PEAC,
Morgan Grenfell, BlackRock and CastleInternational may also terminate their
advisory relationship with respect to a Portfolio on 60 days' written notice to
the Fund. The Advisory Contract relating to the Index Master Portfolio is
terminable by vote of the Trust's Board of Trustees or by the holders of a
majority of the outstanding voting securities of the Index Master Portfolio at
any time without penalty on 60 days' written notice to DFA. DFA may also
terminate its advisory relationship with respect to the Index Master Portfolio
on 90 days' written notice to the Trust. Each of the Advisory Contracts
terminates automatically in the event of its assignment.
For the period from October 1, 1995 through January 4, 1996, the Fund paid
PIMC advisory fees, and PIMC waived advisory fees and reimbursed expenses, as
follows:
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- -------- ---------- ----------
<S> <C> <C> <C>
Money Market $321,268 $1,818,401 $0
Municipal Money Market 46,804 304,226 0
U.S. Treasury Money Market 114,639 745,150 0
Ohio Municipal Money Market 11,052 71,841 0
Pennsylvania Municipal Money Market 64,257 417,675 0
North Carolina Municipal Money 11,026 71,666 0
Market
Virginia Municipal Money Market 0 7,024 0
Managed Income 520,724 223,168 0
Government Income 0 17,234 0
Tax-Free Income 3,933 11,137 0
Intermediate Government Bond 114,345 130,122 0
Ohio Tax-Free Income 723 10,100 0
Pennsylvania Tax-Free Income 43,145 37,663 0
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- -------- ---------- ----------
<S> <C> <C> <C>
Intermediate Bond $136,544 119,059 $0
Large Cap Value Equity 829,764 147,027 0
Large Cap Growth Equity 361,240 95,914 0
Small Cap Growth Equity 304,284 23,327 0
Select Equity 369,071 97,791 0
Index Equity 4,647 88,292 0
Small Cap Value Equity 320,588 24,942 0
International Equity 697,319 127,354 0
International Emerging Markets 144,937 11,380 0
Balanced 201,642 53,929 0
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio), the
Fund paid PAMG (PIMC in the case of the Index Equity Portfolio) advisory fees,
and PAMG (PIMC in the case of the Index Equity Portfolio) waived advisory fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Money Market $1,443,913 $6,290,596 $ 0
Municipal Money Market 158,379 1,029,459 0
U.S. Treasury Money Market 694,221 3,584,858 0
Ohio Municipal Money Market 209,784 32,275 0
Pennsylvania Municipal Money Market 240,350 1,562,271 0
North Carolina Municipal Money 45,997 298,983 0
Market
Virginia Municipal Money Market 0 180,685 14,604
New Jersey Municipal Money Market 176,636 32,663 0
Managed Income 1,796,762 770,041 0
Government Income 0 52,817 7,027
Tax-Free Income 109,211 74,939 0
Intermediate Government Bond 425,069 283,380 0
Ohio Tax-Free Income 4,764 31,253 3,479
Pennsylvania Tax-Free Income 185,302 123,326 0
Intermediate Bond 514,322 342,880 0
New Jersey Tax-Free Income 184,448 122,966 0
International Bond 133,797 4,580 0
</TABLE>
-65-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Core Bond 184,448 122,966 $ 0
Low Duration Bond 338,287 225,525 0
Large Cap Value Equity 4,159,395 421,173 0
Large Cap Growth Equity 2,109,685 210,969 0
Small Cap Growth Equity 1,596,126 7,204 0
Select Equity 1,457,052 145,705 0
Index Equity 28,380 174,535 0
Small Cap Value Equity 1,223,651 0 0
International Equity 2,836,323 202,595 0
International Emerging Markets 740,140 63,810 0
Balanced 91,740 917,400 0
</TABLE>
For the year or periods ended September 30, 1995, the Fund paid PIMC
advisory fees, and PIMC waived advisory fees and reimbursed expenses, as
follows:
<TABLE>
<CAPTION>
FEES PAID 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 304,651 1,264,187 0
Market
North Carolina Municipal Money
Market 46,472 369,591 4,999
Managed Income 1,790,332 767,285 0
Tax-Free Income 0 49,671 1,599
Intermediate Government Bond 379,534 569,302 0
Ohio Tax-Free Income 0 42,044 6,713
Pennsylvania Tax-Free Income 161,038 137,951 0
Intermediate Bond 342,301 335,908 0
Large Cap Value Equity 2,832,644 746,727 0
Large Cap 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
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
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 REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<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
Large Cap Value Equity 2,306,672 865,002 0
Large Cap Growth Equity 467,637 175,364 0
Small Cap Growth Equity 55,825 160,320 0
Select Equity 303,169 113,689 0
Index Equity 28,392 376,934 0
Small Cap Value Equity 890,883 197,974 0
International Equity 1,408,053 477,733 0
Balanced 470,579 202,166 0
Virginia Municipal Money
Market/1/ 0 8,925 4,816
International Emerging
Markets/2/ 7,672 16,051 0
</TABLE>
/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.
-67-
<PAGE>
For the period from October 1, 1995 through January 4, 1996, PIMC paid sub-
advisory fees to the specified Portfolios' sub-advisers, after waivers, and such
sub-advisers waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- ----------
<S> <C> <C>
Money Market $ 0 $235,363
Municipal Money Market 0 38,613
U.S. Treasury Money Market 0 94,577
Ohio Municipal Money Market 0 9,118
Pennsylvania Municipal Money 0 53,013
Market
North Carolina Municipal Money 0 9,096
Market
Virginia Municipal Money Market 0 773
Managed Income 497,581 82,654
Government Income 0 12,063
Tax-Free Income 3,693 9,207
Intermediate Government 73,585 97,542
Bond
Ohio Tax-Free Income 3,258 4,318
Pennsylvania Tax-Free Income 24,323 32,242
Intermediate Bond 76,937 101,986
Large Cap Value Equity 213,057 0
Large Cap Growth Equity 333,722 0
Small Cap Growth Equity 239,156 0
Select Equity 340,809 0
Index Equity 12,385 73,920
Small Cap Value Equity 252,237 0
International Equity 659,738 0
International Emerging Markets 137,559 0
Balanced 186,567 0
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio),
PAMG (PIMC in the case of the Index Equity Portfolio) paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
-68-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- ----------
<S> <C> <C>
Money Market $1,443,913 $ 5,342,421
Municipal Money Market 158,382 897,064
U.S. Treasury Money Market 694,221 3,095,647
Ohio Municipal Money Market 32,275 182,796
Pennsylvania Municipal Money
Market 240,350 1,361,445
North Carolina Municipal Money 45,997 260,559.86
Market
Virginia Municipal Money Market 0 160,601
New Jersey Municipal Money 32,663 149,411
Market
Managed Income 1,488,836 248,415
Government Income - 36,973
Tax-Free Income 95,609 50,559
Intermediate Government
Bond 412,698 2,499
Ohio Tax-Free Income 1,428 23,786
Pennsylvania Tax-Free Income 170,395 84,589
Intermediate Bond 402,873 188,333
New Jersey Tax-Free Income 153,707 61,483
International Bond 106,486 -0-
Core Bond 353,907 141,564
Low Duration Bond 281,905 112,763
Large Cap Value Equity 3,314,383 -
Large Cap Growth Equity 1,686,503 -
Small Cap Growth Equity 1,164,980 -
Select Equity 1,164,368 -
Index Equity 20,642 123,200
Small Cap Value Equity 888,986 -
International Equity 2,431,134 -
International Emerging Markets 707,475 -
Balanced 733,223
</TABLE>
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
</TABLE>
-69-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- ----------
<S> <C> <C>
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
Large Cap Value Equity 2,060,105 543,074
Large Cap Growth Equity 630,015 236,255
Small Cap Growth Equity 449,727 100,084
Select Equity 502,871 188,576
Index Equity 30,772 286,654
Small Cap Value Equity 831,324 83,132
International Equity 1,913,286 478,322
Balanced 467,464 175,299
Virginia Municipal Money Market 0 9,451
International Emerging Markets 227,610 45,924
Government Income/1/ 0 26,079
</TABLE>
/1/ Commenced operations October 3, 1994.
For the year or periods ended September 30, 1994, PIMC paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS 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
</TABLE>
-70-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- ----------
<S> <C> <C>
Ohio Tax-Free Income 0 24,996
Pennsylvania Tax-Free Income 33,198 160,456
Intermediate Bond 97,470 138,685
Large Cap Value Equity 2,018,338 288,334
Large Cap Growth Equity 409,182 58,455
Small Cap Growth Equity 55,825 101,371
Select Equity 265,273 37,896
Index Equity 28,392 275,602
Small Cap Value Equity 791,896 0
International Equity 1,257,191 251,438
Balanced 409,420 79,849
Virginia Municipal Money Market/1/ 0 992
International Emerging Markets/2/ 6,723 14,153
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
For the services it provides as investment adviser to the Index Master
Portfolio, DFA is paid a monthly fee calculated as a percentage of average net
assets of the Index Master Portfolio. For the fiscal years ending November 30,
1994, 1995 and 1996, the Index Master Portfolio paid advisory fees to DFA
totalling $10,833, $18,816 and $62,405, respectively. The Index Equity
Portfolio did not invest in the Index Master Portfolio until June 2, 1996.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and by
BlackRock from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $20,165 in advisory fees to BlackRock.
For the period from March 1, 1995 through December 31, 1995 and for the fiscal
years ended February 28, 1995 and 1994, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $496,305, $607,485 and $159,582,
respectively, in investment advisory fees to Midlantic Bank pursuant to its
prior investment advisory contract. In addition, during the period from March
1, 1995 through December 31, 1995 and during the fiscal years ended February 28,
1995 and 1994, Midlantic Bank waived $0, $2,451 and $318,099, respectively, in
investment advisory fees. During the period from January 13, 1996 through
January 31, 1996, the New Jersey Tax-Free Income Portfolio paid PAMG $12,779 in
investment advisory fees, and PAMG waived $8,520 in investment advisory fees.
During the period from January 13, 1996 through January 31, 1996, PAMG paid
BlackRock $8,945 in sub-
-71-
<PAGE>
advisory fees with respect to the New Jersey Tax-Free Income Portfolio and
BlackRock waived $5,964 in sub-advisory fees.
The predecessor portfolio to the International Bond Portfolio was advised
by Midlantic Bank from July 1, 1991 through December 31, 1995, and by PAMG from
January 1, 1996 through February 12, 1996. For the period from February 1, 1996
through February 12, 1996, the predecessor portfolio to the International Bond
Portfolio paid $_______ in advisory fees to PAMG, and PAMG waived advisory fees
and reimbursed expenses totalling $______ and $______, respectively. For the
period from February 1, 1996 through February 12, 1996, PAMG paid Morgan
Grenfell $______ in sub-advisory fees with respect to the predecessor portfolio
to the International Bond Portfolio, and Morgan Grenfell waived sub-advisory
fees totalling $_______. For the period from January 1, 1996 through January
31, 1996, the predecessor portfolio to the International Bond Portfolio paid
$24,832 in advisory fees to PAMG. For the period from January 1, 1996 through
January 31, 1996, PAMG paid Morgan Grenfell $20,176 in sub-advisory fees with
respect to the predecessor portfolio to the International Bond Portfolio. For
the period from March 1, 1995 through December 31, 1995 and for the fiscal years
ended February 28, 1995 and 1994, the predecessor portfolio to the International
Bond Portfolio paid $305,176, $361,620 and $346,865, respectively, in investment
advisory fees to Midlantic Bank pursuant to its prior investment advisory
contract.
The predecessor portfolio to the New Jersey Municipal Money Market
Portfolio was advised by Midlantic Bank from July 1, 1991 through December 31,
1995, and by PIMC from January 1, 1996 through January 12, 1996. For the period
from January 1, 1996 through January 12, 1996, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $8,000 in advisory fees to
PIMC. For the period from March 1, 1995 through December 31, 1995 and for the
fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $155,696, $158,240 and
$158,536, respectively, in investment advisory fees to Midlantic Bank pursuant
to its prior investment advisory contract. During the period from January 13,
1996 through January 31, 1996, the New Jersey Municipal Money Market Portfolio
paid PIMC $2,128 in investment advisory fees, and PIMC waived $13,826 in
investment advisory fees. During the period from January 13, 1996 through
January 31, 1996, PNC Bank waived all of the sub-advisory fees (in the amount of
$1,125) with respect to the New Jersey Municipal Money Market Portfolio.
-72-
<PAGE>
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Core Bond Portfolio paid BlackRock $53,125 in
investment advisory fees and BlackRock waived $21,255 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Core
Bond Portfolio in the amounts of $56,894 and $34,010, respectively, and
reimbursed expenses amounting to $137,364 and $137,179, respectively. During the
period from January 13, 1996 through March 31, 1996, the Core Bond Portfolio
paid PAMG $182,709 in investment advisory fees, and PAMG waived $121,806 in
investment advisory fees. During the period from January 13, 1996 through March
31, 1996, PAMG paid BlackRock $127,896 in sub-advisory fees with respect to the
Core Bond Portfolio, and BlackRock waived $85,264 in sub-advisory fees.
The predecessor portfolio to the Low Duration Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Low Duration Bond Portfolio paid BlackRock $56,481
in investment advisory fees and BlackRock waived $11,186 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Low
Duration Bond Portfolio in the amounts of $102,707 and $110,232, respectively,
and reimbursed expenses amounting to $61,195 and $55,582, respectively. During
the period from January 13, 1996 through March 31, 1996, the Low Duration Bond
Portfolio paid PAMG $149,488 in investment advisory fees, and PAMG waived
$99,659 in investment advisory fees. During the period from January 13, 1996
through March 31, 1996, PAMG paid BlackRock $104,642 in sub-advisory fees with
respect to the Low Duration Bond Portfolio, and BlackRock waived $69,761 in sub-
advisory fees.
ADMINISTRATION AGREEMENTS. CCG, PFPC and CDI serve as the Fund's co-
administrators pursuant to administration agreements (collectively, the
"Administration Agreement"). PFPC and CDI have agreed to maintain office
facilities for the Fund, furnish the Fund with statistical and research data,
clerical, 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
-73-
<PAGE>
Fund and its service providers; (iii) acting as liaison between the trustees
of the Fund and the Fund's service providers; and (iv) providing ongoing
business management and support services in connection with the Fund's
operations.
The Administration Agreement provides that CCG, PFPC and CDI will not be
liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or a Portfolio in connection with the
performance of the Administration Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard of their respective duties and
obligations thereunder.
PFPC serves as the administrative services agent for the Index Master
Portfolio pursuant to an Administration and Accounting Services Agreement. The
services provided by PFPC are subject to supervision by the executive officers
and the Board of Trustees of the Trust, and include day-to-day keeping and
maintenance of certain records, calculation of the offering price of the shares,
preparation of reports and acting as liaison with the Trust's custodians and
dividend and disbursing agents. For its services, PFPC is entitled to
compensation from the Index Master Portfolio at the annual rate of .015% of the
Index Master Portfolio's average daily net assets. In addition, PFPC charges
each investor in the Index Master Portfolio a monthly fee of $2,600.
From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators to the Fund. CCG became
an Administrator to the Fund on December ____, 1995. For the period from
October 1, 1995 through January 13, 1996, the Fund paid CCG, PFPC and PDI
combined administration fees (after waivers), and CCG, PFPC and PDI waived
combined administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Money Market 645,001 51,681 _____
Municipal Money Market 117,010 8,088 _____
U.S. Treasury Money Market 242,075 52,266 _____
Ohio Municipal Money Market 17,189 12,366 _____
Pennsylvania Municipal 143,962 28,455 0
Money Market
North Carolina Municipal 11,644 17,455 0
Money Market
</TABLE>
-74-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Virginia Municipal Money _____ 12,768 0
Market
Managed Income 226,271 82,078 0
Government Income 353 6,893 0
Tax-Free Income 1,455 4,890 0
Intermediate Government 70,091 37,396 0
Bond
Ohio Tax-Free Income 604 3,942 0
Pennsylvania Tax-Free 23,054 10,922 0
Income
Intermediate Bond 70,091 37,396 0
Large Cap Value Equity 287,181 75,970 0
Large Cap Growth Equity 142,578 32,289 0
Small Cap Growth Equity 105,681 19,886 0
Select Equity 150,292 28,337 0
Index Equity 32,455 65,337 0
Small Cap Value Equity 127,936 4,181 0
International Equity 200,396 30,791 0
International Emerging 26,329 _____ 0
Markets
Balanced 73,163 24,504 0
</TABLE>
For the period form January 14, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996, the Fund paid the Administrators combined administration
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses as follows:
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Money Market 2,319,935 460,119 0
Municipal Money Market 303,192 171,943 0
U.S. Treasury Money Market 1,325,963 264,620 0
Ohio Municipal Money Market 57,595 37,497 0
Pennsylvania Municipal 576,488 139,781 0
Money Market
North Carolina Municipal 57,612 78,873 0
Money Market
</TABLE>
-75-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Virginia Municipal Money 0 60,792 4,868
Market
New Jersey Municipal Money 47,930 52,585 0
Market
Managed Income 740,845 412,076 0
Government Income 1,394 22,902 0
Tax-Free Income 47,371 37,838 0
Intermediate Government 207,399 118,488 0
Bond
Ohio Tax-Free Income 10,045 6,523 0
Pennsylvania Tax-Free 85,441 56,528 0
Income
Intermediate Bond 221,810 172,503 0
New Jersey Tax-Free Income 68,934 69,374 0
International Bond 27,454 28,993 0
Core Bond 196,853 128,743 0
Low Duration Bond 175,769 83,391 0
Large Cap Value Equity 1,589,313 235,958 0
Large Cap Growth Equity 729,234 236,170 0
Small Cap Growth Equity 652,784 17,700 0
Select Equity 471,931 198,312 0
Index Equity 55,265 345,636 0
Small Cap Value Equity 512,358 3,984 0
International Equity 727,738 201,501 0
International Emerging 147,927 _____ 0
Markets
Balanced 339,671 80,233 0
</TABLE>
For the year or periods ended September 30, 1995, the Fund paid PFPC and
PDI combined administration fees (after waivers), and PFPC and PDI waived
combined administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
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
</TABLE>
-76-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
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
Large Cap Value Equity 1,083,967 187,474 0
Large Cap 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 REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
Money Market $ 803,349 $541,066 $ 0
Municipal Money Market 42,931 214,178 0
U.S. Treasury Money Market 132,901 289,756 0
Ohio Municipal Money
Market 2,241 72,646 6,887
Pennsylvania Municipal
Money Market 11,758 114,573 6,340
North Carolina Municipal
Money Market 0 83,304 8,934
Managed Income 521,204 277,849 0
Tax-Free Income 0 19,062 14,359
</TABLE>
-77-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- --------- ---------- ----------
<S> <C> <C> <C>
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
Large Cap Value Equity 1,075,209 61,908 0
Large Cap Growth Equity 128,262 105,557 0
Small Cap Growth Equity 20,166 58,432 0
Select Equity 52,164 99,421 0
Index Equity 27,115 378,211 0
Small Cap Value Equity 354,486 41,462 0
International Equity 502,876 0 0
Balanced 125,112 119,522 0
Virginia Municipal Money
Market/1/ 0 2,975 1,605
International Emerging
Markets/2/ 1,259 2,537 0
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
The predecessor portfolios to the New Jersey Municipal Money Market,
International Bond and New Jersey Tax-Free Income Portfolios received
administrative services from SEI Financial Management Corporation ("SEI").
During the period from March 1, 1995 through January 12, 1996 and during the
fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $73,663, $44,863 and
$43,497,respectively in administration fees to SEI pursuant to the prior
administration agreement, and SEI waived $0, $26,345 and $27,844, respectively,
in administration fees. During the period from January 13, 1996 through January
31, 1996, the New Jersey Municipal Money Market Portfolio paid the
Administrators $3,050 in administration fees, and the Administrators waived
$3,691 in administration fees. During the period from March 1, 1995 through
January 12, 1996 and during the fiscal years ended February 28, 1995 and 1994,
the predecessor portfolio to the New Jersey Tax-Free Income Portfolio paid
$154,232, $105,029 and $79,454, respectively, in administrative fees to SEI
pursuant to the prior administration agreement, and SEI waived $4, $77,951 and
$63,850, respectively, in administrative fees. During the period from January
13, 1996 through January 31, 1996, the New Jersey Tax-Free Income Portfolio paid
the Administrators $4,443 in administration fees, and the Administrators waived
$5,347 in administration fees. During the period from March 1, 1995
-78-
<PAGE>
through January 12, 1996 and during the fiscal years ended February 28, 1995 and
1994, the predecessor portfolio to the International Bond Portfolio paid
$77,924, $81,364 and $78,033, respectively, in administrative fees to SEI
pursuant to the prior administration agreement. During the period from January
13, 1996 through January 31, 1996, the predecessor portfolio to the
International Bond Portfolio paid the Administrators $2,141 in administrative
fees. During the period from February 1, 1996 through February 12, 1996, the
predecessor portfolio to the International Bond Portfolio paid the
Administrators $_______ in administrative fees, and the Administrators waived
fees and reimbursed expenses totalling $_______ and $______, respectively.
The predecessor portfolios to the Low Duration Bond and Core Bond
Portfolios received administrative services from State Street Bank and Trust
Company ("State Street"). During the period from July 1, 1995 through January
12, 1996 and during the fiscal years ended June 30, 1995 and 1994, the
predecessor portfolio to the Core Bond Portfolio paid $29,752, 73,257 and
$40,261, respectively, in administrative fees to State Street pursuant to the
prior administration agreement, and State Street waived $0, $0 and $32,500,
respectively, in administrative fees. During the period from January 13, 1996
through March 31, 1996, the Core Bond Portfolio paid the Administrators $79,269
in administration fees, and the Administrators waived $60,808 in administration
fees. During the period from July 1, 1995 through January 12, 1996 and during
the fiscal years ended June 30, 1995 and 1994, the predecessor portfolio to the
Low Duration Bond Portfolio paid $31,578, $69,234 and $79,160, respectively, in
administrative fees to State Street pursuant to the prior administration
agreement. During the period from January 13, 1996 through March 31, 1996, the
Low Duration Bond Portfolio paid the Administrators $74,552 in administration
fees, and the Administrators waived $40,055 in administration fees.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank is custodian of the
Fund's assets pursuant to a custodian agreement (the "Custodian Agreement").
Under the Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a
separate account or 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
-79-
<PAGE>
respect to sub-custodians other than sub-custodians for foreign securities, PNC
Bank remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Fund harmless from the acts and omissions of
any sub-custodian. The Chase Manhattan Bank, N.A., State Street Bank and Trust
Company, Barclays Bank PLC and Citibank, N.A. serve as the international sub-
custodians for various Portfolios of the Fund.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon each investment portfolio's
average gross assets, with a minimum monthly fee of $1,000 per investment
portfolio. PNC Bank is also entitled to out-of-pocket expenses and certain
transaction charges. PNC Bank has undertaken to waive its custody fees with
respect to the Index Equity Portfolio, which invests substantially all of its
assets in the Index Master Portfolio.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in each Portfolio, (ii) addresses
and mails all communications by each Portfolio to record owners of its shares,
including reports to shareholders, dividend and distribution notices and proxy
materials for its meetings of shareholders, (iii) maintains shareholder accounts
and, if requested, sub-accounts and (iv) makes periodic reports to the Board of
Trustees concerning the operations of each Portfolio. PFPC may, on 30 days'
notice to the Fund, assign its duties as transfer and dividend disbursing agent
to any other affiliate of PNC Bank Corp. For its services with respect to the
Fund's Institutional and Service Shares under the Transfer Agency Agreement,
PFPC receives fees at the annual rate of .03% of the average net asset value of
outstanding Institutional and Service Shares in each Portfolio, plus per account
fees and disbursements. For its services under the Transfer Agency Agreement
with respect to Investor Shares, PFPC receives per account fees, with minimum
annual fees of $24,000 for each Portfolio, plus disbursements.
PNC Bank serves as the Trust's custodian and PFPC serves as the Trust's
transfer and dividend disbursing agent. The Index Equity Portfolio bears its
pro rata portion of the Index Master Portfolio's custody and transfer and
dividend disbursing fees and expenses.
DISTRIBUTOR AND DISTRIBUTION AND SERVICE PLAN. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of each Portfolio
-80-
<PAGE>
on a continuous basis. The Distributor has agreed to use appropriate efforts to
effect sales of the shares, but it is not obligated to sell any particular
amount of shares.
Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or CCG or any other affiliate
of PNC Bank fees for distribution and sales support services. Currently, as
described further below, only Investor A Shares, Investor B Shares and Investor
C Shares bear the expense of distribution fees under the Plan. In addition, the
Fund may pay CCG fees for the provision of personal services to shareholders and
the processing and administration of shareholder accounts. CCG, in turn,
determines the amount of the service fee and shareholder processing fee to be
paid to brokers, dealers, financial institutions and industry professionals
(collectively, "Service Organizations"). The Plan provides, among other things,
that: (i) the Board of Trustees shall receive quarterly reports regarding the
amounts expended under the Plan and the purposes for which such expenditures
were made; (ii) the Plan will continue in effect for so long as its continuance
is approved at least annually by the Board of Trustees in accordance with Rule
12b-1 under the 1940 Act; (iii) any material amendment thereto must be approved
by the Board of Trustees, including the trustees who are not "interested
persons" of the Fund (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
entered into in connection with the Plan (the "12b-1 Trustees"), acting in
person at a meeting called for said purpose; (iv) any amendment to increase
materially the costs which any class of shares may bear for distribution
services pursuant to the Plan shall be effective only upon approval by a vote of
a majority of the outstanding shares of such class and by a majority of the 12b-
1 Trustees; and (v) while the Plan remains in effect, the selection and
nomination of the Fund's trustees who are not "interested persons" of the Fund
shall be committed to the discretion of the Fund's non-interested trustees.
The Plan is terminable as to any class of Shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
-81-
<PAGE>
With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor B Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, and the
contingent deferred sales charge is calculated to charge the investor with any
shortfall that would occur if Investor B Shares are redeemed prior to the
expiration of the conversion period, after which Investor B Shares automatically
convert to Investor A Shares.
With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor C Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, as well as
to cover ongoing commission payments to the broker/dealers. The contingent
deferred sales charge is calculated to charge the investor with any shortfall
that would occur if Investor C Shares are redeemed within 18 months of purchase.
In addition, the Plan permits CDI, PAMG, the Administrators and other
companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of their past profits or other
sources available to them. The Fund is not required or permitted under the Plan
to make distribution payments with respect to Service or Institutional Shares.
Service Organizations may charge their clients additional fees for account-
related services.
The Fund intends to enter into service arrangements with Service
Organizations pursuant to which Service Organizations will render certain
support services to their customers ("Customers") who are the beneficial owners
of Service, Investor A, Investor B and Investor C Shares. Such services will be
provided to Customers who are the beneficial owners of Shares of such classes
and are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of a service fee of up to .25% (on an annualized
basis) of the average daily net asset value of the Investor A, Investor B and
Investor
-82-
<PAGE>
C Shares owned beneficially by their Customers and .15% (on an
annualized basis) of the average daily net asset value of the Service Shares
beneficially owned by their Customers, Service Organizations may provide general
shareholder liaison services, including, but not limited to (i) answering
customer inquiries regarding account status and history, the manner in which
purchases, exchanges and redemptions of shares may be effected and certain other
matters pertaining to the Customers' investments; and (ii) assisting Customers
in designating and changing dividend options, account designations and
addresses. In consideration for payment of a shareholder processing fee of up
to a separate .15% (on an annualized basis) of the average daily net asset value
of Service, Investor A, Investor B and Investor C Shares owned beneficially by
their Customers, Service Organizations may provide one or more of these
additional services to such Customers: (i) providing necessary personnel and
facilities to establish and maintain Customer accounts and records; (ii)
assistance in aggregating and processing purchase, exchange and redemption
transactions; (iii) placement of net purchase and redemption orders with the
Distributor; (iv) arranging for wiring of funds; (v) transmitting and receiving
funds in connection with Customer orders to purchase or redeem shares; (vi)
processing dividend payments; (vii) verifying and guaranteeing Customer
signatures in connection with redemption orders and transfers and changes in
Customer-designated accounts, as necessary; (viii) providing periodic statements
showing Customers' account balances and, to the extent practicable,
integrating such information with other Customer transactions otherwise effected
through or with a Service Organization; (ix) furnishing (either separately or on
an integrated basis with other reports sent to a shareholder by a Service
Organization) monthly and year-end statements and confirmations of purchases,
exchanges and redemptions; (x) transmitting on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other communications from
the Fund to Customers; (xi) receiving, tabulating and transmitting to the Fund
proxies executed by Customers with respect to shareholder meetings; (xii)
providing subaccounting with respect to shares beneficially owned by Customers
or the information to the Fund necessary for subaccounting; (xiii) providing
sub-transfer agency services; and (xiv) providing such other similar services as
the Fund or a Customer may request.
For the twelve months ended September 30, 1996, the Portfolios' share
classes bore the following distribution, shareholder service and shareholder
processing fees under the Portfolios' current and prior plans:
-83-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR A SHARES FEE SERVICE FEE PROCESSING FEE
- --------------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond
Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Income
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Free Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
-84-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR B SHARES FEES SERVICE FEE PROCESSING FEE
- --------------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
-85-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - INVESTOR C SHARES FEES SERVICE FEE PROCESSING FEE
- --------------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
-86-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - SERVICE SHARES FEES SERVICE FEE PROCESSING FEE
- --------------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET N/A 2,406,983 2,406,983
Municipal Money Market N/A 441,075 441,075
U.S. Treasury Money Market N/A 1,492,249 1,492,249
Ohio Municipal Money Market N/A 68,049 68,049
Pennsylvania Municipal Money
Market N/A 336,636 336,636
New Jersey Municipal Money
Market N/A 61,759 61,759
North Carolina Municipal Money
Market N/A 134,373 134,373
Virginia Municipal Money Market N/A 13,965 13,965
Low Duration Bond Core Bond N/A 101,535 101,535
Managed Income N/A 214,670 214,670
Intermediate Government Bond N/A 72,391 72,391
Tax-Free Income N/A 39,630 39,630
Government Intermediate
International Bond N/A 129,105 129,105
Ohio Tax-Free Income N/A 8,609 8,609
Pennsylvania Tax-Free Income N/A 336,636 336,636
New Jersey Tax-Exempt Income N/A 61,759 61,759
Intermediate Bond N/A 62,820 62,820
Large Cap Value Equity N/A 623,745 623,745
Large Cap Growth Equity N/A 286,745 286,745
Small Cap Growth Equity N/A 178,738 178,738
Select Equity N/A 153,708 153,708
Index Equity N/A 129,601 129,601
Small Cap Value Equity N/A 107,973 107,973
International Equity N/A 226,201 226,201
Balanced N/A 187,127 187,127
International Emerging Markets N/A 37,170 37,170
Government Income N/A - -
</TABLE>
-87-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION SHAREHOLDER SHAREHOLDER
PORTFOLIOS - SERVICE SHARES FEES SERVICE FEE PROCESSING FEE
- --------------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
MONEY MARKET
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Intermediate
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Exempt Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
</TABLE>
The Distributor, CCG and their affiliates may pay financial
institutions, broker/dealers and/or their salespersons certain compensation for
the sale and distribution of shares of the Fund or for services to the Fund.
These payments ("Additional Payments") would be in addition to the payments by
the Fund described in the Fund's Prospectuses and this Statement of Additional
Information for distribution and shareholder servicing and processing, and would
also be in addition to the sales commissions payable to dealers as set forth in
the Prospectuses for Investor Shares. These Additional Payments may take the
form of "due diligence" payments for a dealer's examination of the Portfolios
and payments for providing extra employee training and information relating to
Portfolios; "listing" fees for the placement of the Portfolios on a dealer's
list of mutual funds available for purchase by its customers; "finders" or
"referral" fees for directing investors to the Fund; "marketing support" fees
for providing assistance in promoting the sale of the Funds' shares; and
payments for the sale of shares and/or the maintenance of
-88-
<PAGE>
share balances. In addition, the Distributor, CCG and their affiliates may make
Additional Payments for subaccounting, administrative and/or shareholder
processing services that are in addition to the shareholder servicing and
processing fees paid by the Fund. The Additional Payments made by the
Distributor, CCG and their affiliates may be a fixed dollar amount or may be
based on a percentage of the value of shares sold to, or held by, customers of
the financial institutions or dealers involved, and may be different for
different institutions and dealers. Furthermore, the Distributor, CCG and their
affiliates may contribute to various non-cash and cash incentive arrangements to
promote the sale of shares, and may sponsor various contests and promotions
subject to applicable NASD regulations in which participants may receive prizes
such as travel awards, merchandise and cash. The Distributor, CCG and their
affiliates may also pay for the travel expenses, meals, lodging and
entertainment, of broker/dealers financial institutions and their salespersons
in connection with educational and sales promotional programs subject to
applicable NASD regulations.
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees, fees
and expenses of officers and trustees who are not affiliated with PAMG, the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their shares for distribution under federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, fidelity bond and trustees and
officers liability insurance premiums, the expense of independent pricing
services and other expenses which are not expressly assumed by PAMG or the
Fund's service providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular investment portfolio
will be allocated among all investment portfolios by or under the direction of
the Board of Trustees in a manner the Board determines to be fair and equitable.
PAMG and the sub-advisers expect to waive voluntarily a portion of their
respective advisory and sub-advisory fees during the Portfolios' current fiscal
year. In addition, if the total expenses borne by any Portfolio in a fiscal
year exceed the expense limitations imposed by applicable state securities
regulations, PAMG, the respective sub-adviser and the Administrators will bear
the amount of the excess to the extent required by such regulations in
proportion to the advisory and administration fees otherwise payable to them for
such year.
PORTFOLIO TRANSACTIONS
-89-
<PAGE>
In executing portfolio transactions, the adviser and sub-advisers seek to
obtain the best price and execution for a Portfolio, taking into account such
factors as the price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. While the adviser and sub-advisers generally seek
reasonably competitive commission rates, payment of the lowest commission or
spread is not necessarily consistent with obtaining the best price and execution
in particular transactions. Payments of commissions to brokers who are
affiliated persons of the Fund, or the Trust with respect to the Index Master
Portfolio, (or affiliated persons of such persons) will be made in accordance
with Rule 17e-1 under the 1940 Act. With respect to the Index Master Portfolio,
commissions paid on such 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
-90-
<PAGE>
which are greater than another broker might charge if DFA, in good faith,
determines that the commissions paid are reasonable in relation to the research
or brokerage services provided by the broker or dealer when viewed in terms of
either a particular transaction or DFA's overall responsibilities to the Trust.
Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).
For the year or period ended September 30, 1996, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ------------------------------------
<S> <C>
Large Cap Value Equity $1,455,318
Large Cap Growth Equity 696,494
Small Cap Growth Equity 165,153
Select Equity 443,114
Index Equity 44,380
Small Cap Value Equity 380,356
International Equity 1,912,522
Balanced 95,277
International Emerging Markets 588,860
</TABLE>
For the year or period ended September 30, 1995, the following Portfolios paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ------------------------------------
<S> <C>
Large Cap Value Equity $ 364,680
Large Cap 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:
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<PAGE>
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ------------------------------------
<S> <C>
Large Cap Value Equity $ 431,232
Large Cap 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 Index Master Portfolio's fiscal years ended November 30, 1994,
1995, and 1996, the Index Master Portfolio paid brokerage commissions totalling
$10,610, $15,289 and $72,562, respectively.
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market Portfolio, the turnover
rates should not adversely affect the Portfolio's net asset values or net
income.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
-92-
<PAGE>
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.
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
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<PAGE>
most recent fiscal year. As of September 30, 1996, the following Portfolios
held the following securities:
<TABLE>
<CAPTION>
PORTFOLIO SECURITY VALUE
- ---------------------------- ------------------------ ------------
<S> <C> <C>
Money Market
- ----------------------------
Goldman Sachs, LP Variable Rate Obligation $ 47,000,000
Lehman Brothers Variable Rate Obligation 50,000,000
Merrill Lynch & Co. Medium Term Note 49,997,964
Merrill Lynch & Co. Commercial Paper 49,663,333
Morgan Stanley & Co. Commercial Paper 114,310,431
U.S. Treasury Money Market
- ----------------------------
Goldman Sachs, LP Repurchase Agreement 24,000,000
Morgan Stanley & Co. Repurchase Agreement 280,300,000
Nikko Securities Co. Repurchase Agreement 55,000,000
Managed Income
- ----------------------------
Salomon Brothers, Inc. Corporate Bond
Merrill Lynch & Co. Corporate Bond
Morgan Stanley & Co. Corporate Bond 5,106,250
Paine Webber, Inc. Corporate Bond 4,919,063
Balanced
- ----------------------------
Salomon Brothers, Inc. Corporate Bond 315,480
Merrill Lynch & Co. Corporate Bond 1,448,661
Index Equity
- ----------------------------
Morgan Stanley & Co. Common Stock 582,075
Merrill Lynch & Co. Common Stock 859,688
Low Duration Bond
- ----------------------------
Lehman Brothers Corporate Bonds 3,685,520
Merrill Lynch & Co. Corporate Bonds 71,118
Morgan Stanley & Co. Corporate Bonds 413,409
Core Bond
- ----------------------------
Goldman Sachs, LP Corporate Bonds 2,827,706
Merrill Lynch Corporate Bonds 374,118
Intermediate Bond
- ----------------------------
Goldman Sachs, LP Corporate Bonds 1,884,978
Merrill Lynch & Co. Corporate Bonds 1,196,431
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
COMPUTATION OF PUBLIC OFFERING PRICES FOR INVESTOR A SHARES OF THE NON-
MONEY MARKET PORTFOLIOS. An illustration of the computation of the public
offering price per Investor A Share of the respective Non-Money Market
Portfolios, based on the value of such Portfolios' net assets as of September
30, 1996, follows:
-94-
<PAGE>
<TABLE>
<CAPTION>
TABLE
-----
Large Cap Large Cap
Value Growth Small Cap Index
Equity Equity Growth Equity Select Equity Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets........................... $26,190,321 $16,579,152 $27,954,075 $ 6,227,831 $12,752,111
Outstanding
Shares............................... 1,706,757 1,109,844 1,288,710 459,447 913,386
=========== =========== =========== =========== ===========
Net Asset Value
Per Share............................ $ 15.35 $ 14.94 $ 21.69 $ 13.56 $ 13.96
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)/*/.................. $ .72 $ .70 $ 1.02 $ .64 $ .43
----------- ----------- ----------- ----------- -----------
Offering to Public................... $ 16.07 $ 15.64 $ 22.71 $ 14.20 $ 14.39
=========== =========== =========== =========== ===========
- ----------
/*/ 3.00%/3.09% for Index Equity Portfolio.
<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........................... $24,605,308 $19,842,197 $71,899,325 $11,193,072 $ 4,872,905
Outstanding
Shares............................... 1,540,306 1,485,086 4,762,624 1,109,756 449,699
=========== =========== =========== =========== ===========
Net Asset Value
Per Share............................ $ 15.97 $ 13.36 $ 15.10 $ 10.09 $ 10.84
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)/*/.................. $ .75 $ .70 $ .71 $ .48 $ .45
----------- ----------- ----------- ----------- -----------
Offering to Public................... $ 16.72 $ 14.06 $ 15.81 $ 10.57 $ 11.29
=========== =========== =========== =========== ===========
</TABLE>
- ----------
/*/
-95-
<PAGE>
<TABLE>
<CAPTION>
Intermediate Pennsylvania Low
Government Ohio Tax- Tax-Free Duration Intermediate
Bond Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets................................................. $ 5,902,721 $ 9,619,203 $38,027,710 $ 937,658 $ 935,485
Outstanding
Shares..................................................... 594,767 947,248 3,642,501 95,732 100,344
=========== =========== =========== =========== ===========
Net Asset Value
Per Share.................................................. $ 9.92 $ 10.15 $ 10.44 $ 9.79 $ 9.32
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)/*/........................................ $ .41 $ .42 $ .44 $ .30 $ .39
----------- ----------- ----------- ----------- -----------
Offering to Public......................................... $ 10.33 $ 10.57 $ 10.88 $ 10.09 $ 9.71
=========== =========== =========== =========== ===========
</TABLE>
- -------------
/*/3.00%/3.09% for Low Duration Bond Portfolio; 5.00%/5.26% for International
Equity Portfolio.
<TABLE>
<CAPTION>
International New Jersey
Government International Emerging Tax-Free Core
Income Bond Markets Income Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets................................................. $ 3,650,842 $ 175,812 $ 2,995,584 $ 893,803 $ 319,914
Outstanding
Shares..................................................... 358,070 15,017 343,864 79,324 33,503
=========== =========== =========== =========== ===========
Net Asset Value
Per Share.................................................. $ 10.20 $ 11.71 $ 8.71 $ 11.27 $ 9.55
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)/*/........................................ $ .48 $ .62 $ .46 $ .47 $ .40
----------- ----------- ----------- ----------- -----------
Offering to Public......................................... $ 10.68 $ 12.33 $ 9.71 $ 11.74 $ 9.95
=========== =========== =========== =========== ===========
- --------------
</TABLE>
/*/4.50%/4.71% for Government Income Portfolio; 5.00%/5.26% for International
Bond and International Emerging Markets Portfolios.
<TABLE>
<CAPTION>
Mid-Cap Mid-Cap
Value Growth
Equity Equity
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets................ $ 100 $ 100
Outstanding
Shares................... 10 10
====== ======
Net Asset Value
Per Share................ $10.00 $10.00
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .47 $ .47
------ ------
Offering to Public........ $10.47 $10.47
====== ======
</TABLE>
-96-
<PAGE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Managed Income $ 43,417
Tax-Free Income 9,109
Intermediate Government Bond 22,989
Ohio Tax-Free Income 4,649
Pennsylvania Tax-Free Income 81,436
Intermediate Bond 8,598
Large Cap Value Equity 141,011
Large Cap Growth Equity 95,694
Small Cap Growth Equity 344,911
Select Equity 44,112
Index Equity 78,263
Small Cap Value Equity 51,676
International Equity 85,795
Balanced 143,547
International Emerging Markets 18,147
Government Income 30,034
Core Bond 8,481
New Jersey Tax Free Income 17,606
Low Duration Bond 6,294
International Bond 7,565
</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
Large Cap Value Equity 68,289
Large Cap Growth Equity 47,859
Small Cap Growth Equity 77,356
Select Equity 34,761
Index Equity 51,229
Small Cap Value Equity 61,709
International Equity 83,938
Balanced 144,255
</TABLE>
-97-
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
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
Large Cap Value Equity 195,675
Large Cap 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>
For the period from January 13, 1996 through January 31, 1996, the
total front-end sales charges paid by the shareholders of Investor A Shares of
the New Jersey Tax-Free Income Portfolio were $435. For the period from January
13, 1996 through March 31, 1996, the total front-end sales charges paid by the
shareholders of Investor A Shares of the Short Government Bond and Core Bond
Portfolios were $3,848 and $1,723, respectively.
There is no initial sales charge on purchases of $1,000,000 or more of
Investor A Shares of the Non-Money Market Portfolios. However, a contingent
deferred sales charge of 1.00% will be imposed on the lesser of the net asset
value of the shares on the purchase or redemption date for Investor A Shares
purchased on a no-load basis and subsequently redeemed within 18 months after
purchase.
Investor B Shares of the Non-Money Market Portfolios are sold at the
net asset value per share next determined after a purchase order is received.
Investor B Shares of the Non-Money Market Portfolios are subject to a contingent
deferred sales charge which is payable on redemption of such Investor B Shares.
-98-
<PAGE>
Investor C Shares of the Non-Money Market Portfolios are sold at the
net asset value per share next determined after a purchase order is received.
In addition, Investor C Shares of the Non-Money Market Portfolios are subject to
a contingent deferred sales charge which is payable on redemptions of such
Investor C Shares within 18 months of purchase.
Service and Institutional Shares of each Portfolio are sold at the net
asset value per share next determined after a purchase order is received without
a sales charge.
EXCHANGE PRIVILEGE. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states where
the exchange may legally be made.
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Investor A Shares, Investor B Shares or Investor C Shares of a Non-
Money Market Portfolio.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Investor A Shares of the Non-Money Market Portfolios at
net asset value, without a sales charge, with the proceeds from the redemption
of shares of any other investment company which were sold with a sales charge or
commission in accordance with the terms set forth in the Prospectuses. This
does not include shares of an affiliated mutual fund which were or would be
subject to a contingent deferred sales charge upon 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
-99-
<PAGE>
investment adviser or distributor of the Fund or the company,
respectively.
MISCELLANEOUS. The Fund reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption or repurchase of
a Portfolio's shares by making payment in whole or in part in securities chosen
by the Fund and valued in the same way as they would be valued for purposes of
computing a Portfolio's net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act so that a Portfolio is obligated to redeem its shares solely in cash up
to the lesser of $250,000 or 1% of its net asset value during any 90-day period
for any one shareholder of a Portfolio.
With respect to the Index Master Portfolio, if the Board of Trustees of the
Trust determines that it would be detrimental to the best interests of the
remaining shareholders of the Index Master Portfolio to make payment wholly or
partly in cash, the Index Master Portfolio may pay the redemption price in whole
or in part by a distribution of portfolio securities from the Index Master
Portfolio of the shares being redeemed in lieu of cash in accordance with Rule
18f-1 under the Investment Company Act of 1940. Investors, such as the
Portfolio, may incur brokerage charges and other transaction costs selling
securities that were received in payment of redemptions.
Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the Fund may
redeem shares involuntarily to reimburse a Portfolio for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder as provided in the Prospectus from time to
time.
VALUATION OF PORTFOLIO SECURITIES
In determining the market value of portfolio investments, the Fund may
employ outside organizations, which may use, without
-100-
<PAGE>
limitation, a matrix or formula method that takes into consideration market
indexes, matrices, yield curves and other specific adjustments. This may result
in the securities being valued at a price different from the price that would
have been determined had the matrix or formula method not been used. All cash,
receivables and current payables are carried on the Fund's books at their face
value. Other assets, if any, are valued at fair value as determined in good
faith under the supervision of the Board of Trustees.
MONEY MARKET PORTFOLIOS. The net asset value for each class of each share
of the Money Market Portfolios for the purpose of pricing purchase and
redemption orders is determined twice each day, once as of 12:00 noon (Eastern
Time) and once as of 4:00 p.m. (Eastern Time) on each Business Day. Each
Portfolio's net asset value per share is calculated by adding the value of all
securities, cash and other assets of the respective classes of the Portfolio,
subtracting the liabilities and dividing the result by the number of outstanding
shares of such classes. The net asset value per share of each class of each
Portfolio is determined independently of the other classes and the other
Portfolios.
The Fund seeks to maintain for each of the Money Market Portfolios a net
asset value of $1.00 per share for purposes of purchase and redemptions and
values their portfolio securities on the basis of the amortized cost method of
valuation.
Under this method the market value of an instrument is approximated by
amortizing the difference between the acquisition cost and value at maturity of
the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account. The market value of
debt securities usually reflects yields generally available on securities of
similar quality. When such yields decline, market values can be expected to
increase, and when yields increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Money Market Portfolio would receive if the security were sold prior to
maturity. The Fund's Board of Trustees has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share for each
Money Market Portfolio, which include a review of the extent of any deviation of
net asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1% for a Money
Market Portfolio, the Fund's Board of Trustees 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
-101-
<PAGE>
securities prior to maturity, reducing or withholding dividends, shortening the
average portfolio maturity, reducing the number of outstanding shares without
monetary consideration, and utilizing a net asset value per share as determined
by using available market quotations.
Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will
limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser determines present minimal credit
risks pursuant to guidelines adopted by the Fund's Board of Trustees. There can
be no assurance that a constant net asset value will be maintained for any Money
Market Portfolio.
EQUITY PORTFOLIOS. Net assets value is calculated separately for each
class of shares of each Equity Portfolio as of the close of regular trading
hours on the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by
dividing the value of all securities, cash and other assets owned by a Portfolio
that are allocated to a particular class of shares, less the liabilities charged
to that class, by the total number of outstanding shares of the class.
Valuation of securities held by each Portfolio is as follows: securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at the last reported sale price that day; securities traded on a
national securities exchange or on the NASDAQ National Market System for which
there were no sales on that day and securities traded on other over-the-counter
markets for which market quotations are readily available are valued at the mean
of the bid and asked prices; an option or futures contract is valued at the last
sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal
exchange or board of trade on which such option or contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices prior to 4:00
p.m. (Eastern Time); and securities for which market quotations are not readily
available are valued at fair market value as determined in good faith by or
under the direction of the Fund's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of
the Board of Trustees determines such method does not represent fair value.
Valuation of securities of foreign issuers is as follows: to the extent
sale prices are available, securities which are traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular
-102-
<PAGE>
trading hours on the NYSE. In the event that there are no sales, the mean
between the last available bid and asked prices will be used. If a security is
traded on more than one exchange, the latest sale price on the exchange where
the stock is primarily traded is used. An option or futures contract is valued
at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the
principal exchange or board of trade on which such option or contract is traded,
or in the absence of a sale, the mean between the last bid and asked prices
prior to 4:00 p.m. (Eastern Time). In the event that application of these
methods of valuation results in a price for a security which is deemed not to be
representative of the market value of such security, the security will be valued
by, under the direction of or in accordance with a method specified by the Board
of Trustees as reflecting fair value. The amortized cost method of valuation
will be used with respect to debt obligations with sixty days or less remaining
to maturity unless the investment adviser and/or sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value. All other assets and securities held by the Portfolios (including
restricted securities) are valued at fair value as determined in good faith by
the Board of Trustees or by someone under its direction. Any assets which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
Certain of the securities acquired by the International Equity and
International Emerging Markets Portfolios may be traded on foreign exchanges or
over-the-counter markets on days on which a Portfolio's net asset value is not
calculated. In such cases, the net asset value of the Portfolio's shares may be
significantly affected on days when investors can neither purchase nor redeem
shares of the Portfolio.
A Portfolio may use a pricing service, bank or broker/dealer experienced in
such matters to value the Portfolio's securities.
The valuation of securities held by the Index Master Portfolio is discussed
in its Registration Statement.
BOND PORTFOLIOS. Net asset value is calculated separately for each class
of Shares of each Bond Portfolio as of the close of regular trading hours on the
NYSE on each Business Day by dividing the value of all securities, cash and
other assets owned by a Portfolio that are allocated to a particular class of
shares, less the liabilities charged to that class, by the total number of
outstanding shares of the class.
Valuation of securities held by each Bond Portfolio is as follows: domestic
securities traded on a national securities exchange or on the NASDAQ National
Market system are valued at the last reported sale price that day; domestic
securities traded on a national securities exchange or on the NASDAQ National
Market System for which there were no sales on that day are
-103-
<PAGE>
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.
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
-104-
<PAGE>
beginning of the period to obtain the base period return; and (c) annualizing
the results (i.e., multiplying the base period return by 365/7). The net change
----
in the value of the account reflects the value of additional shares purchased
with dividends declared and all dividends declared on both the original share
and such additional shares, but does not include realized gains and losses or
unrealized appreciation and depreciation. Compound effective yields are
computed by adding 1 to the base period return (calculated as described above)
raising the sum to a power equal to 365/7 and subtracting 1. In addition, a
standardized "tax-equivalent yield" may be quoted for Service, Investor A,
Investor B, Investor C and Institutional Shares in the Municipal Money Market,
Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios, which is computed separately for each class by: (a)
dividing the portion of the Portfolio's yield for shares (as calculated above)
that is exempt from Federal or state income tax by one minus a stated Federal or
state income tax rate; and (b) adding the figure resulting from (a) above to
that portion, if any, of the yield that is not exempt from Federal and state
income tax.
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1996 before waivers was as follows:
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ------ --------- ----------------------
<S> <C> <C> <C>
Money Market
Service Shares 4.61% 4.72% N/A
Investor A Shares 4.52 4.62 N/A
Institutional Shares 4.91 5.03 N/A
Investor B Shares 3.83 3.90 N/A
Municipal Money Market
Service Shares 2.77% 2.81% 3.84%
Investor A Shares 2.60 2.63 3.61
Institutional Shares 3.07 3.12 4.26
U.S. Treasury Money Market
Service Shares 4.39% 4.49% N/A
Investor A Shares 4.22 4.31 N/A
Institutional Shares 4.69 4.80 N/A
Ohio Municipal Money Market
Service Shares 2.82% 2.86% 3.92%
Investor A Shares 4.22 2.67 3.67
Institutional Shares 4.69 3.17 4.33
Pennsylvania Municipal Money
Market
Service Shares 2.78% 2.82% 3.86%
Investor A Shares 2.60 2.63 3.61
Institutional Shares 3.08 3.13 4.28
</TABLE>
-105-
<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 2.78% 2.82% 3.86%
Investor A Shares 2.61 2.64 3.63
Institutional Shares 3.08 3.13 4.28
Virginia Municipal Money
Market
Service Shares 2.64% 2.67% 3.67%
Institutional Shares 2.94 2.98 4.08
New Jersey Municipal Money
Market Portfolio
Service Shares 2.58% 2.61% 3.58%
Investor A Shares 2.33 2.36 3.24
Institutional Shares 2.88 2.92 4.00
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1996,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1996.
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1996 after waivers was as follows:
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ------ --------- ----------------------
<S> <C> <C> <C>
Money Market
Service Shares 4.97% 5.09% N/A
Investor A Shares 4.88 5.00 N/A
Institutional Shares 5.27 5.41 N/A
Investor B Shares 4.19 4.28 N/A
Municipal Money Market
Service Shares 3.21% 3.26% 4.46%
Investor A Shares 3.04 3.09 4.22
Institutional Shares 3.51 3.57 4.88
U.S. Treasury Money Market
Service Shares 4.79% 4.90% N/A
Investor A Shares 4.62 4.73 N/A
Institutional Shares 5.09 5.22 N/A
Ohio Municipal Money Market
Service Shares 3.28% 3.33% 4.56%
Investor A Shares 3.10 3.15 4.31
Institutional Shares 3.58 3.65 4.97
</TABLE>
-106-
<PAGE>
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ------ --------- ----------------------
<S> <C> <C> <C>
Pennsylvania Municipal Money
Market
Service Shares 3.20% 3.25% 4.44
Investor A Shares 3.02 3.07 4.19
Institutional Shares 3.50 3.56 4.86
North Carolina Municipal
Money Market
Service Shares 3.22% 3.29% 4.47%
Investor A Shares 3.05 3.10 4.24
Institutional Shares 3.52 3.58 4.89
Virginia Municipal Money
Market
Service Shares 3.32% 3.37% 4.61%
Institutional Shares 3.62 3.68 5.03
New Jersey Municipal Money
Market Portfolio
Service Shares 3.07% 3.12% 4.26%
Investor A Shares 2.82 2.86 3.92
Institutional Shares 3.37 3.43 4.68
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1996,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1996.
The fees which may be imposed by institutions on their Customers are not
reflected in the calculations of yields for the Money Market Portfolios. Yields
on Institutional Shares will 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,
-107-
<PAGE>
Inc., a widely-recognized independent service that monitors the performance of
mutual funds. Yield may also be compared to yields set forth in the weekly
statistical release H.15(519) or the monthly statistical release designated
G.13(415) published by the Board of Governors of the Federal Reserve system.
TOTAL RETURN. For purposes of quoting and comparing the performance of
shares of the Non-Money Market Portfolios to the performance of other mutual
funds and to stock or other relevant indexes in advertisements, sales
literature, communications to shareholders and other materials, performance may
be stated in terms of total return. The total return for each class of a Non-
Money Market Portfolio will be calculated independently of the other classes
within that Portfolio. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according to the
following formula:
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
-108-
<PAGE>
is deducted at the end of the period, and all dividends and distributions by the
particular Portfolio are assumed to have
been reinvested at net asset value as described in the particular Prospectus on
the reinvestment dates during the period. Total
return, or "T" in the formula above, is computed by finding the average annual
compounded rates of return over the specified periods that would equate the
initial amount invested to the ending redeemable value.
Performance information presented for the following
Non-Money Market Portfolios includes performance information for a corresponding
predecessor portfolio which transferred its assets and liabilities to the
related Non-Money Market Portfolio pursuant to a reorganization consummated on
January 13, 1996 (February 13, 1996 with respect to the International Bond
Portfolio):
<TABLE>
<CAPTION>
Commencement of
Non-Money Market Predecessor Operations of
Portfolio Portfolio Predecessor Portfolio
- ---------------- -------------------------- ---------------------
<S> <C> <C>
New Jersey Tax-Free Income Compass Capital Group July 1, 1991
Portfolio New Jersey Municipal
Bond Fund
International Bond Portfolio Compass Capital Group July 1, 1991
International Fixed Income
Fund
Core Bond Portfolio BFM Institutional Trust December 9, 1992
Core Fixed Income
Portfolio
Low Duration Bond Portfolio BFM Institutional Trust July 17, 1992
Short Duration Portfolio
</TABLE>
Each Non-Money Market Portfolio presents performance information for each
class thereof since the commencement of operations of that Portfolio (or the
related predecessor portfolio), rather than the date such class was introduced.
Performance information for each class introduced after the commencement of
operations of the related Portfolio (or predecessor portfolio) is therefore
based on the performance history of a predecessor class. Performance information
is
-109-
<PAGE>
restated to reflect the current maximum front-end sales charge (in the case of
Investor A Shares) or the maximum contingent deferred sales charge (in the case
of Investor B Shares) when presented inclusive of sales charges. Additional
performance information is presented which does not reflect the deduction of
sales charges. Historical expenses reflected in performance information are
based upon the distribution, shareholder servicing and processing fees and other
expenses actually incurred during the periods presented and have not been
restated, in cases in which the performance information for a particular class
includes the performance history of a predecessor class, to reflect the ongoing
expenses currently borne by the particular class.
Based on the foregoing, the average annual total
returns for each Non-Money Market Portfolio for periods ended September 30, 1996
were as follows*:
-110-
<PAGE>
/*/Notes
-----
Performance information presented for Investor A, Investor B, Investor
C and Service Shares of a Portfolio prior to their introduction dates
does not reflect shareholder servicing and processing and/or
distribution fees and certain other expenses borne by these share
classes which, if reflected, would reduce the performance quoted.
Performance information presented assumes the reinvestment of
dividends and distributions. Performance information presented for
Investor A, Investor B, Investor C and Service Shares of a Portfolio
prior to their introduction as indicated in the table above is based
upon historical expenses of the predecessor class which do not reflect
the actual expenses that an investor would incur as a holder of shares
of these classes of the Portfolios. The ongoing fees and expenses
borne by Investor B Shares and Investor C Shares are greater than
those borne by Investor A Shares; the ongoing fees and expenses borne
by a Portfolio's Investor A, Investor B and Investor C Shares are
greater than those borne by the Portfolio's Service Shares; and the
ongoing fees and expenses borne by a Portfolio's Investor A, Investor
B, Investor C and Service Shares are greater than those borne by the
Portfolio's Institutional Shares. Performance information presented
for Institutional Shares of the Balanced, Tax-Free Income, New Jersey
Tax-Free Income and International Bond Portfolios prior to their
introduction dates is based upon historical expenses of the
predecessor class which are higher than the actual expenses that an
investor would incur as a holder of Institutional Shares of the above-
mentioned Portfolios. Accordingly, the performance information may be
used in assessing each Portfolio's performance history but does not
reflect how the distinct classes would have performed on a relative
basis prior to the introduction of these classes, which would require
an adjustment to the ongoing expenses.
The original class or classes of shares of each Portfolio were as
follows: Balanced - Investor A Shares; Index Equity - Institutional
Shares; Select Equity - Institutional Shares; Large Cap Growth Equity
- Institutional Shares; Large Cap Value Equity -Institutional Shares;
Small Cap Value Equity -Institutional Shares; Small Cap Growth Equity
-Institutional Shares; International Equity -Institutional Shares;
International Emerging Markets -Investor A, Institutional and Service
Shares; Low Duration Bond - Institutional Shares; Intermediate
Government Bond - Institutional Shares; Intermediate
-111-
<PAGE>
Bond -Institutional Shares; Core Bond - Institutional Shares; Managed
Income- Institutional Shares; Tax-Free Income - Investor A Shares; New
Jersey Tax-Free Income - Service Shares; Pennsylvania Tax-Free Income-
Investor A and Institutional Shares; Ohio Tax-Free Income - Investor
A, and Institutional Shares; Government Income - Investor A Shares;
and International Bond - Service Shares.
The performance quoted reflects fee waivers that subsidize and reduce
the total operating expenses of each Portfolio. The Portfolios'
returns would have been lower if there were not such waivers. PAMG
and the Portfolio's Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain each Portfolio's total
operating expenses during the remainder of the current fiscal year at
the levels set forth in the applicable prospectus.
Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
each class of a Non-Money Market Portfolio's shares with other performance
measures. For example, in comparing the total return of a Non-Money Market
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money Market Portfolio may calculate the aggregate
total return for its shares of a certain class for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
such Non-Money Market Portfolio's shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. A Non-Money Market Portfolio may not, for these purposes, deduct from
the initial value invested or the ending value any amount representing front-end
and deferred sales charges charged to purchasers of Investor A, Investor B or
Investor C Shares. The Investor A, Investor B and Investor C classes of the
Portfolio will, however, disclose, if appropriate, the maximum applicable sales
charges and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
-112-
<PAGE>
In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
NON-MONEY MARKET PORTFOLIO YIELD. The Balanced, Managed Income, Tax-Free
Income, Intermediate Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, Low Duration Bond, Intermediate Bond,
Government Income, Core Bond and International Bond Portfolios may advertise
their yields on their Service, Investor A, Investor B, Investor C and
Institutional Shares. Under the rules of the SEC, each such Portfolio
advertising the respective yields for its Service, Investor A, Investor B,
Investor C and Institutional Shares must calculate yield using the following
formula:
a-b
YIELD = 2[(----- +1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360th of the stated dividend rate of
the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the
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<PAGE>
Portfolio is calculated by computing the yield to maturity of each obligation
held by the Portfolio based on the market value of the obligation (including
actual accrued interest) at the close of business on the last business day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent month that the obligation is held by the
Portfolio. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. However,
interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have discounts based on current market value that are less
than the then-remaining portion of the original issue discount (market premium),
the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend,
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<PAGE>
but is reasonably expected to be and is declared and paid as a dividend shortly
thereafter. In the case of Investor A Shares of a Non-Money Market Portfolio, a
Portfolio's maximum offering price per share for purposes of the formula
includes the maximum front-end sales charge imposed by the Portfolio --currently
as much as 5.00% of the per share offering price.
Each of the Tax-Free Income, Ohio Tax-Free Income, New Jersey Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios may advertise the tax-
equivalent yield for shares of a specified class. Under the rules of the SEC, a
Portfolio advertising its tax-equivalent yield must calculate such tax-
equivalent yield by dividing that portion of the yield of the Portfolio which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Portfolio which is not tax-exempt.
The annualized yield information for the 30-day period ended September 30,
1996 for the Portfolios referenced below was as follows:
<TABLE>
<CAPTION>
AFTER WAIVERS BEFORE 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 6.44% N/A 6.21% N/A
Investor A Shares 6.26 N/A 6.03 N/A
Institutional Shares 6.74 N/A 6.51 N/A
Tax-Free Income
Service Shares 5.16% 7.17% 4.83% 6.70%
Investor A Shares 4.98 6.92 4.65 6.45
Institutional Shares 5.46 7.58 5.13 7.13
Intermediate Government
Bond
Service Shares 5.69% N/A 5.39% N/A
Investor A Shares 5.51 N/A 5.21 N/A
Institutional Shares 5.99 N/A 5.69 N/A
Ohio Tax-Free Income
Service Shares 4.34% 6.03% 3.75% 5.21%
Investor A Shares 4.17 5.80 3.58 4.98
Institutional Shares 4.65 6.46 4.06 5.63
Investor B Shares 3.40 4.72 2.81 3.90
</TABLE>
-115-
<PAGE>
<TABLE>
<CAPTION>
AFTER WAIVERS BEFORE 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>
Pennsylvania Tax-Free
Income
Service Shares 5.10% 7.08% 4.80% 6.68%
Investor A Shares 4.96 6.89 4.66 6.47
Institutional Shares 5.40 6.92 5.10 7.08
Investor B Shares 4.16 5.77 3.86 5.36
Intermediate Bond
Service Shares 5.59% N/A 5.29% N/A
Investor A Shares 5.42 N/A 5.12 N/A
Institutional Shares 5.90 N/A 5.60 N/A
Government Income
Investor A Shares 6.81% N/A 6.05% N/A
Investor B Shares 6.04 N/A 5.28 N/A
New Jersey Tax-Free Income
Portfolio
Service Shares 4.41% 6.13% 4.09% 5.68%
Investor A Shares 4.24 5.89 3.92 5.44
Investor B Shares 3.47 4.82 3.15 3.62
International Bond
Portfolio
Service Shares 4.54% N/A 4.43% N/A
Investor A Shares 4.37 N/A 3.97 N/A
Investor B Shares 3.62 N/A 3.22 N/A
Institutional 4.84 N/A 4.40 N/A
Short Government Bond
Service Shares 4.43% N/A 4.15% N/A
Investor A Shares 4.26 N/A 3.98 N/A
Institutional Shares 4.73 N/A 4.45 N/A
Core Bond
Service Shares 6.42% N/A 6.13% N/A
Investor A Shares 6.25 N/A 5.96 N/A
Investor B Shares 5.50 N/A 5.21 N/A
Institutional Shares 6.73 N/A 6.44 N/A
</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 dividends in a dividend reinvestment plan or the impact
of tax-free investing. As illustrated below, the Fund may demonstrate, using
certain specified hypothetical
-116-
<PAGE>
data, the compounding effect of dividend reinvestment on investments in a Non-
Money Market Portfolio.
-117-
<PAGE>
The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising, sales literature, communications to shareholders and other
materials the benefits of tax-free investing. For example, Table 1 shows
taxpayers how to translate Federal tax savings from investments the income on
which is not subject to Federal income tax into an equivalent yield from a
taxable investment. Similarly, Tables 2, 3, 4, 5 and 6 show Pennsylvania, Ohio,
North Carolina, Virginia and New Jersey shareholders the approximate yield that
a taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of the Pennsylvania Municipal Money Market and
Pennsylvania Tax-Free Income Portfolios, the Ohio Municipal Money Market and
Ohio Tax-Free Income Portfolios, the North Carolina Municipal Money Market
Portfolio, the Virginia Municipal Money Market Portfolio, and the New Jersey
Municipal Money Market and New Jersey Tax-Free Income Portfolios, respectively.
The yields below are for illustration purposes only and are not intended to
represent current or future yields for the Money and Non-Money Market Municipal
Portfolios, which may be higher or lower than the yields shown.
-118-
<PAGE>
TABLE 1 - FEDERAL ONLY
- ------- ------------
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1997 Taxable Marginal
Income Bracket Tax Rate/*/ 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $24,000 $ 0 - $40,100 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$24,001 - $58,150 $40,101 - $96,900 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$58,151 -$121,300 $96,901 -$147,700 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$121,301-$263,750 $147,701-$263,750 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $263,750 Over $263,750 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%
</TABLE>
/*/ Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1997, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $117,950 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $117,950 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1997 is estimated to be from $117,950 to $240,451 and for married
taxpayers filing a joint return from $176,950 to $299,451. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1997.
-119-
<PAGE>
TABLE 2 - FEDERAL AND PENNSYLVANIA
- ------- ------------------------
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1997 Federal Marginal
Taxable Income Bracket Tax Rate/*/ 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -------------------------------------------- ------------------ ------ ------ ----- ----- ----- ----- -----
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 1997, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $117,950 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $117,950 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1997 is
estimated to be from $117,950 to $240,451 and for married taxpayers filing a
joint return from $176,950 to $299,451. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1997.
-120-
<PAGE>
TABLE 3 - FEDERAL AND OHIO
- ------- ----------------
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
---------------------------------------------------------------------------------------------
3 3.5 4 4.5 5 5.5 6
1997 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE SINGLE RETURN
<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>
1997 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 - 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>
-121-
<PAGE>
<TABLE>
<CAPTION>
1997 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>
40,101- 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001 - 96,900 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
96,901 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 147,700 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
147,701 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
/*/The income brackets applicable to the state of Ohio do not correspond to the
Federal taxable income brackets. In addition, Ohio taxable income will likely
be different than Federal taxable income because it is computed by reference to
Federal adjusted gross income with specifically-defined Ohio modifications and
exemptions, and does not consider many of the deductions allowed from Federal
adjusted gross income in computing Federal taxable income. No other state tax
credits, exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals. For
1997, taxpayers with adjusted gross income in excess of a $117,950 threshold
amount are subject to an overall limitation on certain itemized deductions,
requiring a reduction in such deductions equal to the lesser of (i) 3% of
adjusted gross income in excess of the $117,950 threshold or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1997 is from $117,950 to $240,450 and for married taxpayers filing a
joint return the range is from $176,950 to $299,450. The Federal tax brackets,
the threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be further adjusted
for inflation for each year after 1997.
-122-
<PAGE>
TABLE 4 - FEDERAL AND NORTH CAROLINA
- ------- --------------------------
<TABLE>
<CAPTION>
Combined
Federal
1997 Taxable and
Income Bracket North North
Federal Carolina Carolina Tax-Exempt Yield
Joint Marginal Marginal Marginal
Single Return Return Tax Rate Tax Rate Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------ ---------- -------- -------- --------- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 12,750 $ 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%
12,751 - 24,650 21,251 - 41,200 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
24,651 - 59,750 41,201 - 99,600 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
59,751 - 60,000 99,601 -100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 124,650 100,001 -151,750 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
124,651 - 271,050 151,751 -271,050 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 271,050 Over 271,050 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 8.076% 8.974% 9.871% 10.768%
</TABLE>
*The taxable income brackets applicable to North Carolina do not correspond to
the Federal taxable income brackets. The taxable income brackets presented in
this table represent the breakpoints for both the Federal and North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable income
may be different than North Carolina taxable income. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at the
combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher-income individuals. For
1997, taxpayers with adjusted gross income in excess of $121,200 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 $121,200 or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased out at the rate of
two percentage points for each $2,500 (or fraction thereof) of adjusted gross
income in the phase-out zone. For single taxpayers the range of adjusted gross
income comprising the phase-out zone for 1997 is from $121,200 to $243,701, and
for married taxpayers filing a joint return the range is from $181,800 to
$304,301. The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1997.
-123-
<PAGE>
TABLE 5 - FEDERAL AND VIRGINIA
- ------- --------------------
<TABLE>
<CAPTION>
1997 Taxable Combined
Income Bracket Federal Tax-Exempt Yield
and
Federal Virginia Virginia
Joint Marginal Marginal Marginal
Single Return Return Tax Rate Tax Rate Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------ ---------- -------- -------- --------- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 15.0% 5.75% 19.888% 3.745% 4.369% 4.993% 5.617% 6.241% 6.865% 7.489%
12,751 - 55,100 38,001 - 91,850 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631% 7.368% 8.105% 8.842%
55,101 - 115,000 91,851 - 140,000 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920% 7.688% 8.457% 9.226%
115,001 - 250,000 140,001 - 250,000 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460% 8.289% 9.118% 9.947%
OVER 250,000 OVER 250,000 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905% 8.783% 9.661% 10.540%
</TABLE>
*The taxable income brackets applicable to Virginia do not correspond to the
Federal taxable income brackets. Because Virginia imposes a maximum tax rate of
5.75% on taxable income over $17,000, the taxable income brackets presented in
this table represent the breakpoints only for the Federal marginal tax rate
changes. When applying these brackets, Federal taxable income may be different
than Virginia taxable income. No state tax credits, exemptions, or local taxes
have been taken into account in arriving at the combined marginal tax rate. The
income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the table.
It is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1995, taxpayers with adjusted gross income in
excess of $114,700 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser of (i)
3% of adjusted gross income excess of $114,700 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1995 is
from $114,700 to $237,201 and for married taxpayers filing a joint return from
$172,050 to $294,551. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1995.
-124-
<PAGE>
<TABLE>
<CAPTION>
TABLE 6 - FEDERAL AND NEW JERSEY
- ---------------------------------
Approximate
Combined Tax-Exempt
Federal Yield
Federal NJ and NJ
1997 Taxable Marginal Marginal Marginal
Income Bracket* Tax Rate Tax Rate Tax Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
- -------------------- -------- -------- ----------- ----- ----- ----- ----- ----- -----
Single Return Taxable Yield - Single Return
- ---------------
<S> <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 - 24,650 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
24,651 - 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 - 59,750 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
59,751 - 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 - 124,650 31.0% 6.370% 35.395% 4.643% 5.418% 6.191% 6.965% 7.739% 8.513% 9.287% 10.061 10.835%
124,651 - 271,050 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 271,050 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 - 41,200 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
40,201 - 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 - 99,600 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
99,601 - 150,000 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9 10.738%
.971%
150,001 - 151,750 36.0% 5.525% *39.536% 4.961% 5.789% 6.616% 7.442% 8.269% 9.096% 9.923% 10.750 11.577%
151,751 - 271,050 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 271,050 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>
-125-
<PAGE>
* The taxable income brackets applicable to New Jersey do not correspond to
the Federal taxable income brackets. The taxable income brackets
presented in this table represent the breakpoints for both the Federal and
New Jersey marginal tax rate changes. When applying these brackets,
Federal taxable income will be different than New Jersey taxable income
because New Jersey does not start with Federal taxable income in computing
its own state income tax base. No state tax credits, exemptions, or local
taxes have been taken into account in arriving at the combined marginal
tax rate. The income amount shown is income subject to Federal income tax
reduced by adjustments to income, exemptions, and itemized deductions
(including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at
least as great as that shown in the table. It is assumed that the
investor is not subject to the alternative minimum tax. Where applicable,
investors should consider that the benefit of certain itemized deductions
and the benefit of personal exemptions are limited in the case of higher-
income individuals. For 1997, taxpayers with adjusted gross income in
excess of $117,950 are subject to an overall limitation on certain
itemized deductions, requiring a reduction in such deductions equal to the
lesser of (i) 3% of adjusted gross income in excess of $117,950 or (ii)
80% of the amount of such itemized deductions otherwise allowable. The
benefit of each personal exemption is phased out at the rate of two
percentage points for each $2,500 (or fraction thereof) of adjusted gross
income in the phase-out zone. For single taxpayers the range of adjusted
gross income comprising the phase-out zone for 1997 is from $117,950 to
$240,451, and for married taxpayers filing a joint return the range is
from $176,950 to $299,451. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the
range over which personal exemptions are phased out will be further
adjusted for inflation for each year after 1997.
-126-
<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
-127-
<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
-128-
<PAGE>
detail therein. Materials may include lists of representative clients of the
Portfolios' investment advisers. Materials may refer to the CUSIP numbers of
the various classes of the Portfolios and may illustrate how to find the
listings of the Portfolios in newspapers and periodicals. Materials may also
include discussions of other Portfolios, products, and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
A Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate a Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the
Portfolio's percentage change in price movements over that period.
A Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. A Portfolio may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
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A Portfolio may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of
the tax treatment of the Portfolios or their shareholders, and the discussion
here and in the Prospectuses is not intended as a substitute for careful tax
planning. Investors are urged to consult their tax advisers with specific
reference to their own tax situation.
Please note that for purposes of satisfying certain of the requirements
for taxation as a regulated investment company described below, the Index Equity
Portfolio is deemed to own a proportionate share of the assets and gross income
of the Index Master Portfolio in which the Index Equity Portfolio invests all of
its assets. Also, with respect to the Index Equity Portfolio, the discussion
below that relates to the taxation of futures contracts and other rules
pertaining to the timing and character of income apply to the Index Master
Portfolio.
Each Portfolio has elected and intends to qualify for taxation as a
regulated investment company under Part I of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Portfolio generally is exempt from Federal income tax on its net
investment income and realized capital gains that it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of (a) 90% of its investment company taxable income (net investment income and
the excess of net short-term capital gain over net long-term capital loss, if
any, for the year) and (b) 90% of its net tax-exempt interest income, if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below. Distributions of investment
company taxable income and net tax-exempt interest income made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each
Portfolio must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities
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loans and gains from the sale or other disposition of stock or securities or
foreign currencies (including, but not limited to, gains from forward foreign
currency exchange contacts), or from other income derived with respect to its
business of investing in such stock, securities, or currencies (the "Income
Requirement") and derive less than 30% of its gross income from the sale or
other disposition of stock, securities and certain other investments (including
foreign currencies or options, futures or forward contracts on foreign
currencies but only to the extent that such currencies or options, futures or
forward contracts are not directly related to the Portfolio's principal business
of investing in stock or securities) held for less than three months (the
"Short-Short Gain Test"). Future Treasury regulations may provide that foreign
currency gains that are not "directly related" to a Portfolio's principal
business of investing in stock or securities will not satisfy the Income
Requirement. Interest (including original issue discount and "accrued market
discount") received by a Portfolio at maturity or upon disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security held for less than three months
for purposes of the Short-Short Gain Test. However, any other income that is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each of the Money and Non-Money Market Municipal Portfolios is designed to
provide investors with tax-exempt interest income. Shares of the Money and Non-
Money Market Municipal Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Portfolio's dividends being
tax-exempt but also such dividends would be taxable when distributed to the
beneficiary. In addition, the Money and Non-Money Market Municipal Portfolios
may
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not be an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related person" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and (a) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, (b) who occupies more than 5% of the entire
usable area of such facilities, or (c) for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, all
shareholders required to file a Federal income tax return are required to report
the receipt of exempt interest dividends and other exempt interest on their
returns. Moreover, while such dividends and interest are exempt from regular
Federal income tax, they may be subject to alternative minimum tax (currently
imposed at the rate of 26% (28% on the taxable excess over $175,000) or 28% in
the case of non-corporate taxpayers and at the rate of 20% in the case of
corporate taxpayers) in two circumstances. First, exempt interest dividends
derived from certain "private activity" bonds issued after August 7, 1986,
generally will constitute an item of tax preference for both corporate and non-
corporate taxpayers. Second, exempt interest dividends derived from all bonds,
regardless of the date of issue, must be taken into account by corporate
taxpayers in determining certain adjustments for alternative minimum tax
purposes. Receipt of exempt interest dividends may result in collateral Federal
income tax consequences to certain other taxpayers, including financial
institutions, property and casualty insurance companies, individual recipients
of Social Security or Railroad Retirement benefits, and foreign corporations
engaged in trade or business in the United States. Prospective investors should
consult their own tax advisors as to such consequences.
If a Money or Non-Money Market Municipal Portfolio distributes exempt
interest dividends during the shareholder's
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taxable year, no deduction generally will be allowed for any interest expense on
indebtedness incurred to purchase or carry shares of such Portfolio.
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 Municpal Money Market Portfolio or Ohio
Tax-Free Income 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) if (a) the Portfolio continues to qualify as a regulated
investment company for Federal Income tax purposes and (b) at all times at least
50% of the value of the total assets of the Portfolio consists of Ohio Municipal
Obligations or similar obligations of other states or their subdivisions. The
Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios are not subject
to the Ohio personal income tax, school district income taxes in Ohio, the Ohio
corporation franchise tax, or the Ohio dealer in intangibles tax, provided that,
with respect to the Ohio corporation franchise tax and the Ohio dealer in
intangibles tax, the Fund timely files the annual report required by Section
5733.09 of the Ohio Revised Code. Distributions with respect to shares of the
Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios properly
attributable to proceeds of insurance paid to those Portfolios that represent
maturing or matured interest on defaulted Obligations held by those Portfolios
and that are excluded from gross income for federal income tax purposes will not
be subject to Ohio personal income tax or municipal or school district income
taxes in Ohio, nor included in the net income base of the Ohio corporation
franchise tax.
Distributions of exempt-interest dividends, to the extent attributable to
interest on North Carolina Municipal Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax. An
investment in a Portfolio (including the North Carolina Municipal Money Market
Portfolio) by a corporation subject to the North Carolina franchise tax will be
included in the capital stock, surplus and undivided profits base in computing
the North Carolina franchise tax. Investors in a Portfolio including, in
particular, corporate investors which may be subject to the North Carolina
franchise tax, should consult their tax advisors with
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respect to the effects on such tax of an investment in a Portfolio and with
respect to their North Carolina tax situation in general.
As a regulated investment company, the Virginia Municipal Money Market
Portfolio may distribute dividends that are exempt from the Virginia income tax
to its shareholders if the Portfolio satisfies all requirements for conduit
treatment under Federal law and, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations the
interest on which is exempt from taxation under Federal law. If the Portfolio
fails to qualify, no part of its dividends will be exempt from the Virginia
income tax. To the extent any portion of the dividends are derived from taxable
interest for Virginia purposes or from net short-term capital gains, such
portion will be taxable to the shareholders as ordinary income. The character
of long-term capital gains realized and distributed by the Portfolio will follow
through to its shareholders regardless of how long the shareholders have held
their shares. Generally, interest on indebtedness incurred by shareholders to
purchase or carry shares of the Portfolio will not be deductible for Virginia
income tax purposes.
To be classified as a qualified investment fund for New Jersey personal
income tax purposes, at least 80% of the investments of the New Jersey Municipal
Money Market Portfolio and New Jersey Tax-Free Income Portfolio must consist of
New Jersey Municipal Obligations or direct U.S. Government obligations; the
Portfolios must have no investments other than interest-bearing obligations,
obligations issued at a discount, and cash and cash items (including
receivables); and the Portfolios must satisfy certain reporting obligations and
provide certain information to shareholders.
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 capital loss ("net capital gain")
for each taxable year. Such gain is distributed as a capital gain dividend and
is taxable to
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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 marginal rate
of 39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate of
tax for some taxpayers may be higher. An individual's long-term capital gains
will be taxable at a maximum rate of 28%. Capital gains and ordinary income of
corporate taxpayers are both taxed at a maximum nominal rate of 35%.
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 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
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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
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
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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 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.
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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 each calendar year to avoid liability for this excise
tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund
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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.
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
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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 L.L.P. serves as the
Fund's and the Trust's independent accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of each
person that on ________, 1996 owned of record or beneficially 5% or more of the
outstanding shares of a Portfolio which had commenced operations as of that date
was as follows: [ADD INFO]
On _________, 1996, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a national bank organized under the laws of the
United States. All of the capital stock of PNC Bank is owned by PNC Bancorp,
Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp.,
a publicly-held bank holding company.
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BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. PAMG, PIMC, BlackRock, PCM, PEAC,
CastleInternational, PNC Bank and other institutions that are banks or bank
affiliates are subject to such banking laws and regulations.
PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational and PNC Bank believe
they may perform the services for the Fund contemplated by their respective
agreements with the Fund without violation of applicable banking laws or
regulations. It should be noted, however, that there have been no cases
deciding whether bank and non-bank subsidiaries of a registered bank holding
company may perform services comparable to those that are to be performed by
these companies, and future changes in either Federal or state statutes and
regulations relating to permissible activities of banks and their subsidiaries
or affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
these companies from continuing to perform such services for the Fund. If such
were to occur, it is expected that the Board of Trustees would recommend that
the Fund enter into new agreements or would consider the possible termination of
the Fund. Any new advisory or sub-advisory agreement would normally be subject
to shareholder approval. It is not anticipated that any change in the Fund's
method of operations as a result of these occurrences would affect its net asset
value per share or result in a financial loss to any shareholder.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the 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.
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<PAGE>
FINANCIAL STATEMENTS
COMPASS CAPITAL FUNDS. The audited financial statements and notes
thereto in the Fund's Annual Report to Shareholders for the fiscal year ended
September 30, 1996 (the "1996 Annual Report") are incorporated in this Statement
of Additional Information by reference. No other parts of the 1996 Annual
Report are incorporated by reference herein. The financial statements included
in the 1996 Annual Report have been audited by the Fund's independent
accountants, Coopers & Lybrand, L.L.P., except for the statements of changes in
net assets for the year ended June 30, 1995 for the Core Bond Portfolio and
Short Government Bond Portfolio (now known as Low Duration Bond Portfolio) and
the financial highlights for the periods ended June 30, 1995, 1994 and 1993 for
those same Portfolios which have been audited by other auditors. The reports of
Coopers & Lybrand L.L.P. are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon their authority as experts in accounting and auditing. Additional copies
of the 1996 Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.
The financial highlights included in the 1996 Annual 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,
and the statements of changes in net assets for the year ended June 30, 1995 for
those same Portfolios have been audited by the former independent accountants of
the Predecessor BFM Portfolios, Deloitte & Touche, L.L.P., 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, L.L.P. and Deloitte & Touche, L.L.P. given upon their authority as
experts in accounting and auditing.
INDEX MASTER PORTFOLIO. The audited financial statements for the U.S.
Large Company Series of The DFA Investment Trust Company (the "Trust") for the
fiscal year ended November 30, 1995 (the "1995 Index Master Report"), and the
unaudited financial statements for the Trust's U.S. Large Company Series for the
period ended September 30, 1996 (the "1996 Index Master Report"), are
incorporated by reference into this Statement of Additional Information. No
other parts of the 1995 Index Master Report or 1996 Master Report are
incorporated by reference herein. The financial statements included in the 1995
Index Master Report have been audited by the Trust's independent accountants,
Coopers & Lybrand L.L.P., whose reports thereon are incorporated herein by
reference. Such financial statements have been incorporated herein by reference
in reliance upon such reports given upon
-142-
<PAGE>
their authority as experts in accounting and auditing. Additional copies of the
1995 Index Master Report and 1996 Index Master Report may be obtained at no
charge by telephoning the Trust at (310) 395-8005.
-143-
<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 in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE>
year or less which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are
A-6
<PAGE>
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
A-7
<PAGE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA"
A-8
<PAGE>
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"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
A-9
<PAGE>
business, economic or financial conditions are more likely to lead to increased
investment risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
A-10
<PAGE>
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection
A-11
<PAGE>
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/(SM)/
STATEMENT OF ADDITIONAL INFORMATION
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
This Statement of Additional Information provides supplementary information
pertaining to Institutional Shares ("Shares") representing interests in the
Multi-Sector Mortgage Securities Portfolio III (the "Portfolio") of Compass
Capital Funds (the "Fund"). This Statement of Additional Information is not a
prospectus, and should be read only in conjunction with the Prospectus of the
Fund relating to the Portfolio dated
______________, as amended from time to time (the "Prospectus"). The
--------------
Prospectus may be obtained from the Fund's distributor by calling toll-free
(800) 441-7379. This Statement of Additional Information is dated
______________. Capitalized terms used herein and not otherwise defined have
the same meanings as are given to them in the Prospectus.
<TABLE>
<CAPTION>
CONTENTS
Page
----
<S> <C>
THE FUND
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT RESTRICTIONS
TRUSTEES AND OFFICERS
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
PORTFOLIO TRANSACTIONS
PURCHASE AND REDEMPTION INFORMATION
VALUATION OF PORTFOLIO SECURITIES
PERFORMANCE INFORMATION
TAXES
ADDITIONAL INFORMATION CONCERNING SHARES
MISCELLANEOUS
FINANCIAL STATEMENTS
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR
<PAGE>
IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts
business trust. The Portfolio originally commenced operations on October 6,
1994 as a separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
April 26, 1996 the assets and liabilities of the Predecessor Portfolio were
transferred to the Portfolio, which had no prior operating history.
The Fund also offers other investment portfolios which are described
in separate Prospectuses and a separate Statement of Additional Information.
For information concerning these other portfolios contact the distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
For a description of the objective and policies of the Portfolio, see
"Investment Policies" in the Prospectus. In accordance with the applicable
provisions of the Investment Company Act of 1940 (the "1940 Act"), the Portfolio
will maintain with its custodian a segregated account of cash, cash equivalents,
U.S. Government securities or other liquid debt to the extent the Portfolio's
obligations require segregation from the use of investment practices listed
below. The following information is provided for those investors desiring
information in addition to that contained in the Prospectus.
OTHER INVESTMENT PRACTICES
INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest
rate swaps and the purchase or sale of interest rate caps and floors. The
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio as a
duration management technique or to protect against any increase in the price of
securities that the Portfolio anticipates purchasing at a later date. The
Portfolio will use these transactions as a hedge or for duration or risk
management. The Portfolio will not sell interest rate caps or floors that it
does not own. Interest rate swaps involve the exchange by the 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 with respect to a
notional amount of principal. The
-2-
<PAGE>
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, and 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 on the payment dates. The Portfolio will accrue the
net amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap on a daily basis and will
segregate with a custodian an amount of cash or liquid securities having an
aggregate net asset value at all times at least equal to the accrued excess. If
there is a default by the other party to such a transaction, the Portfolio will
have contractual remedies pursuant to the agreements related to the transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
also enter into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Portfolio will ordinarily engage in such transactions
only for bona fide hedging, risk management (including duration management) and
other portfolio management purposes.
CALLS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Portfolio may
sell or purchase call options ("calls") on U.S. Treasury securities, mortgage-
backed securities, other debt securities, indices, and Eurodollar instruments
that are traded on U.S. and foreign securities exchanges and in the over-the-
counter markets, and future contracts. A call gives the purchaser of the option
the right to buy, and obligates the seller to sell, the underlying security,
futures contract or index at the exercise price at any time or at a specified
time during the option period. All such calls sold by the Portfolio must be
"covered" as long as the call is outstanding (i.e., the Portfolio must own the
----
securities or futures contract subject to the call or other securities
acceptable for applicable segregation requirements). A call sold by the
Portfolio exposes the Portfolio during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the
-3-
<PAGE>
underlying security, index or futures contract and may require the Portfolio to
hold a security or futures contract which it might otherwise have sold. The
purchase of a call gives the Portfolio the right to buy a security, futures
contract or index at a fixed price. Calls on futures on U.S. Treasury
securities, Mortgage-Backed Securities, other debt securities and Eurodollar
instruments must also be covered by deliverable securities or the futures
contract or by liquid debt securities segregated to satisfy the Portfolio's
obligations pursuant to such instruments.
PUTS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Portfolio may
purchase put options ("puts") that relate to U.S. Treasury securities, Mortgage-
Backed Securities, other debt securities and Eurodollar instruments (whether or
not it holds such securities in its portfolio), indices or futures contracts.
The Portfolio may also sell puts on U.S. Treasury securities, Mortgage-Backed
Securities, other debt securities, Eurodollar instruments, indices or futures
contracts on such securities if the Portfolio's contingent obligations on such
puts are secured by segregated assets consisting of cash or liquid debt
securities having a value not less than the exercise price. The Portfolio will
not sell puts if, as a result, more than 50% of the Portfolio's assets would be
required to cover its potential obligations under its hedging and other
investment transactions. In selling puts, there is a risk that the Portfolio
may be required to buy the underlying instrument at a price higher than the
current market price.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Portfolio may also
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When such transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. When-issued securities and forward commitments may be sold prior to
the settlement date, but the Portfolio will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. If the Portfolio disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it can incur a gain or loss.
At the time the Portfolio enters into a transaction on a when-issued or forward
commitment basis, it will segregate with its custodian cash or other liquid debt
securities with a value not less than the value of the when-issued or forward
commitment securities. The value of these assets will be monitored daily to
ensure that their marked to market value will at all times equal or exceed the
corresponding obligations of the Portfolio. There is always a risk that the
securities may not be delivered and that the
-4-
<PAGE>
Portfolio may incur a loss. Settlements in the ordinary course, which typically
occur monthly for mortgage-related securities, are not treated by the Portfolio
as when-issued or forward commitment transactions and accordingly are not
subject to the foregoing restrictions.
REPURCHASE AGREEMENTS. The Portfolio may invest temporarily, without
limitation, in repurchase agreements, which are agreements pursuant to which
securities are acquired by the Portfolio from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Portfolio is authorized to invest. Repurchase
agreements may be characterized as loans secured by the underlying securities
and will be entered into in accordance with the requirements of the SEC. The
Portfolio may enter into repurchase agreements with (i) member banks of the
Federal Reserve System having total assets in excess of $500 million and (ii)
securities dealers, provided that such banks or dealers meet the
creditworthiness standards established by the Fund's Board of Trustees
("Qualified Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the supervision of the
Fund's Board of Trustees. The resale price reflects the purchase price plus an
agreed upon market rate of interest which is unrelated to the coupon rate or
date of maturity of the purchased security. The collateral is marked to market
daily. Such agreements permit the Portfolio to keep all its assets earning
interest while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature.
The use of repurchase agreements involves certain risks. For example,
if the seller of securities under a repurchase agreement defaults on its
obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Portfolio will seek to dispose of such securities,
which action could involve costs or delays. If the seller becomes insolvent and
subject to liquidation or reorganization under applicable bankruptcy or other
laws, the Portfolio's ability to dispose of the underlying securities may be
restricted. Finally, it is possible that the Portfolio may not be able to
substantiate its interest in the underlying securities. To minimize this risk,
the securities underlying the repurchase agreement will be held by the custodian
at all times in an amount at least equal to the repurchase price, including
accrued interest. If the seller fails to repurchase the securities, the
Portfolio may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase price.
-5-
<PAGE>
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may purchase certain
restricted securities ("Rule 144A securities") eligible for sale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A provides an exemption from the registration requirements of the
Securities Act of 1933 for the resale of certain restricted securities to
qualified institutional buyers. One effect of Rule 144A is that certain
restricted securities may now be liquid, though no assurance can be given that a
liquid market for Rule 144A securities will develop or be maintained. The
Portfolio's holdings of Rule 144A securities which are liquid securities will
not be subject to its limitation on investment in illiquid securities. The
Fund's Board of Trustees has adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid. The Board of Trustees will periodically review the
Portfolio's purchases and sales of Rule 144A securities.
OTHER INVESTMENTS
U.S. GOVERNMENT SECURITIES
U.S. Government securities include:
1. U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which
are direct obligations of the U.S. Government and, as such, are backed
by the "full faith and credit" of the United States.
2. Securities issued by agencies and instrumentalities of the
U.S. Government which are backed by the full faith and credit of the
United States. Among the agencies and instrumentalities issuing such
obligations are the Federal Housing Administration, the Government
National Mortgage Association ("GNMA"), the Department of Housing and
Urban Development, the Export-Import Bank, the Farmers Home
Administration ("FHA"), the General Services Administration, the
Maritime Administration and the Small Business Administration. The
maturities of such obligations range from three months to 30 years.
3. Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but
whose issuing agency or instrumentalities may borrow, to meet its
obligations, from the U.S. Treasury. Among the
-6-
<PAGE>
agencies and instrumentalities issuing such obligations are the
Tennessee Valley Authority, the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the
U.S. Postal Service.
4. Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but
which are backed by the credit of the issuing agency or
instrumentality. Among the agencies and instrumentalities issuing
such obligations are the Federal Farm Credit System and the Federal
Home Loan Bank.
Neither the value nor the yield of the Portfolio's shares or of the U.S.
Government securities which may be invested in by the Portfolio are guaranteed
by the U.S. Government. Such values and yield will fluctuate with changes in
prevailing interest rates and other factors. Generally, as prevailing interest
rates rise, the value of any U.S. Government securities held by the Portfolio
will fall. Such securities with longer maturities generally tend to produce
higher yields and are subject to greater market fluctuation, as a result of
changes in interest rates, than debt securities with shorter maturities.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the Mortgage-Backed Securities purchased by
the Portfolio evidence an interest in a specific pool of mortgages. Such
securities are issued by GNMA, FNMA and FHLMC and by private issuers, such as
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorized GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. Government is pledged to the payment of all amounts that may
be required to be paid under the guarantee. In order to meet its obligations
under such
-7-
<PAGE>
guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
The GNMA certificates will represent a pro-rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to
purchase home mortgage loans from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each FNMA certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro-rata interest in scheduled principal
payments and interest payments (at such FNMA certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage
-8-
<PAGE>
loans (i.e., mortgage loans that are not insured or guaranteed by any
governmental agency) of the following types: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; and (iii)
adjustable rate mortgage loans.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily FHLMC certificates.
FHLMC guarantees to each registered holder of a FHLMC certificate the
timely payment of interest at the rate provided for by such FHLMC certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii) the
expiration of any right of redemption, whichever occurs later, but in any event
no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by the full faith and credit
of the U.S. Government.
FHLMC certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. A FHLMC certificate group
may include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC certificate
group.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed
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<PAGE>
rates ("ARMs"). ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the mortgage. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but also
may be collateralized by whole loans or private mortgage pass-through securities
(collectively, "Mortgage Assets"). Multi-class pass-through securities are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multi-class pass-
through certificates. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class pass-
through securities. CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of CMOs or multi-class pass-
through securities may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal
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<PAGE>
prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a CMO series in a number of different
ways. Generally, the purpose of the allocation of the cash flow of a CMO to the
various classes is to obtain a more predictable cash flow to the individual
tranches than exists with the underlying collateral of the CMO. As a general
rule, the more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on Mortgage-Backed securities.
The Portfolio also may invest in, among other things, parallel-pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are parallel-pay
CMOs with the required principal payment on such securities having the highest
priority after interest has been paid to all classes.
The Portfolio may invest in CMO residuals. The residual in a CMO structure
generally represents the interest in any excess cash flow remaining after making
required payments of principal of and interest on the CMOs and related
administrative expenses of the issuer.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, those
securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of
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<PAGE>
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The Portfolio will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "overcollateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
RISK FACTORS RELATING TO MORTGAGE-BACKED SECURITIES
The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Portfolio purchases
such a security at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Portfolio purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, yield to maturity.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Mortgage-
Backed Securities may decrease in value as a result of increases in interest
rates and may
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benefit less than other fixed income securities from declining interest rates
because of the risk of prepayment.
INVESTMENT RESTRICTIONS
The Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed only by a vote of the holders of a majority of
the Portfolio's outstanding shares (as defined below under "Miscellaneous").
The Portfolio may not:
(1) invest 25% or more of the value of its total assets in any one
industry (Mortgage-Backed Securities and other securities issued
or guaranteed by the U.S. government or any agency or
instrumentality thereof are not treated as industries); provided,
however, that the Portfolio will, except for temporary defensive
purposes, invest at least 25% of the value of its total assets
in securities which represent interests in mortgages or liens on
real property;
(2) issue senior securities (including borrowing money, including on
margin if margin securities are owned) in excess of 33 1/3% of
its total assets (including the amount of senior securities
issued but excluding any liabilities and indebtedness not
constituting senior securities) except that the Portfolio may
borrow up to an additional 5% of its total assets for temporary
purposes; or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short
sales, when-issued and forward commitment transactions and
similar investment strategies. The Portfolio's obligations under
interest rate swaps are not treated as senior securities;
(3) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of fixed income
securities consistent with the Portfolio's investment objective
and policies or the acquisition of securities subject to
repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities
or the sale of its own shares the Portfolio may be deemed to be
an underwriter;
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<PAGE>
(5) invest for the purpose of exercising control over management of
any company other than issuers of collateralized mortgage
obligations;
(6) purchase real estate or interests therein other than Commercial
and Residential Mortgage-Backed Securities and similar
instruments;
(7) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable
law without the Portfolio becoming subject to registration with
the Commodity Futures Trading Commission as a commodity pool; or
(8) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, giving effect
to such sale, the market value of all securities sold short does
not exceed 25% of the value of the Portfolio's total assets and
the Portfolio's aggregate short sales of a particular class of
securities does not exceed 25% of the then outstanding securities
of that class.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President
Bell Atlantic Corporation and Chief Financial
1717 Arch Street Officer since February
47th Floor West 1995, Vice President and
Philadelphia, PA 19103 Chief Financial Officer
Age: from January 1991 -
February 1995, Bell Atlantic
Corporation (a diversified
telecommuni-cations company);
Chairman, President and Chief
Executive Officer from August 1989
-January 1991, Bell Atlantic
Enterprises International, Inc.;
Director, Group Iusacell, S.A. de
C.V.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
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 Trustee, United Way
08540 Princeton Area
Age: 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,
USX Corporation Vice Chairman and Chief
600 Grant Street Financial Officer
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: Accounting & Finance and Chief
Financial Officer from 1991 to
1994, Senior Vice President -
Finance and Treasurer from 1990 to
1991, USX Corporation (a
diversified company principally
engaged in energy and steel
businesses); Director, ACE
Limited; Trustee, Allegheny
General Hospital and Allegheny
Health, Education and Research
Foundation; Director, Marinette
Marine Corporation; Director,
Pittsburgh
</TABLE>
- ----------
/1/ This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-15-
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
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 K. Mellon Professor
Pennsylvania of Finance since April
Room 2344 1984, Director, Wharton
Steinberg Financial Institutions
Hall-Dietrich Hall Center, since July 1995,
Philadelphia, PA and Dean's Advisory Council Member
19104-6367 since July 1984, The Wharton
Age: School, University of
Pennsylvania; Associate Editor,
Journal of Banking and Finance
since June 1978; Associate Editor,
Journal of Economics and Business
since October 1979; Associate
Editor, Journal of Money, Credit
and Banking since January 1980;
Research Associate, New York
University Center for Japan-U.S.
Business and Economic Studies
since July 1989; Editorial
Advisory Board, Open Economics
Review since November 1990;
Director, The Zweig Fund and The
Zweig Total Return Fund; Director
of Municipal Fund for California
Investors, Inc., and Municipal
Fund for New York Investors, Inc.
David R. Wilmerding, Jr. Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: (investment advisers) since
February 1989; Director, Beaver
Management Corporation; Director,
Independence Square Income
Securities, Inc.; until September
1988, President, Treasurer and
Trustee, The Mutual
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
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.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age:
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" or "Distributor")
$10,000 annually and $275 per Portfolio for each full meeting of the Board that
they attend. 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"), Compass Distributors, Inc. ("CDI" and, collectively with PFPC and CCG,
the "Administrators"), or PNC Bank, National Association ("PNC Bank" or the
"Custodian") currently receives any compensation from the Fund. Drinker Biddle
& Reath, of which Mr. Jones is a partner, receives legal fees as counsel to the
Fund. As of the date of this Statement of Additional Information, the trustees
and officers of the Fund, as a group, owned less than 1% of the outstanding
shares of each Portfolio of the Fund.
-17-
<PAGE>
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1996:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL FUND COMPLEX/1/
NAME OF PERSON, POSITION FROM PART OF FUND BENEFITS UPON PAID TO
REGISTRANT EXPENSES RETIREMENT TRUSTEES
- ------------------------ ------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Philip E. Coldwell,/*/ $ 1,875 N/A N/A (4)/2/ $41,325
Trustee
Robert R. Fortune,/*/ $ 1,875 N/A N/A (6)/2/$61,325
Trustee
Rodney D. Johnson,/*/ $ 1,875 N/A N/A (6)/2/$53,325
Trustee
G. Willing Pepper,/*/ $ 3,125 N/A N/A (7)/2/$92,575
Former Chairman of
the Board
Anthony M. $38,025 N/A N/A (6)/2/$58,500
Santomero, Vice
Chairman of the
Board
David R. Wilmerding, $43,025 N/A N/A (7)/2/ $64,750
Jr., Chairman of the
Board
William O.
Albertini, Trustee** $31,150 N/A N/A (1)/2/ $31,150
Raymond J. Clark,
Trustee, President $31,150 N/A N/A (1)/2/ $31,150
and Treasurer**
Robert M. Hernandez,
Trustee** $31,150 N/A N/A (1)/2/ $31,150
==========================================================================================
</TABLE>
- ----------
/1/ A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
/2/ Total number of investment company boards trustee served on within the Fund
Complex.
-18-
<PAGE>
* 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.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law, shareholders
of a business trust may, under certain circumstances, be held personally liable
as partners for the obligations of the trust. However, the Fund's Declaration
of Trust provides that shareholders shall not be subject to any personal
liability in connection with the assets of the Fund for the acts or obligations
of the Fund, and that every note, bond, contract, order or other undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not personally liable thereunder. The Declaration of Trust provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason. The Declaration of Trust
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund, and shall
satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved or
with which he may be threatened by reason of his being or having been a trustee,
and that the Fund will indemnify officers, representatives and employees of the
Fund to the same extent that trustees are entitled to indemnification.
-19-
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENT. The advisory services provided by BlackRock and
the fees received by it for such services are described in the Prospectus. As
stated in the Prospectus, BlackRock may from time to time voluntarily waive its
advisory fees with respect to the Portfolio and may voluntarily reimburse the
Portfolio for expenses. In addition, if the total expenses borne by the
Portfolio in any fiscal year exceed the expense limitations imposed by
applicable state securities regulations, BlackRock 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 1/2% of average annual net assets in
excess of $100 million.
BlackRock renders advisory services to the Portfolio pursuant to an
Investment Advisory Agreement (the "Advisory Contract"). Under the Advisory
Contract, BlackRock is not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or the Portfolio in connection with the
performance of the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of BlackRock in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder. The Advisory Contract is terminable as to the Portfolio
by vote of the Board of Trustees or by the holders of a majority of the
outstanding voting securities of the Portfolio, at any time without penalty, on
60 days' written notice to BlackRock. BlackRock may also terminate its advisory
relationship with respect to the Portfolio, on 60 days' written notice to the
Fund. The Advisory Contract terminates automatically in the event of its
assignment.
For the period from April 26, 1996 through September 30, 1996, the
Portfolio paid $________ in advisory fees to BlackRock, and BlackRock waived
$_______ in expenses.
The Predecessor Portfolio was also advised by BlackRock. For the
period from April 1, 1996 through April 25, 1996, the Portfolio paid $_______ in
advisory fees to BlackRock, and BlackRock waived $______ in expenses. For the
fiscal period from July 1, 1995 to March 31, 1996 and the fiscal period from
October 6, 1994 (commencement of investment operations) through June 30,
-20-
<PAGE>
1995, the Predecessor Portfolio paid $213,047 and $189,677, respectively, in
investment advisory fees to BlackRock pursuant to the prior advisory agreement.
In addition, during the same periods, BlackRock waived $3,652 and $56,269,
respectively, in expenses.
ADMINISTRATION AGREEMENTS. The Fund has entered into a Co-
Administration Agreement with CCG and a separate Administration Agreement with
PFPC and CDI (the "Administration Agreements"). The Administrators have agreed
to maintain office facilities for the Fund, furnish the Fund with statistical
and research data, clerical, accounting, and bookkeeping services, and certain
other services required by the Fund.
The Administration Agreements provide that the Administrators will not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund or the Portfolio in connection with the performance of the
Administration Agreements, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard of their respective duties and obligations thereunder.
For the period from April 26, 1996 through September 30, 1996, the
Portfolio paid $______ in administrative fees to the Administrators, and the
Administrators waived fees totalling
$________.
During the periods from April 1, 1996 through April 25, 1996 and
January 13, 1996 through March 31, 1996, the Predecessor Portfolio paid $_______
and $8,620, respectively, in administrative fees to the Administrators, and the
Administrators waived fees totalling $_______ and $_______, respectively.
During the period from July 1, 1995 through January 12, 1996, the
Predecessor Portfolio received administrative services from PFPC. During that
period, the Predecessor Portfolio paid PFPC $55,878 in administrative fees
pursuant to a prior administrative agreement. Prior to July 1, 1995, the
Predecessor Portfolio received administrative services from State Street Bank
and Trust Company ("State Street"). During the fiscal period from October 6,
1994 (commencement of investment operations) through June 30, 1995, the
Predecessor Portfolio paid $32,948 in administrative fees to State Street
pursuant to a prior administration agreement.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank, National
Association ("PNC Bank") is custodian of the Fund's assets pursuant to a
custodian agreement (the "Custodian Agreement"). Under the Custodian Agreement,
PNC Bank or a sub-
-21-
<PAGE>
custodian (i) maintains a separate account or accounts in the name of the
Portfolio, (ii) holds and transfers portfolio securities on account of the
Portfolio, (iii) accepts receipts and makes disbursements of money on behalf of
the Portfolio, (iv) collects and receives all income and other payments and
distributions on account of the Portfolio's securities and (v) makes periodic
reports to the Board of Trustees concerning the Portfolio's operations. PNC Bank
is authorized to select one or more banks or trust companies to serve as sub-
custodian on behalf of the Fund, provided that, with respect to sub-custodians
other than sub-custodians for foreign securities, PNC Bank remains responsible
for the performance of all its duties under the Custodian Agreement and holds
the Fund harmless from the acts and omissions of any sub-custodian. The Chase
Manhattan Bank, N.A., State Street Bank and Trust Company, Barclays Bank PLC and
Citibank, N.A. serve as the Fund's sub-custodians.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon the Portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PNC Bank
is also entitled to out-of-pocket expenses and certain transaction charges.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems shares in
the Portfolio, (ii) addresses and mails all communications by the Portfolio to
record owners of its shares, including reports to shareholders, dividend and
distribution notices and proxy materials for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board of Trustees concerning the operations of the
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 Shares under the
Transfer Agency Agreement, PFPC is entitled to receive fees at the annual rate
of .03% of the average net asset value of outstanding Institutional Shares in
the Portfolio, plus per account fees and disbursements.
DISTRIBUTOR AND DISTRIBUTION PLAN. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of the Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares.
The Fund has adopted an Amended and Restated Distribution and Service
Plan (the "Plan") pursuant to Rule 12b-1 under the
-22-
<PAGE>
1940 Act on behalf of its Institutional Shares pursuant to which the
Distributor, CCG and other affiliates of PNC Bank 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 in connection with the
Portfolio's Institutional Shares out of its past profits or any additional
sources which are available to it. The Plan was approved by a majority of (i)
the trustees of the Fund and (ii) the trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan
(the "Rule 12b-1 Trustees"). The Fund is not required or permitted under the
Plan to make distribution payments to promote the sale of its Institutional
Shares; the Plan merely permits parties that receive fees from the Fund to make
such payments out of their own resources.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to the Portfolio at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Trustees or by a vote of the holders of a
majority of the outstanding shares of the Portfolio. The Plan may not be
amended materially without the approval of the Board of Trustees, including a
majority of the Rule 12b-1 Trustees, cast in person at a meeting called for that
purpose. Any modification to the Plan which would materially increase the costs
borne by the Portfolio for distribution purposes pursuant to the Plan must also
be submitted to the stockholders of the Portfolio for approval. In addition,
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.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities
for the Portfolio, the selection of brokers and dealers to effect the
transactions and the negotiation of prices and any brokerage commissions. The
securities in which the Portfolio invests are traded principally in the over-
the-counter market. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a mark-up to the dealer. Securities purchased in underwritten offerings
generally include, in the price, a fixed amount of compensation for the
manager(s), underwriter(s) and dealer(s). The Portfolio may also purchase
certain money market instruments directly from an issuer, in
-23-
<PAGE>
which case no commissions or discounts are paid. Purchases and sales of debt
securities on a stock exchange are effected through brokers who charge a
commission for their services.
The Adviser's primary considerations in selecting the manner of
executing securities transactions for the Portfolio will be prompt execution of
orders, the size and breadth of the market for the security, the reliability,
integrity and financial condition and execution capability of the firm, the size
of and difficulty in executing the order, and the best net price. There are
many instances when, in the judgment of the Adviser, more than one firm can
offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the
Adviser, absent special circumstances, to pay higher commissions to a firm
because it has supplied such services.
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Portfolio without receiving such information from
brokers; however, it considers access to such information to be an important
element of financial management. Although such information is considered
useful, its value is not determinable, as it must be reviewed and assimilated by
the Adviser, and does not reduce the Adviser's normal research activities in
rendering investment advice under the Advisory Contract. It is possible that
the Adviser's expenses could be materially increased if it attempted to purchase
this type of information or generate it through its own staff.
One or more of the other accounts which the Adviser manages may own
from time to time the same investments as the Portfolio. Investment decisions
for the Portfolio are made independently from those of such other accounts;
however, from time to time, the same investment decision may be made for more
than one company or account. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or sold
will be allocated among the companies and accounts on a good faith equitable
basis by the Adviser in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the Portfolio. In other cases,
however, the ability of the Portfolio to participate in volume transactions may
produce better execution for the Portfolio.
Although the Advisory Agreement contains no restrictions on portfolio
turnover, it is not the policy of the Portfolio to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Portfolio will not exceed 400%,
excluding
-24-
<PAGE>
securities having a maturity of one year or less. Because it is difficult to
predict accurately portfolio turnover rate, actual turnover may be higher or
lower. Higher portfolio turnover results in increased Portfolio expenses,
including brokerage commissions, dealer mark-ups and other transaction costs on
the sale of securities and on reinvestment in other securities. The Adviser will
monitor the tax status of the Portfolio under the Internal Revenue Code during
periods in which the annual turnover rate of the Portfolio exceeds 100%. To the
extent that increased portfolio turnover results in sales at a profit of
securities held less than three months, the Portfolio's ability to qualify as a
"regulated investment company" under the Internal Revenue Code may be affected.
See "Taxes" below.
For the period form April 26, 1996 through September 30, 1996, the
Portfolio paid no brokerage commissions. In addition, for the same period, the
portfolio turnover rate for the Portfolio was ___%. For the period from April
1, 1996 through April 25, 1996, the period from July 1, 1995 through March 31,
1996 and the period from October 6, 1994 (commencement of operations) through
June 30, 1995, the Predecessor Portfolio paid no brokerage commissions. In
addition, for the same periods, the portfolio turnover rate for the Predecessor
Portfolio was ___%, 119% and 215%, respectively.
The Fund is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held
by the Fund as of the end of its most recent fiscal year. As of September 30,
1996, the following Portfolios held the following securities:
PORTFOLIO SECURITY VALUE
- --------- -------- -----
-25-
<PAGE>
PURCHASE AND REDEMPTION INFORMATION
Institutional Shares of the 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.
MISCELLANEOUS. The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase of the 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 the 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 the Portfolio is obligated to redeem its shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for any one shareholder of the Portfolio.
Under the 1940 Act, the 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. (The 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 Prospectus, the Fund
may redeem shares involuntarily to reimburse the 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.
-26-
<PAGE>
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.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance
of shares of the Portfolio to the performance of other mutual funds and to stock
or other relevant indexes in advertisements or in communications to
shareholders, performance may be stated in terms of total return. Under the
rules of the SEC, funds advertising performance must include total return quotes
calculated according to the following formula:
ERV /to the first power divided by 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.
Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the specified periods that would
equate the initial amount invested to the ending redeemable value.
-27-
<PAGE>
The total returns for the Portfolio include performance information for the
Predecessor Portfolio for periods prior to April 26, 1996, the date on which the
assets and liabilities of the Predecessor Portfolio were transferred to the
Portfolio. Based on the foregoing, the total returns for the Portfolio were as
follows:
================================================================================
================================================================================
AGGREGATE TOTAL Average Annual
RETURN Total Return
--------------- -----------------
FOR THE
TWELVE MONTHS From Commencement
ENDED of Operations to
9/30/96 9/30/96/(1)/
--------------- -----------------
- --------------------------------------------------------------------------------
% %
--------- --------
================================================================================
/(1)/ Predecessor Portfolio commenced investment operations on October
6, 1994.
The Portfolio may also from time to time include in advertisements and
communications to shareholders a total return figure that is not calculated
according to the formula set forth above in order to compare more accurately the
performance of the Portfolio's shares with other performance measures. For
example, in comparing the total return of the Portfolio's shares with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of the
Salomon Broad Investment Grade Index, as appropriate, the Portfolio may
calculate the aggregate total return for its shares for the period of time
specified in the advertisement or communication by assuming the investment of
$10,000 in the Portfolio's shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value.
YIELD. The Portfolio may advertise its yield on its Institutional Shares.
Under the rules of the SEC, the Portfolio must calculate yield using the
following formula:
-28-
<PAGE>
a-b
YIELD = 2[(----- +1)/to the sixth power/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the 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.
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) the Portfolio may elect either (i) to amortize the discount
-29-
<PAGE>
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.
The annualized yield for the 30-day period ended September 30, 1996 for the
Portfolio was ___%.
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to
providing performance information that demonstrates the total return or yield of
Institutional Shares of the 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. As
illustrated below, the Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in the Portfolio.
[CHART ILLUSTRATING THE COMPOUNDING EFFECT OF DIVIDEND REINVESTMENTS]
-30-
<PAGE>
MISCELLANEOUS. Yield on shares of the Portfolio will fluctuate daily and
does not provide a basis for determining future yield. Because yield will
fluctuate, it cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one fund to another,
consideration should be given to each fund's investment policies, including the
types of investments made, lengths of maturities of the portfolio securities,
and whether there are any special account charges which may reduce the effective
yield. The fees which may be imposed by Authorized Dealers and other
institutions on their customers are not reflected in the calculations of total
returns or yields for the Portfolio.
As stated above, the Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment in
the Portfolio are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of the Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of the Portfolio, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Portfolio), as well as the
views of BlackRock as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to the Portfolio. The Fund may
also include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of the
Portfolio. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in the
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Portfolio. Such advertisements or communications may include symbols, headlines
or other material which highlight or summarize the information discussed in more
detail therein.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussion here and in
the Prospectuses is not intended as a substitute for careful tax planning.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Part I of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, the 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, the Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investment in such stock,
securities, or currencies (the "Income Requirement") and derive less than 30% of
its gross income from the sale or other disposition of stock, securities and
certain other investments (including securities and forward foreign currency
exchange contracts, but only to the extent that such contracts are not directly
related to the 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 the Portfolio's principal business of
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investing in stock or securities will not satisfy the Income Requirement.
Interest (including original issue discount and "accrued market discount")
received by the 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 the Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any taxable
distribution from the Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date.
The Portfolio intends to distribute to shareholders any of its excess of
net long-term capital gain over net short-term capital loss ("net capital gain")
for each taxable year. Net capital 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 net capital 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.
It is expected that distributions from the Portfolio will generally not
qualify for the "dividends received" deduction for corporate shareholders.
Ordinary income of individuals will be taxable at a maximum marginal rate
of 39.6%, but because of limitations on itemized
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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%. Investors should be aware that any loss realized
upon the sale, exchange or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent any capital gain dividends
have been paid with respect to such shares.
Generally, futures contracts held by the Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "mark-to-market." Forty percent of any gain or loss resulting from
such constructive sale will be treated as short-term capital gain or loss and
60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized by
the Portfolio in a subsequent sale or other disposition of those futures
contracts will be adjusted to reflect any capital gain or loss taken into
account by the Portfolio in a prior year as a result of the constructive sale of
the contracts. With respect to futures contracts to sell, which will be
regarded as parts of 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, the
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, the 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
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losses would be recognized and offset on a periodic basis during the taxable
year. Under either election, the 40-60 rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50% of any net gain may be treated as long-term
and no more than 40% of any net loss may be treated as short-term. Options on
futures contracts generally receive Federal tax treatment similar to that
described above.
Under the Federal income tax provisions applicable to regulated investment
companies, less than 30% of a company's gross income for a taxable year must be
derived from gains realized on the sale or other disposition of securities held
for less than three months. The Internal Revenue Service has issued a private
letter ruling with respect to certain other investment companies to the
following effect: gains realized from a futures contract to purchase or to sell
will be treated as being derived from a security held for three months or more
regardless of the actual period for which the contract is held if the gain
arises as a result of a constructive sale of the contract at the end of the
taxable year as described above, and will be treated as being derived from a
security held for less than three months only if the contract is terminated (or
transferred) during the taxable year (other than by reason of mark-to-market)
and less than three months elapses between the date the contract is acquired and
the termination date. Although private letter rulings are not binding on the
Internal Revenue Service with respect to the Portfolio, the Fund believes that
the Internal Revenue Service would take a comparable position with respect to
the Portfolio. In determining whether the 30% test is met for a taxable year,
increases and decreases in the value of the Portfolio's futures contracts and
securities that qualify as part of a "designated hedge," as defined in the Code,
may be netted.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The 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.
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The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolio each year.
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 the Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
Portfolio or class) may elect all of the trustees. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect trustees.
Except as set forth above, the trustees will continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust
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provides that meetings of the shareholders of the Fund will be called by the
trustees upon the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote.
The 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.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of each
person that on December ___, 1996 owned of record or beneficially 5% or more of
the outstanding shares of the Portfolio was as follows: Ameritech Pension Trust,
c/o Harris Trust & Savings Bank, 111 West Monroe 5W, Chicago, IL 60603,
______%.
On December ___, 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
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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. PIMC, BlackRock, CCG, PFPC and PNC Bank are
subject to such banking laws and regulations.
PIMC, BlackRock, CCG, PFPC and PNC Bank believe they may perform the
services for the Fund contemplated by their respective agreements with the Fund
without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent these companies from continuing
to perform such services for the Fund. If such were to occur, it is expected
that the Board of Trustees would recommend that the Fund enter into new
agreements or would consider the possible termination of the Fund. Any new
advisory or sub-advisory agreement would be subject to shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" means, with
respect to the approval of the Portfolio's investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the lesser of
(1) 67% of the shares of the Portfolio represented at a meeting at which the
holders of more than 50% of the outstanding shares of the Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
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FINANCIAL STATEMENTS
The audited financial statements for the Portfolio contained in its
Annual Report to Shareholders for the period ended September 30, 1996 (the "1996
Annual Report") are incorporated by reference in this Statement of Additional
Information. No other parts of the 1996 Annual Report are incorporated by
reference herein. The financial statements included in the 1996 Annual Report
have been audited by the Fund's independent accountant, Coopers & Lybrand
L.L.P., except for the financial statements and financial highlights covering
the periods ended March 31, 1996 and June 30, 1995 which have been audited by
other auditors. The reports of Coopers & Lybrand, L.L.P. 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 Annual Report may be obtained at no
charge by telephoning the Distributor at the telephone number appearing on the
front page of this Statement of Additional Information.
The financial statements included in the 1996 Annual Report for the
period from October 6, 1994 through June 30, 1995 and for the nine month period
ended March 31, 1996 have been audited by the former independent accountants of
the Predecessor Portfolio, Deloitte & Touche, L.L.P., 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
L.L.P. and Deloitte & Touche, L.L.P. given upon their authority as experts in
accounting and auditing.
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COMPASS CAPITAL FUNDS/SM/
(FORMERLY, THE PNC(R) FUND)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A of the Registration Statement are the
following tables:
(i) Audited Financial Highlights for the Money Market, U.S.
Treasury Money Market, Municipal Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, Value Equity, Growth Equity,
Small Cap Value Equity, Small Cap Growth Equity,
International Equity, International Emerging Markets,
Select Equity, Index Equity, Balanced, Intermediate
Government Bond, Intermediate Bond, Managed Income,
Tax-Free Income, Pennsylvania Tax-Free Income,
Government Income and Ohio Tax-Free Income Portfolios
for the fiscal years ended September 30, 1996,
September 30, 1995, September 30, 1994, September 30,
1993, September 30, 1992, September 30, 1991 and
September 30, 1990.
(ii) Audited Financial Highlights for the International
Bond, New Jersey Tax-Free Income and New Jersey
Municipal Money Market Portfolios for the periods ended
September 30, 1996 and January 31, 1996, and for the
fiscal years ended February 28, 1995, February 28,
1994, February 28, 1993 and February 29, 1992.
(iii) Audited Financial Highlights for the Low Duration Bond
and Core Bond Portfolios for the periods ended
September 30, 1996 and March 31, 1996, and for the
fiscal years ended June 30, 1995, June 30, 1994 and
June 30, 1993.
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(iv) Audited Financial Highlights for the Multi-Sector
Mortgage Securities Portfolio III for the periods ended
September 30, 1996 and March 31, 1996, and for the
period ended June 30, 1995.
(2) Incorporated by reference into Part B of the Registration
Statement are the following audited financial statements:
(i) With respect to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, New Jersey Municipal
Money Market and Virginia Municipal Money Market
Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1996;
Statements of Net Assets -September 30, 1996;
Statements of Operations for the year or period
ended September 30, 1996;
Statements of Changes in Net Assets for the year
or period ended September 30, 1996;
Notes to Financial Statements.
(ii) With respect to the Value Equity, Growth Equity, Small
Cap Growth Equity, Select Equity, Index Equity, Small
Cap Value Equity, International Equity, International
Emerging Markets and Balanced Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1996;
Statements of Net Assets (all Portfolios except
International Equity and International Emerging
Markets Portfolios) - September 30, 1996;
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Schedules of Investments with respect to the
International Equity and International Emerging
Markets Portfolios - September 30, 1996;
Statements of Operations for the year ended
September 30, 1996;
Statements of Changes in Net Assets for the year
ended September 30, 1996;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Intermediate Bond,
Government Income, Low Duration Bond, Core Bond, New
Jersey Tax-Free Income and International Bond
Portfolios:
Report of Independent Accountants (Coopers &
Lybrand L.L.P.) for the fiscal year ended
September 30, 1996;
Schedules of Investments and Statements of Assets
and Liabilities (all Portfolios except
Pennsylvania Tax-Free Income and Ohio Tax-Free
Income Portfolios) -September 30, 1996;
Statements of Net Assets with respect to the
Pennsylvania Tax-Free Income and Ohio Tax-Free
Income Portfolios - September 30, 1996;
Statements of Operations for the year or periods
ended September 30, 1996;
Statements of Changes in Net Assets for the year
or periods ended September 30, 1996 and 1995 and
for the period ended March 31, 1996 for the Low
Duration Bond (formerly the Short Government Bond)
Portfolio and Core Bond Portfolio;
Financial highlights for all periods presented
except for the periods ended June 30, 1995 and
prior periods for the Short Government Bond and
Core Bond Portfolios.
Notes to Financial Statements.
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(iv) With respect to the Low Duration Bond Portfolio
(formerly the Short Government Bond Portfolio) and Core Bond
Portfolio
Report of Independent Accountants (Deloitte &
Touche L.L.P.) for the fiscal year ended June 30,
1995 as it relates to the Statement of Changes in
Net Assets for the year ended June 30, 1995 and
the Financial Highlights for the years or period
ended June 30, 1995, 1994 and 1993 .
(v) With respect to The Multi-Sector Mortgage Securities
Portfolio III:
Report of Independent Accountants (Coopers &
Lybrand L.L.P.) for the fiscal year ended
September 30, 1996 as it relates to:
The Schedule of Investments--September 30, 1996
Statement of Assets and Liabilities--September 30, 1996
Statement of Operations for the period ended September
30, 1996
Statement of Changes in Net Assets and Financial
Highlights for the period ended September 30, 1996
Reports of Independent Accountants (Deloitte & Touche
L.L.P) for the fiscal year ended June 30, 1995 and the
period ended March 31, 1996 as it relates to:
Statement of Operations for the period ended March 31,
1996
Statement of Changes in Net Assets and Financial
Highlights for the periods ended March 31, 1996 and June
30, 1995
(vi) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Report of Independent Accountants for the fiscal
year ended November 30, 1995;
Statement of Net Assets - November 30, 1995;
Statement of Operations for the year ended
November 30, 1995;
Statement of Changes in Net Assets for the year
ended November 30, 1995;
Notes to Financial Statements.
(vii) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Statement of Net Assets - September 30, 1996
(unaudited);
Statement of Operations for the ten months ended
September 30, 1996 (unaudited);
Statement of Changes in Net Assets for the ten
months ended September 30, 1996 (unaudited);
Notes to Financial Statements (unaudited).
(b) Exhibits:
(1) (a) Declaration of Trust of the Registrant dated December
22, 1988 is incorporated herein by reference to Exhibit
(1) of Registrant's Registration Statement on Form N-1A
filed on December 23, 1988.
(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.
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(c) Amendment No. 2 to the Declaration of Trust dated
December 23, 1993 is incorporated herein by reference
to Exhibit (1)(c) of Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A filed
on July 8, 1994.
(d) Amendment No. 3 to the Declaration of Trust dated
January 5, 1996 is incorporated by reference to Exhibit
1(d) of Post-Effective Amendment No. 23 to Registrant's
Registration Statement on Form N-1A (No. 33-26305)
filed on October 18, 1996 ("Post-Effective Amendment
No. 23").
(2) Registrant's Code of Regulations is incorporated herein
by reference to Exhibit (2) of Registrant's
Registration Statement on Form N-1A, filed on December
23, 1988.
(3) None.
(4) Sections V, VIII and IX of Registrant's Declaration of
Trust dated December 22, 1988 is incorporated herein by
reference to Exhibit (1) of Registrant's Registration
Statement on Form N-1A filed on December 23, 1988;
Article II of Registrant's Code of Regulations is
incorporated herein by reference to Exhibit (2) of
Registrant's Registration Statement on Form N-1A filed
on December 23, 1988.
(5) (a) Investment Advisory Agreement between Registrant and
PNC Asset Management Group, Inc. relating to all
Portfolios except the Multi-Sector Mortgage Securities
Portfolio III and Index Equity Portfolio is
incorporated herein by reference to Exhibit (5)(a) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(b) Investment Advisory Agreement between Registrant and
BlackRock Financial Management, Inc. with respect to
the Multi-Sector Mortgage Securities
Portfolio III is incorporated herein by reference to
Exhibit (5)(b) of Post-
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Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(c) Form of Amendment No. 1 to Investment Advisory
Agreement between Registrant and PNC Asset Management
Group, Inc. with respect to the Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios is incorporated by
reference to Exhibit 5(c) of Post-Effective Amendment
No. 23.
(d) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and BlackRock Financial Management, Inc.
with respect to the Managed Income, Tax-Free Income,
Intermediate Government Bond, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Low Duration Bond,
Intermediate Bond, Government Income, New Jersey Tax-
Free Income and Core Bond Portfolios is incorporated
herein by reference to Exhibit (5)(c) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(e) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and Provident Capital Management, Inc. with
respect to the Value Equity, Small Cap Value Equity and
Select Equity Portfolios is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(f) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with
respect to the Growth Equity and Small Cap Growth
Equity Portfolios is incorporated herein by reference
to Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(g) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Institutional Management
Corporation with respect to the Money Market, U.S.
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Treasury Money Market, Municipal Money Market,
Pennsylvania Municipal Money Market, Ohio Municipal
Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey
Municipal Money Market Portfolios is incorporated
herein by reference to Exhibit (5)(c) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(h) Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and CastleInternational Asset Management
Limited with respect to the International Equity and
International Emerging Markets Portfolios is
incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(i) Sub-Advisory Agreement among PNC Asset Management
Group, Inc., Provident Capital Management, Inc. and
BlackRock Financial Management, Inc. with respect to
the Balanced Portfolio is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(j) Form of Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and Provident Capital
Management, Inc. with respect to the Mid-Cap Value
Equity Portfolio is incorporated by reference to
Exhibit 5(k) of Post-Effective Amendment No. 23.
(k) Form of Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and PNC Equity Advisors Company
with respect to the Mid-Cap Growth Equity Portfolio is
incorporated by reference to Exhibit 5(l) of Post-
Effective Amendment No. 23.
(l) Form of Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and
C-7
<PAGE>
BlackRock Financial Management, Inc. with respect to
the International Bond Portfolio.
(6) (a) Distribution Agreement between Registrant and Provident
Distributors, Inc. dated January 31, 1994 is
incorporated herein by reference to Exhibit (6)(a) of
Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A filed on July 8,
1994.
(b) Appendix A to the Distribution Agreement between
Registrant and Compass Distributors, Inc. is
incorporated herein by reference to Exhibit (6)(b) of
Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A filed on July 29,
1996.
(c) Form of Appendix A to the Distribution Agreement
between Registrant and Compass Distributors, Inc. is
incorporated by reference to Exhibit 6(c) of Post-
Effective Amendment No. 23.
(d) Amendment No. 2 to the Distribution Agreement between
Registrant and Provident Distributors, Inc. dated
October 18, 1994 is incorporated herein by reference to
Exhibit 6(c) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(e) Amendment No. 3 to the Distribution Agreement between
Registrant and Provident Distributors, Inc. is
incorporated herein by reference to Exhibit (6)(d) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(7) None.
(8) (a) Custodian Agreement dated October 4, 1989 between
Registrant and PNC Bank, National Association is
incorporated herein by reference to Exhibit 8(a) of
Post-Effective Amendment No. 1 to
C-8
<PAGE>
Registrant's Registration Statement on Form N-1A filed
on December 29, 1989.
(b) Amendment No. 1 to Custodian Agreement between
Registrant and PNC Bank, National Association is
incorporated herein by reference to Exhibit 8(b) of
Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A filed on December
13, 1991.
(c) Amendment No. 2 dated March 1, 1993 to Custodian
Agreement between Registrant and PNC Bank, National
Association with respect to the Short-Term Bond,
Intermediate-Term Bond, Core Equity, Small Cap Growth
Equity and North Carolina Municipal Money Market
Portfolios is incorporated herein by reference to
Exhibit (8)(c) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A filed
on November 10, 1993.
(d) Appendix B to Custodian Agreement dated October 4, 1989
between Registrant and PNC Bank, National Association
is incorporated herein by reference to Exhibit (8)(d)
of Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A filed on July 29,
1996.
(e) Form of Appendix B to Custodian Agreement dated October
4, 1989 between Registrant and PNC Bank, National
Association is incorporated by reference to Exhibit
8(e) of Post-Effective Amendment No. 23.
(f) Sub-Custodian Agreement dated April 27, 1992 among the
Registrant, PNC Bank, National Association and The
Chase Manhattan Bank is incorporated herein by
reference to Exhibit (8)(e) of Post-Effective Amendment
No. 10 to Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(g) Global Sub-Custody Agreement between Barclays Bank PLC
and PNC Bank, National Association dated October 28,
1992 is
C-9
<PAGE>
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.
(h) Custodian Agreement between State Street Bank and Trust
Company and PNC Bank, National Association dated June
13, 1983 is incorporated herein by reference to Exhibit
(8)(f) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(i) Amendment No. 1 to Custodian Agreement between State
Street Bank and Trust Company and PNC Bank, National
Association dated November 21, 1989 is incorporated
herein by reference to Exhibit (8)(g) of Post-Effective
Amendment No. 14 to Registrant's Registration Statement
on Form N-1A filed on January 18, 1995.
(j) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to the Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit 8(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(k) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to the Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Index Equity and Small Cap Value
Equity Portfolios is incorporated herein by reference
to Exhibit (8)(e) of Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A filed
on December 1, 1992.
(l) Letter Agreement dated March 1, 1993 between Registrant
and PNC Bank, National Association relating to
C-10
<PAGE>
custodian services with respect to the North Carolina
Municipal Money Market, Short-Term Bond, Intermediate-
Term Bond, Small Cap Growth Equity and Core Equity
Portfolios is incorporated herein by reference to
Exhibit (8)(h) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A filed
on November 10, 1993.
(9) (a) Administration Agreement among Registrant, Compass
Distributors, Inc. and PFPC Inc. is incorporated herein
by reference to Exhibit (9)(a) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(b) Forms of Appendix A and Appendix B to Administration
Agreement among Registrant, Compass Distributors, Inc.
and PFPC Inc. is incorporated by reference to Exhibit
9(b) of Post-Effective Amendment No. 23.
(c) Co-Administration Agreement between Registrant and
Compass Capital Group, Inc. is incorporated herein by
reference to Exhibit (9)(b) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(d) Form of Appendix A to Co-Administration Agreement
between Registrant and Compass Capital Group, Inc. is
incorporated by reference to Exhibit 9(d) of Post-
Effective Amendment No. 23.
(e) Transfer Agency Agreement dated October 4, 1989 between
Registrant and PFPC Inc. is incorporated herein by
reference to Exhibit 9(e) of Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-
1A filed on December 29, 1989.
(f) Amendment No. 1 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Tax-Free Income Portfolio is
incorporated herein by reference to
C-11
<PAGE>
Exhibit 9(h) of Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A filed
on February 5, 1992.
(g) Amendment No. 2 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Pennsylvania Municipal Money Market,
Ohio Municipal Money Market, Intermediate Government,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Value Equity, Index Equity and Small Cap Value Equity
Portfolios is incorporated herein by reference to
Exhibit 9(h) of Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A filed
on December 13, 1991.
(h) Amendment No. 3 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Short-Term Bond, Intermediate-Term
Bond, Core Equity, Small Cap Growth Equity and North
Carolina Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit (9)(e) of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A filed on November
10, 1993.
(i) Amendment No. 4 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to Series B Investor Shares of the Money
Market, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Growth Equity, Index Equity,
Small Cap Value Equity, Intermediate-Term Bond, Small
Cap Growth Equity, Core Equity, International Fixed
Income, Government Income, International Emerging
Markets, International Equity and Balanced Portfolios
is incorporated herein by reference to Exhibit (9)(i)
of Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A filed on January
18, 1995.
(j) Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is
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<PAGE>
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.
(k) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is incorporated by reference
to Exhibit 9(k) of Post-Effective Amendment No. 23.
(l) Trademark License Agreement between Registrant and PNC
Bank Corp. is incorporated herein by reference to
Exhibit 9(h) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed
on December 29, 1989.
(10) Opinion and Consent of Counsel./1/
(11) (a) Consent of Drinker Biddle & Reath.
(b) Consent of Deloitte & Touche LLP.
(c) Consent of Coopers & Lybrand, L.L.P.
(12) None.
(13) (a) Purchase Agreement between Registrant and Shearson
Lehman Hutton Inc. ("Shearson") relating to Classes A-
1, B-1, C-1, D-2, E-2, F-2 and G-2 is incorporated
herein by reference to Exhibit 13(a) of Post-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-1A filed on December 29, 1989.
(b) Purchase Agreement between Registrant and Shearson
relating to shares of Class H-2 is incorporated herein
by reference to Exhibit 13(b) of Post-Effective
Amendment No. 2 to Registrant's
- -------------------
/1/ Filed on November 26, 1996 under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
C-13
<PAGE>
Registration Statement on Form N-1A filed on April 30,
1990.
(c) Purchase Agreement between Registrant and Shearson
relating to shares of Class I-1, Class I-2, Class J-1,
Class J-2, Class K-2, Class L-2, Class M-2, Class N-2,
Class O-2 and Class P-2 is incorporated herein by
reference to Exhibit 13(c) of Post-Effective Amendment
No. 4 to Registrant's Registration Statement on Form N-
1A filed on December 13, 1991.
(d) Purchase Agreement between Registrant and Shearson
relating to shares of Class D-1, Class E-1, Class F-1,
Class G-1, Class H-1, Class K-1, Class L-1, Class M-1,
Class N-1, Class O-1, Class P-1, Class A-2, Class B-2,
Class C-2, Class I-2, Class J-2, Class A-3, Class B-3,
Class C-3, Class D-3, Class E-3, Class F-3, Class G-3,
Class H-3, Class I-3, Class J-3, Class K-3, Class L-3,
Class M-3, Class N-3, Class O-3 and Class P-3 is
incorporated herein by reference to Exhibit (13)(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(e) Purchase Agreement between the Registrant and
Pennsylvania Merchant Group Ltd relating to shares of
Class Q-1, Class Q-2, Class Q-3, Class R-1, Class R-2,
Class R-3, Class S-1, Class S-2, Class S-3, Class T-1,
Class T-2, Class T-3, Class U-1, Class U-2 and Class U-
3 is incorporated herein by reference to Exhibit
(13)(e) of Post-Effective No. 10 to Registrant's
Registration Statement on Form N-1A as filed on
November 10, 1993.
(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
C-14
<PAGE>
W-4, Class X-4, Class Y-4 is incorporated herein by
reference to Exhibit (13)(f) of Post-Effective
Amendment No. 14 to Registrant's Registration Statement
on Form N-1A filed on January 18, 1995.
(g) Purchase Agreement dated February 1, 1994 between the
Registrant and Provident Distributors, Inc. relating to
shares of Class V-1, Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3 is incorporated
herein by reference to Exhibit (13)(g) of Post-
Effective Amendment No. 15 to Registrant's Registration
Statement on Form N-1A filed on May 11, 1995.
(h) Purchase Agreement dated August 1, 1995 between
Registrant and Provident Distributors, Inc. relating to
shares of Class Z-1, Class Z-2 and Class Z-3 is
incorporated herein by reference to Exhibit (13)(h) of
Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A filed on May 11,
1995.
(i) Purchase Agreement between Registrant and Provident
Distributors, Inc. relating to shares of Class AA-1,
Class AA-2, Class AA-3, Class AA-4 and Class AA-5;
Class BB-1, Class BB-2, Class
BB-3, Class BB-4 and Class BB-5; Class CC-3; Class A-5,
Class B-4, Class B-5, Class C-4, Class C-5, Class I-4,
Class I-5, Class J-4, Class J-5, Class Q-4, Class Q-5,
Class V-4, Class V-5, Class Z-4 and Class Z-5; Class X-
1 and Class X-3; and Class D-5, E-5, F-5, G-5, H-5, K-
5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-
5 and Y-5 is incorporated by reference to Exhibit 13(i)
of Post-Effective Amendment No. 23.
(j) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to shares of Class
DD-1, Class DD-2, Class DD-3, Class DD-4 and
C-15
<PAGE>
DD-5; and Class EE-1, Class EE-2, Class EE-3, Class EE-
4 and Class EE-5 is incorporated by reference to
Exhibit 13(j) of Post-Effective Amendment No. 23.
(14) None.
(15) (a) Amended and Restated Distribution and Service Plan for
Service, Series A Investor, Series B Investor, Series C
Investor and Institutional Shares is incorporated
herein by reference to Exhibit (15) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(b) Form of Appendix A to Amended and Restated Distribution
and Service Plan is incorporated by reference to
Exhibit 15(b) of Post-Effective Amendment No. 23.
(16) Schedules for computation of performance quotations are
incorporated herein by reference to Exhibit (16) of
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A filed on February
5, 1992.
(18) Plan Pursuant to 18f-3 for Operation of a Multi-Class
Distribution System is incorporated herein by reference
to Exhibit (18) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(24) (a) Registrant's Annual Report dated September 30, 1996 is
incorporated herein by reference to Registrant's
filing including such Annual Report and filed on
November 29, 1996 (Accession Nos. 0000935069-000160 and
0000935069-000163).
(b) Annual Report for The DFA Investment Trust Company
("DFA") (File No. 811-7436) dated November 30, 1995
with respect to the U.S. Large Company Series
is incorporated herein by reference to
C-16
<PAGE>
DFA's filing including such Annual Report and filed on
January 26, 1996 (Accession No. 0000950116-96-000032).
(c) Unaudited Financial Statements for the Ten Months Ended
September 30, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant is controlled by its Board of Trustees.
Item 26. Number of Holders of Securities
Compass Distributors, Inc. has provided the initial capitalization for
and holds all of the outstanding shares of beneficial interest of the following
classes as of November 30, 1996: B-4, B-5, C-4, C-5, D-5, E-5, F-4, F-5, G-5,
H-5, I-4, I-5, J-4, J-5, L-5, M-5, P-5, Q-4, Q-5, R-5, S-4, S-5, V-2, V-4, V-5,
X-1, X-3, X-5, Y-5, Z-4, Z-5, AA-3, AA-5, BB-5, DD-1, DD-2, DD-3, DD-4, DD-5,
EE-1, EE-2, EE-3, EE-4 and EE-5.
C-17
<PAGE>
With regard to the other classes of shares, the following information
is as of November 30, 1996:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A-1 605
Class B-1 187
Class C-1 57
Class D-1 528
Class E-1 105
Class F-1 7
Class G-1 468
Class H-1 94
Class I-1 2
Class J-1 28
Class K-1 2
Class L-1 2
Class M-1 82
Class N-1 3,271
Class O-1 1
Class P-1 9
Class Q-1 4
Class R-1 680
Class S-1 1
Class T-1 354
Class U-1 7
Class V-1 2
Class W-1 112
Class Y-1 9
Class Z-1 91
Class AA-1 126
Class BB-1 866
Class A-2 654
Class B-2 71
Class C-2 6
Class D-2 451
Class E-2 1,796
Class F-2 248
Class G-2 631
Class H-2 149
Class I-2 3
Class J-2 53
Class K-2 115
Class L-2 31
Class M-2 404
Class N-2 578
Class O-2 331
Class P-2 629
Class Q-2 3
Class R-2 31
Class S-2 32
</TABLE>
C-18
<PAGE>
<TABLE>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class T-2 748
Class U-2 86
Class W-2 11
Class X-2 39
Class Y-2 109
Class Z-2 20
Class AA-2 10
Class BB-2 12
Class A-3 16
Class B-3 3
Class C-3 2
Class D-3 19
Class E-3 9
Class F-3 23
Class G-3 22
Class H-3 4
Class I-3 7
Class J-3 2
Class K-3 8
Class L-3 4
Class M-3 1
Class N-3 38
Class O-3 8
Class P-3 38
Class Q-3 14
Class R-3 39
Class S-3 10
Class T-3 73
Class U-3 21
Class V-3 10
Class W-3 2
Class Y-3 10
Class Z-3 1
Class BB-3 101
Class CC-3 2
Class A-4 2
Class D-4 389
Class E-4 844
Class G-4 543
Class H-4 6
Class K-4 2
Class L-4 9
Class M-4 265
Class N-4 482
Class O-4 362
Class P-4 406
Class R-4 1
Class T-4 1,263
Class U-4 189
Class W-4 10
</TABLE>
C-19
<PAGE>
<TABLE>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class X-4 621
Class Y-4 91
Class BB-4 115
Class A-5 1
Class N-5 2
Class 0-5 77
Class P-5 2
Class T-5 48
Class U-5 3
Class W-5 6
</TABLE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit (6)(a). Indemnification of PFPC Inc. and Compass
Distributors, Inc. in their capacity as co-administrators is provided for in
Section 7 of the Administration Agreement incorporated by reference herein as
Exhibit 9(a). Indemnification of Registrant's Custodian and Transfer Agent is
provided for, respectively, in Section 22 of the Custodian Agreement
incorporated by reference herein as Exhibit 8(a) and Section 17 of the Transfer
Agency Agreement incorporated by reference herein as Exhibit 9(e).
Indemnification of Compass Capital Group, Inc. in its capacity as co-
administrator as provided for in Section 7 of the Co-Administration Agreement
incorporated by reference herein as Exhibit 9(c). Registrant intends to obtain
from a major insurance carrier a trustees' and officers' liability policy
covering certain types of errors and omissions. In addition, Section 9.3 of the
Registrant's Declaration of Trust incorporated by reference herein as Exhibit
1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives and Employees.
-------------------------------------------------------------------
The Trust shall indemnify each of its Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while as a Trustee or thereafter, by reason
of his being or having been such a Trustee except with respect to any matter
------
as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties,
provided that as to any matter disposed of by a compromise payment by such
--------
person, pursuant to a consent decree or otherwise, no indemnification either
for said payment or for
C-20
<PAGE>
Title of Class Number of Record Holders
-------------- ------------------------
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to
the effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of bad faith had
been adjudicated, it would in the opinion of such counsel have been
adjudicated in favor of such person. The rights accruing to any person
under these provisions shall not exclude any other right to which he may be
lawfully entitled, provided that no person may satisfy any right of
--------
indemnity or reimbursement hereunder except out of the property of the
Trust. The Trustees may make advance payments in connection with the
indemnification under this Section 9.3, provided that the indemnified person
--------
shall have given a written undertaking to reimburse the Trust in the event
it is subsequently determined that he is not entitled to such
indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having
C-21
<PAGE>
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
(a) PNC Asset Management Group, Inc. ("PAMG") is an indirect wholly-
owned subsidiary for PNC Bank Corp. PAMG was organized in 1994 for the purpose
of providing advisory services to investment companies. The list required by
this Item 28 of officers and directors of PAMG, together with information as to
any other business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years, is
incorporated by reference to Schedules A and D of Form ADV, filed by PAMG
pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-47710).
(b) PNC Institutional Management Corporation ("PIMC") is an indirect
wholly-owned subsidiary of PNC Bank Corp. The list required by this Item 28 of
officers and directors of PIMC, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by PIMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-13304).
(c) Provident Capital Management, Inc. ("PCM") is an indirect wholly-
owned subsidiary of PNC Bank Corp. PCM currently offers investment advisory
services to institutional investors such as pension and profit-sharing plans or
trusts, insurance companies and banks. The list required by this Item 28 of
officers and directors of PMC, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by PMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-1438).
(d) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
wholly-owned subsidiary of PNC Bank Corp.
C-22
<PAGE>
BlackRock currently offers investment advisory services to institutional
investors such as pension and profit-sharing plans or trusts, insurance
companies and banks. The list required by this Item 28 of officers and
directors of BlackRock, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by BlackRock pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-48433).
(e) PNC Equity Advisors Company ("PEAC") is an indirect wholly-owned
subsidiary of PNC Bank Corp. PEAC currently offers investment advisory services
to institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. The list required by this Item 28 of officers
and directors of PEAC, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by PEAC pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-47711).
(f) CastleInternational Asset Management Limited
("CastleInternational") is an indirect wholly-owned subsidiary of PNC Bank Corp.
The list required by this Item 28 of officers and directors of
CastleInternational, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by CastleInternational pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-51087).
Item 29. Principal Underwriter
(a) Not applicable.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Compass Distributors, Inc. is incorporated by
reference to Schedule A of FORM BD filed by Compass Distributors, Inc. with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 (File No. 8-48775).
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) PNC Bank, National Association, Broad and Chestnut Streets,
Philadelphia, Pennsylvania
C-23
<PAGE>
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 adviser and sub-adviser).
(7) PNC Equity Advisors Company, 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
(8) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its
functions as co-administrator, transfer agent and dividend
disbursing agent).
(9) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas,
New York, New York 10019 (records relating to its function
as sub-custodian).
(10) State Street Bank and Trust Company, P.O. Box 1631, Boston,
Massachusetts (records relating to its function as sub-
custodian).
(11) Barclays Bank PLC, 75 Wall Street, New York, New York 10265
(records relating to its function as sub-custodian).
C-24
<PAGE>
(12) Compass Capital Group, Inc., 345 Park Avenue, New York, New
York 10154 (records relating to its functions as co-
administrator).
(13) CastleInternational Asset Management Limited, 7 Castle
Street, Edinburgh, Scotland, EH2 3AH (records relating to
its functions as investment sub-adviser).
(14) Citibank, N.A. 111 Wall Street, 23rd Floor, Zone 6, New
York, NY 10043 (records relating to its functions as sub-
custodian).
(15) Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496
(Registrant's declaration of trust, code of regulations and
minute books).
Item 31. Management Services
None.
Item 32. Undertakings
(a) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
(b) Registrant undertakes to file a Post-Effective Amendment with respect
to the Mid-Cap Value Equity and Mid-Cap Growth Equity Portfolios using
financial statements which need not be certified within four to six
months from the effective date of this Post-Effective Amendment No.
24.
C-25
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 24 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 13th day of December, 1996.
COMPASS CAPITAL FUNDS
Registrant
By *Raymond J. Clark
-----------------------------
Raymond J. Clark,
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 24 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
*Raymond J. Clark Trustee, President and December 13, 1996
- ----------------------------
(Raymond J. Clark) Treasurer
*David R. Wilmerding, Jr. Chairman of the Board December 13, 1996
- ----------------------------
(David R. Wilmerding, Jr.)
*Anthony M. Santomero Vice-Chairman of December 13, 1996
- ----------------------------
(Anthony M. Santomero) the Board
*William O. Albertini Trustee December 13, 1996
- ----------------------------
(William O. Albertini)
*Robert M. Hernandez Trustee December 13, 1996
- ----------------------------
(Robert M. Hernandez)
*By: /S/ Karen H. Sabath
----------------------------------
Karen H. Sabath, Attorney-in-fact
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
David R. Wilmerding, Jr., whose signature appears below, hereby constitutes
and appoints David R. Wilmerding, Jr., Raymond J. Clark and Karen H. Sabath, and
each of them, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, or any of them, may
deem necessary or advisable or which may be required to enable Compass Capital
Funds (the "Company") to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (collectively, the "Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Company's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a trustee and/or officer of
the Company any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or any of them, shall do or cause to be done by virtue
hereof.
/s/David R. Wilmerding, Jr.
---------------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Raymond J. Clark, whose signature appears below, hereby constitutes and
appoints Edward J. Roach his true and lawful attorney and agent, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorney and agent may deem necessary or
advisable or which may be required to enable Compass Capital Funds (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Company any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/Raymond J. Clark
-------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Robert M. Hernandez, whose signature appears below, hereby constitutes and
appoints G. Willing Pepper and Edward J. Roach, and either of them, his true and
lawful attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, may deem necessary or advisable or
which may be required to enable Compass Capital Funds (the "Company") to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended (collectively, the "Acts"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of any and all amendments
(including post-effective amendments) to the Company's Registration Statement
pursuant to said Acts, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a trustee and/or officer of the Company any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/Robert M. Hernandez
----------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Anthony M. Santomero, whose signature appears below, hereby constitutes and
appoints G. Willing Pepper and Edward J. Roach, and either of them, his true and
lawful attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, may deem necessary or advisable or
which may be required to enable Compass Capital Funds (the "Company") to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended (collectively, the "Acts"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of any and all amendments
(including post-effective amendments) to the Company's Registration Statement
pursuant to said Acts, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a trustee and/or officer of the Company any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/Anthony M. Santomero
-----------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
William O. Albertini, whose signature appears below, hereby constitutes and
appoints G. Willing Pepper and Edward J. Roach, and either of them, his true and
lawful attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, may deem necessary or advisable or
which may be required to enable Compass Capital Funds (the "Company") to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended (collectively, the "Acts"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of any and all amendments
(including post-effective amendments) to the Company's Registration Statement
pursuant to said Acts, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a trustee and/or officer of the Company any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/William O. Albertini
-----------------------
Date: March 5, 1996
<PAGE>
COMPASS CAPITAL FUNDS
SECRETARY'S CERTIFICATE
The undersigned, Morgan R. Jones, Secretary of Compass Capital Funds (the
"Fund") hereby certifies that set forth below is a copy of the resolutions duly
adopted by the Board of Trustees of the Fund on August 6, 1996:
RESOLVED, that the officers of the Fund be, and each of them hereby
is, authorized in the name and on behalf of the Fund to execute and cause
to be filed with the SEC Post-Effective Amendments to the Fund's
Registration Statement on Form N-1A under the 1940 Act and the Securities
Act of 1933, as amended (the "1933 Act"), in such forms as the officer or
officers executing the same may approve as necessary or desirable and
proper, such approval to be conclusively evidenced by his or their
execution thereof;
FURTHER RESOLVED, that Morgan R. Jones be, and hereby is, designated
to act on behalf of the Fund as its agent for service of process for
matters relating to said Registration Statement with the powers enumerated
in Rule 478 of the Rules and Regulations of the SEC under the 1933 Act, as
amended; and
FURTHER RESOLVED, that the trustees and officers of the Fund who may
be required to execute any amendments to the Fund's Registration Statement
be, and each of them hereby is, authorized to execute a power of attorney
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath, and
any of them, their true and lawful attorney or attorneys, to execute in
their name, place and stead, in their capacity as trustee or officer, or
both, of the Fund any and all amendments to the Registration Statement, and
all instruments necessary or incidental in connection therewith, and to
file the same with the SEC; and any of said attorneys shall have the power
to act thereunder with or without the other of said attorneys and shall
have full power of substitution and resubstitution; and any of said
attorneys shall have full power and authority to do in the name and on
behalf of said trustees and officers, or any or all of them, in any and all
capacities, every act whatsoever requisite or necessary to be done on the
premises, as fully and to all intents and purposes as each of said trustees
or officers, or any or all of them, might or could do in person, said acts
of said attorneys, or either of them, being hereby ratified and approved.
IN WITNESS THEREOF, I have hereunto signed my name and affixed the seal of
the Fund on December 10, 1996.
/S/
---------------
Morgan R. Jones
Secretary
<PAGE>
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 13th day of December, 1996.
THE DFA INVESTMENT TRUST COMPANY
* David G. Booth
- ---------------------------
David G. Booth
President and Chairman-Chief Executive Officer
The undersigned Trustees and Principal Officers of The DFA Investment
Trust Company consent to the filing of this Amendment to the Registration
Statement of Compass Capital Funds as it relates to the Index Equity Portfolio
only, on the dates indicated.
Signature Title Date
- ----------- ----- ----
* David G. Booth President, Chairman
- ------------------------
President, Chairman - Chief Executive Officer
December 13, 1996 and Trustee
David G. Booth
* Rex A. Sinquefield Chairman - Chief December 13, 1996
- ----------------------------
Rex A. Sinquefield Investment Officer
and Trustee
* George M. Constantinides Trustee December 13, 1996
- ----------------------------
George M. Constantinides
* John P. Gould Trustee December 13, 1996
- ----------------------------
John P. Gould
* Roger G. Ibbotson Trustee December 13, 1996
- ----------------------------
Roger G. Ibbotson
* Merton H. Miller Trustee December 13, 1996
- ----------------------------
Merton H. Miller
* Myron S. Scholes Trustee December 13, 1996
- ----------------------------
Myron S. Scholes
* Michael T. Scardina Vice President, Chief December 13, 1996
- ----------------------------
Michael T. Scardina Financial Officer,
Controller and Treasurer
*By: /S/
----------------
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. Sinquefield
- --------------------------- -----------------------------
David G. Booth, Rex A. Sinquefield,
Chairman-Chairman-Chief Executive Chief Investment Officer and
Officer, President and Trustee Trustee
/s/George M. Constantinides /s/John P. Gould
- ---------------------------- -----------------------------
George M. Constantinides, John P. Gould, Trustee
Trustee
/s/Roger G. Ibbotson /s/Merton H. Miller
- ---------------------------- -----------------------------
Roger G. Ibbotson, Trustee Merton H. Miller, Trustee
/s/Myron S. Scholes /s/Michael T. Scardina
- ------------------------- -----------------------------
Myron S. Scholes, Trustee Michael T. Scardina, Chief
Financial Officer, Treasurer
and Vice President
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ---------- ----------- --------
(5) (1) Form of Sub-Advisory Agreement
between PNC Asset Management
Group, Inc. and BlackRock
Financial Management, Inc.
with respect to the International
Bond Portfolio.
(11) (a) Consent of Drinker Biddle & Reath.
(b) Consent of Deloitte & Touch LLP.
(c) Consent of Coopers & Lybrand, L.L.P.
(24) (c) Unaudited Financial Statements for the
Ten Months Ended September 30, 1996.
(27) Financial Data Schedule
<PAGE>
EXHIBIT 5(1)
SUB-ADVISORY AGREEMENT
International Bond Portfolio
AGREEMENT dated as of December __, 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
International Bond Portfolio (the "Portfolio") of Compass Capital Funds (the
"Fund"), an open-end, management investment company registered under the
Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with sub-
advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Adviser and the Fund dated January
4, 1996 (such Agreement or the most recent successor agreement between such
parties relating to advisory services to the Portfolio is referred to herein as
the "Advisory Agreement") contemplates that Adviser may sub-contract investment
advisory services with respect to the Portfolio to a sub-adviser pursuant to a
sub-advisory agreement agreeable to the Fund and approved in accordance with the
provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the provisions
of the 1940 Act, and Sub-Adviser is willing to furnish such services upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-adviser
-----------
with respect to the Portfolio as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and supervision of
-----------------------
Adviser and the Fund's Board of Trustees, Sub-Adviser will supervise the day-to-
day operations of the Portfolio and perform the following services: (i) provide
investment
<PAGE>
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 its own initiative, furnish to the Fund from
time to time whatever information Sub-Adviser believes appropriate for this
purpose. Sub-Adviser will communicate to Adviser on each day that a purchase or
sale of an instrument is effected for the Portfolio (i) the name of the issuer,
(ii) the amount of the purchase or sale, (iii) the name of the broker or dealer,
if any, through which the purchase or sale will be effected, (iv) the CUSIP
number of the instrument, if any, and (v) such other information as Adviser may
reasonably require for purposes of fulfilling its obligations to the Fund under
the Advisory Agreement. Sub-Adviser will provide the services rendered by it
under this Agreement in accordance with the Portfolio's investment objectives,
policies and restrictions as stated in the Portfolio's Prospectus 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 its activities
under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with any broker or
dealer. Subject to the other provisions of this paragraph, in placing orders
with brokers and dealers, Sub-Adviser will attempt to obtain the best price and
the most favorable execution of its orders. In placing orders, Sub-Adviser will
consider the experience and skill of the firm's securities traders as well as
the firm's financial responsibility and administrative efficiency. Consistent
with this obligation, Sub-Adviser may, subject to the approval of the Fund's
Board of Trustees, select brokers on the basis of the research, statistical and
pricing services they provide to the Portfolio and other clients of Adviser or
Sub-Adviser. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by Sub-
Adviser hereunder. A commission paid to such brokers may be higher than that
which another qualified broker would have
<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
Portfolio and their other clients and that the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long-term. In addition, Sub-Adviser is authorized to take into account the
sale of shares of the Fund in allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers and dealers that are
affiliated with Adviser, Sub-Adviser or the Fund's distributor), provided that
Sub-Adviser believes that the quality of the transaction and the commission are
comparable to what they would be with other qualified firms. In no instance,
however, will the Portfolio's securities be purchased from or sold to the
Adviser, Sub-Adviser, the Fund's distributor or any affiliated person thereof,
except to the extent permitted by the SEC or by applicable law;
(c) will maintain or cause Adviser to maintain books and records with
respect to the Portfolio's securities transactions and will render to Adviser
and the Fund's Board of Trustees such periodic and special reports as they may
request;
(d) will maintain a policy and practice of conducting its investment
advisory services hereunder independently of the commercial banking operations
of its affiliates. When Sub-Adviser makes investment recommendations for the
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Portfolio's account are customers of the commercial department of its
affiliates; and
(e) will treat confidentially and as proprietary information of the Fund
all records and other information relative to the Fund, the Portfolio's and the
Fund's prior, current or potential shareholders, and will not use such records
and information for any purpose other than performance of its responsibilities
and duties hereunder, except after prior notification to and approval in writing
by the Fund, which approval shall not be unreasonably withheld and may not be
withheld where Sub-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
<PAGE>
5. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolio are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolio.
7. Compensation. For the services which the Sub-Adviser will render to
------------
Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the following annual rates for the Portfolio: .40%
of the first $1 billion of the 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.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to the Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to the
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the Advisory Agreement with respect to the Portfolio. Adviser
shall inform Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any error
-----------------------
of judgment or mistake of law or for any loss suffered by Adviser or by the
Portfolio in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as of
------------------------
the date hereof and, unless sooner terminated as provided herein, shall continue
in effect until March 31, 1998. Thereafter, if not terminated, this Agreement
<PAGE>
shall continue in effect 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
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.
<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:______________________________
BLACKROCK FINANCIAL MANAGEMENT, INC.
By:______________________________
<PAGE>
EXHIBIT 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our firm
under the caption "Counsel" in the Statement of Additional Information that is
included in Post-Effective Amendment No. 24 to the Registration Statement (File
No. 33-26305) on Form N-1A of Compass Capital Funds(R) (formerly, The PNC(R)
Fund) under the Securities Act of 1933 and the Investment Company Act of 1940,
respectively. This consent does not constitute a consent under Section 7 of the
Securities Act of 1933, and in consenting to the use of our name and the
reference to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath
-------------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
December 13, 1996
<PAGE>
EXHIBIT 11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 24 to Registration Statement No. 33-26305 of Compass Capital Funds
(formerly The PNC Fund) on Form N-1A of our reports dated May 22, 1996 and
August 7, 1995 on the financial statements of The Multi-Sector Mortgage
Securities Portfolio III of The BFM Institutional Trust, Inc. (the "Trust")
appearing in the Annual Reports of the Trust for the period ended March 31, 1996
and June 30, 1995 insofar as such reports relate to the Statement of Operations
for the period ended March 31, 1996 and the Statement of Changes in Net Assets
and Financial Highlights for the periods ended March 31, 1996 and June 30, 1995.
Deloitte & Touche LLP
New York, New York
December 12, 1996
<PAGE>
EXHIBIT 11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 24 to Registration Statement No. 33-26305 of Compass Capital Funds
(formerly The PNC Fund) on Form N-1A of our report dated August 7, 1995 on the
financial statements of the Short Government Bond Portfolio (now known as Low
Duration Bond Portfolio) and the Core Bond Portfolio of The BFM Institutional
Trust, Inc. (the "Trust") appearing in the 1996 Annual Report of the Trust
insofar as such report relates to the Statements of Changes in Net Assets for
the year ended June 30, 1995 and the Financial Highlights for the year or period
ended June 30, 1995, 1994 and 1993.
Deloitte & Touche LLP
New York, New York
December 12, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of the following
reports in this Post-Effective Amendment No. 24 under the Securities Act of
1933, as amended, to this Registration Statement on Form N-1A (No. 33-26305) of
the Compass Capital Funds:
. Our report dated November 22, 1996 for the Compass
Capital Funds' Bond Portfolios.
. Our report dated November 22, 1996 for the Compass
Capital Funds' Equity Portfolios.
. Our report dated November 15, 1996 for the Compass
Capital Funds' Money Market Portfolios.
. Our report dated November 22, 1996 for the Multi-
Sector Mortgage Securities Portfolio III.
. Our report dated January 19, 1996 for The U.S.
Large Company Series of The DFA Investment Trust
Company.
We also consent to the reference to our Firm under the headings
"Miscellaneous - Independent Accountants" and "Financial Statements" in the
Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 13, 1996
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
ANNUAL REPORT
Ten Months Ended September 30, 1996
(Unaudited)
Year Ended November 30, 1995
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS THE DFA INVESTMENT TRUST COMPANY
- --------------------------------------------------------------------------------
Page
Statements of Net Assets.............................X
Statements of Operations.............................X
Statements of Changes in Net Assets..................
Financial Highlights.................................X
Notes to Financial Statements........................X
This report is submitted for the information of the Fund's shareholders. It is
not authorized for distribution to prospective investors unless preceded or
accompanied by an effective prospectus.
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
STATEMENTS OF NET ASSETS
THE U.S. LARGE COMPANY SERIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
COMMON STOCKS - (99.7% and 99.50%, respectively)
AMP, Inc......................................... 16,904 $ 655,030 4,640 $186,180
AMR Corp......................................... 6,900 549,413 * 1,800 137,925 *#
AON Corp......................................... 8,250 447,563 - -
AT & T Corp...................................... 124,939 6,528,063 34,219 2,258,454
Abbott Laboratories.............................. 60,500 2,979,625 17,100 694,687
Advanced Micro Devices, Inc...................... 10,500 154,875 * 2,300 47,150
Aetna, Inc....................................... 11,537 811,916 2,500 183,438
Ahmanson (H.F.) & Co............................. 8,800 246,400 2,500 66,875 #
Air Products & Chemicals, Inc.................... 8,500 495,125 2,500 138,750
Airtouch Communications, Inc..................... 38,300 1,058,038 * 10,700 311,637 *
Alberto-Culver Co. Class B....................... 2,100 91,088 200 6,450
Albertson's Inc.................................. 19,500 821,438 5,500 169,125
Alcan Aluminum, Ltd.............................. 17,500 525,000 4,900 162,312
Alco Standard Corp............................... 9,800 488,775 2,200 95,700
Alexander & Alexander Services, Inc.............. 3,500 58,188 900 19,687
Allegheny Teledyne, Inc.......................... 13,600 307,700 * - -
Allergan, Inc.................................... 4,900 186,813 1,200 37,200
AlliedSignal, Inc................................ 21,900 1,442,663 6,100 288,225
Allstate Corp.................................... 34,227 1,685,680 9,838 403,357
Alltel Corp...................................... 14,500 404,188 4,200 123,900
Aluminium Co. of America......................... 13,700 808,300 3,800 222,300
Alza Corp........................................ 6,400 172,000 * 1,600 36,800 *
Amdahl Corp...................................... 9,100 85,881 * 2,600 24,700 *
Amerada Hess Corp................................ 7,100 375,413 2,100 99,750 #
American Brands, Inc............................. 13,600 574,600 4,200 175,350
American Electric Power Co., Inc................. 14,500 589,063 4,100 154,262
American Express Co.............................. 37,400 1,729,750 10,500 446,250
American General Corp............................ 16,100 607,775 4,500 152,437 #
American Greetings Corp. Class A................. 5,700 163,519 1,600 43,700
American Home Products Corp...................... 49,300 3,142,875 6,600 602,250
American International Group, Inc................ 36,362 3,663,472 10,300 924,425
American Stores Co............................... 11,500 460,000 3,300 86,625
Ameritech Corp................................... 42,900 2,257,613 12,000 660,000
Amgen, Inc....................................... 20,600 1,301,663 * 5,600 278,250 *
Amoco Corp....................................... 38,400 2,707,200 10,800 731,700
Andrew Corp...................................... 4,562 227,530 * 750 32,531 *
Anheuser-Busch Companies, Inc.................... 39,200 1,474,900 5,400 357,750
Apple Computer, Inc.............................. 9,700 215,219 2,600 99,287
Applied Materials, Inc........................... 14,000 387,625 * 4,000 194,250 *
Archer-Daniels Midland Co........................ 42,178 811,927 11,692 201,687
Armco, Inc....................................... 8,200 36,900 * 2,300 13,225 *
Armstrong World Industries, Inc.................. 2,800 174,650 900 53,887
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Asarco, Inc......................... 3,450 $ 91,856 1,100 $ 38,912
Ashland, Inc........................ 4,900 194,775 1,400 48,825
Atlantic Richfield Co............... 12,300 1,568,250 3,500 379,313
Autodesk, Inc....................... 3,600 93,375 1,200 42,450
Automatic Data Processing, Inc...... 22,400 977,200 3,100 246,837
Avery Dennison Corp................. 4,000 222,000 1,200 57,150
Avon Products, Inc.................. 10,500 521,063 1,400 101,675
Baker Hughes, Inc................... 10,900 331,088 3,100 63,162
Ball Corp........................... 2,400 58,800 600 17,175
Bally Entertainment Corp............ 3,800 107,825 * 1,200 14,550 *
Baltimore Gas & Electric Co......... 11,350 296,519 3,050 81,206 #
Banc One Corp....................... 34,711 1,423,151 8,502 324,139
Bank of Boston Corp................. 12,100 700,288 2,400 111,300
Bank of New York Co., Inc........... 30,000 881,250 4,000 188,500
BankAmerica Corp.................... 28,168 2,313,297 8,156 518,926
Bankers Trust New York Corp......... 6,100 479,613 1,800 16,775
Bard (C.R.), Inc.................... 4,400 136,950 1,300 37,537
Barnett Banks, Inc.................. 14,400 486,000 2,200 132,275
Barrick Gold Corp................... 27,500 690,938 7,800 205,725
Battle Mountain Gold Co............. 17,400 134,850 - -
Bausch & Lomb, Inc.................. 4,400 161,700 1,400 50,575
Bay Networks, Inc................... 14,400 392,400 * - -
Baxter International, Inc........... 21,000 981,750 6,100 256,200
Becton Dickinson & Co............... 9,800 433,650 1,600 111,600
Bell Atlantic Corp.................. 33,700 2,017,788 9,500 598,500
Bellsouth Corp...................... 77,200 2,856,400 21,600 839,700
Bemis Co., Inc...................... 4,100 138,888 1,300 33,962
Beneficial Corp..................... 4,300 247,250 1,200 60,900
Bethlehem Steel Corp................ 8,700 87,000 * 2,500 35,000 *
Beverly Enterprises................. 7,700 83,738 * 2,000 23,250 *
Biomet, Inc......................... 8,900 144,625 * 2,500 46,094 *
Black & Decker Corp................. 6,800 282,200 2,000 74,750
Block (H.&R.), Inc.................. 7,900 235,025 2,400 106,800
Boatmen's Bancshares, Inc........... 12,300 686,494 2,800 108,150
Boeing Co........................... 27,200 2,570,400 7,400 539,275
Boise Cascade Corp.................. 3,900 132,600 1,200 44,700
Boston Scientific Corp.............. 13,600 782,000 * 3,300 133,650 *
Briggs & Stratton Corp.............. 2,300 102,063 800 33,300
Bristol Myers Squibb Co............. 38,900 3,748,988 11,000 882,750
Brown Group, Inc.................... - - 400 5,600
Brown-Forman Corp. Class B.......... 5,300 207,363 900 34,312
Browning-Ferris Industries, Inc..... 16,500 412,500 4,700 141,587
Brunswick Corp...................... 7,500 180,000 2,200 47,025
Burlington Northern Santa Fe Corp... 11,637 981,872 3,089 249,051
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Burlington Resources, Inc................... 9,900 $ 439,313 2,800 $107,800
CIGNA Corp.................................. 5,800 695,275 1,700 187,000
CPC International, Inc...................... 11,100 831,113 3,100 213,125
CSX Corp.................................... 16,400 828,200 2,200 192,775
CUC International, Inc...................... 19,100 761,613 * 3,800 144,400 *
Cabletron Systems, Inc...................... 5,800 395,850 * 1,500 124,500 *
Caliber Systems, Inc........................ 2,900 46,763 - -
Campbell Soup Co............................ 19,300 1,505,400 5,500 307,312
Capital Cities ABC, Inc..................... - - 3,300 407,962
Carolina Power & Light Co................... 11,600 400,200 3,400 111,775
Case Corp................................... 5,700 277,875 - -
Caterpillar, Inc............................ 15,100 1,138,163 4,400 270,050
Centex Corp................................. 2,300 75,038 800 26,300
Central & South West Corp................... 16,200 421,200 4,100 110,187
Ceridian Corp............................... 5,200 260,000 * 800 33,600
Champion International Corp................. 7,300 334,888 2,100 98,962
Charming Shoppes, Inc....................... 8,000 47,750 * 2,200 5,156
Chase Manhattan Corp........................ 33,996 2,723,930 3,700 225,238
Chemical Banking Corp....................... - - 5,298 317,880
Chevron Corp................................ 50,800 3,181,350 14,100 696,187
Chrysler Corp............................... 57,600 1,648,800 8,400 435,750
Chubb Corp.................................. 13,700 630,200 2,000 194,500
Cincinnati Milacron, Inc.................... 3,100 58,513 600 15,675
Cinergy Corp................................ 12,293 379,546 3,418 100,831
Circuit City Stores, Inc.................... 7,400 267,325 2,200 63,800
Cisco Sytems, Inc........................... 50,000 3,103,125 * 5,900 496,706 *
Citicorp.................................... 37,400 3,389,375 9,000 636,750
Clorox Co................................... 4,100 393,088 1,100 83,325
Coastal Corp................................ 8,050 332,063 2,200 73,150
Coca-Cola Co................................ 193,300 9,834,138 27,300 2,067,975 #
Colgate-Palmolive Co........................ 11,200 973,000 3,000 219,750
Columbia Gas System, Inc.................... 4,200 235,200 1,000 43,250 *
Columbia/HCA Healthcare Corp................ 34,455 1,959,628 # 9,455 488,114
Comcast Corp. Class A Special............... 18,550 286,366 4,200 82,687
Comerica, Inc............................... 8,900 458,350 - -
Community Psychiatric Centers............... 3,538 33,169 * 900 10,012
Compaq Computer Corp........................ 20,700 1,327,388 * 5,700 282,150 *
Computer Associates International, Inc...... 27,975 1,671,506 5,250 343,875
Computer Sciences Corp...................... 5,700 438,188 * 1,300 94,575 *
Conagra, Inc................................ 18,850 928,363 5,350 213,331
Conrail, Inc................................ 6,000 434,250 1,700 118,787
Consolidated Edison Co. of New York, Inc... 18,200 505,050 5,100 147,262
Consolidated Freightways, Inc............... 3,500 85,750 800 21,000
Consolidated Natural Gas Co................. 7,100 380,738 2,000 88,750
Cooper Industries, Inc...................... 8,200 354,650 2,300 83,950
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Cooper Tire & Rubber Co.................. 6,600 $ 142,725 1,800 $ 44,325
Coors (Adolph) Co. Class B............... 3,100 68,006 1,000 20,375
Corestates Financial Corp................ 17,200 743,900 3,000 116,250
Corning, Inc............................. 17,900 698,100 4,900 147,612
Crane Co................................. 2,400 106,500 500 17,062
Cray Research, Inc....................... - - 500 12,000 *
Crown Cork & Seal Co., Inc............... 9,800 452,025 1,900 79,562 *
Cummins Engine Co., Inc.................. 3,300 129,938 700 27,475 #
Cyprus Amax Minerals Co., Inc............ 7,250 155,875 2,100 57,750
DSC Communications Corp.................. 9,000 226,688 * 2,500 98,906 *
DTE Energy Co............................ 11,200 313,600 - -
Dana Corp................................ 8,000 242,000 2,100 61,425
Darden Restaurants, Inc.................. 12,300 106,088 * 3,400 39,525
Data General Corp........................ 3,100 43,400 * 1,000 12,125 *
Dayton-Hudson Corp....................... 16,800 555,400 1,700 123,462
Dean Witter, Discover & Co............... 12,977 713,735 3,566 181,866
Deere & Co............................... 20,300 852,600 5,700 187,387
Dell Computer Corp....................... 7,000 544,250 * - -
Delta Air Lines, Inc..................... 6,100 439,200 1,000 77,625
Deluxe Corp.............................. 6,300 237,825 1,600 44,200
Detroit Edison Co........................ - - 3,200 104,400 #
Dial Corp................................ - - 2,100 56,700
Digital Equipment Corp................... 11,700 418,275 * 3,200 188,400 *
Dillard Department Stores, Inc. Class A.. 8,900 287,025 2,300 66,412
Disney (Walt) Co......................... 52,800 3,346,200 11,200 673,400 #
Dominion Resources, Inc. VA.............. 13,800 520,950 3,850 152,556
Donnelley (R.R.) & Sons Co............... 11,800 380,550 3,300 126,637
Dover Corp............................... 8,700 415,425 2,400 93,300
Dow Chemical Co.......................... 19,400 1,556,850 5,800 411,075
Dow Jones & Co., Inc..................... 7,400 273,800 1,900 72,913
Dresser Industries, Inc.................. 13,900 413,525 3,900 92,137
DuPont (E.I.) de Nemours & Co............ 43,300 3,821,225 12,000 798,000
Duke Power Co............................ 15,900 741,338 4,500 201,937
Dun & Bradstreet Corp.................... 13,000 775,125 3,800 237,025
E G & G, Inc............................. 3,700 66,138 1,300 25,025
EMC Corp. MA............................. 17,900 404,988 * - -
Eastern Enterprises...................... 1,700 64,175 300 9,750
Eastman Chemical Co...................... 6,050 353,169 1,625 106,641
Eastman Kodak Co......................... 26,700 2,095,950 7,400 503,200
Eaton Corp............................... 5,900 356,213 1,800 98,100
Echlin, Inc.............................. 4,700 147,463 1,400 51,100
Echo Bay Mines, Ltd...................... 10,900 96,056 2,500 25,937
Ecolab, Inc.............................. 5,100 172,125 1,300 37,375
Edison International..................... 34,200 611,325 - -
Emerson Electric Co...................... 17,400 1,568,175 4,900 382,200
Engelhard Corp........................... 11,074 254,702 3,037 70,990
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Enron Corp............................. 19,400 $ 790,550 5,500 $ 206,250
Enserch Corp........................... 5,200 108,550 1,500 23,250
Entergy Corp........................... 17,700 477,900 4,800 133,800
Exxon Corp............................. 96,100 8,000,325 26,900 2,081,387
FMC Corp............................... 2,800 190,050 * 600 44,325 *
FPL Group, Inc......................... 14,300 618,475 4,000 173,500
Federal Express Corp................... 4,400 348,700 * 1,100 82,225 *
Federal Home Loan Mortgage Corp........ 13,900 1,360,463 3,800 292,600
Federal National Mortgage Association.. 84,600 2,950,425 6,000 657,000
Federal Paper Board Co., Inc........... - - 1,000 52,000
Federated Department Stores, Inc....... 16,100 539,350 * 3,900 113,587 *#
Fifth Third Bancorp.................... 7,800 453,375 - -
First Bank System, Inc................. 10,800 722,250 2,900 149,712
First Chicago NBD Corp................. 24,393 1,103,783 # 1,800 125,100
First Data Corp........................ 17,300 1,412,113 2,500 177,500 #
First Fidelity Bancorp................. - - 1,600 117,400
First Interstate Bancorp............... - - 1,500 201,000
First Union Corp....................... 22,040 1,471,170 3,600 196,650
Fleet Financial Group, Inc............. 20,364 906,198 3,200 133,600
Fleetwood Enterprises, Inc............. 2,600 79,950 800 19,200
Fleming Companies, Inc................. 2,800 48,650 900 20,812
Fluor Corp............................. 6,400 393,600 1,800 117,000
Ford Motor Co.......................... 91,800 2,868,750 23,300 658,225
Foster Wheeler Corp.................... 3,250 142,188 600 23,700
Freeport McMoran Copper & Gold, Inc.
Class B............................... 14,900 465,625 3,000 81,375 *
Fruit of The Loom, Inc. Class A........ 5,800 179,800 * 1,300 25,187 *
GPU, Inc............................... 9,200 282,900 - -
GTE Corp............................... 75,200 2,895,200 21,000 895,125
Gannett Co., Inc....................... 11,000 774,125 2,900 176,900
Gap, Inc............................... 22,300 643,913 3,000 135,750
General Dynamics Corp.................. 4,800 330,600 1,200 71,550
General Electric Co.................... 128,200 11,666,128 36,400 2,447,900
General Instrument Corp................ 9,880 244,530 * - -
General Mills, Inc..................... 12,200 736,575 3,400 187,425
General Motors Corp.................... 58,700 2,817,600 16,100 780,850
General Public Utilities Corp.......... - - 2,400 75,900
General RE Corp........................ 6,200 878,850 1,900 284,287
General Signal Corp.................... 3,800 167,200 1,200 38,700
Genuine Parts Co....................... 9,550 417,813 2,550 102,956
Georgia-Pacific Corp................... 7,000 553,875 2,000 155,500
Giant Food, Inc. Class A............... 4,600 156,400 1,400 45,150
Giddings & Lewis, Inc.................. 2,750 32,313 900 14,119
Gillette Co............................ 34,700 2,502,738 9,700 503,187
Golden West Financial Corp............. 4,700 274,363 1,200 61,350
Goodrich (B.F.) Co..................... 4,100 185,013 500 35,062
Goodyear Tire & Rubber Co.............. 12,100 558,113 3,400 144,075
Grace (W.R.) & Co...................... 7,500 562,500 2,200 133,650
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Grainger (W.W.), Inc....................... 4,100 $288,025 1,000 $66,875
Great Atlantic & Pacific Tea Co., Inc...... 3,000 77,625 700 15,312
Great Lakes Chemical Corp.................. 4,900 279,300 1,500 106,687
Great Western Financial Corp............... 10,600 280,900 3,000 76,500
Green Tree Financial Corp.................. 10,500 412,125 - -
HFS, Inc................................... 9,200 615,250 * - -
Halliburton Co............................. 9,000 464,625 2,400 104,100
Handleman Co............................... - - 600 3,750
Harcourt General, Inc...................... 5,623 310,671 1,423 57,276
Harland (John H.) Co....................... 2,450 73,500 500 10,312
Harnischfeger Industries, Inc.............. 3,676 138,769 900 30,488
Harrahs Entertainment, Inc................. 8,000 149,000 2,200 54,725 *
Harris Corp................................ 3,000 195,375 700 40,337
Hasbro, Inc................................ 6,650 246,881 1,750 53,375
Heinz (H.J.) Co............................ 28,450 960,188 8,100 258,188
Helmerich & Payne, Inc..................... 2,000 87,250 400 10,900
Hercules, Inc.............................. 8,300 454,425 2,300 126,212
Hershey Foods Corp......................... 11,800 592,950 1,700 104,975
Hewlett-Packard Co......................... 79,100 3,856,125 11,000 911,625
Hilton Hotels Corp......................... 15,200 431,300 1,000 64,625
Home Depot, Inc............................ 37,248 2,118,480 10,366 459,991
Homestake Mining Co........................ 11,300 165,263 2,900 47,850
Honeywell, Inc............................. 9,700 612,313 2,900 138,112
Household International, Inc............... 7,400 608,650 2,200 137,500
Houston Industries, Inc.................... 20,300 449,138 2,900 132,675
Humana, Inc................................ 12,400 251,100 * - -
ITT Corp................................... 9,200 401,350 * 2,500 306,563
ITT Hartford Group, Inc.................... 9,200 542,800 - -
ITT Industries, Inc........................ 9,000 217,125 - -
Illinois Tool Works, Inc................... 9,100 656,338 2,400 152,100
Inco, Ltd.................................. 13,100 402,825 2,600 92,625
Ingersoll-Rand Co.......................... 8,300 394,250 2,400 92,100
Inland Steel Industries, Inc............... 3,900 69,713 1,100 28,737
Intel Corp................................. 63,700 6,079,369 17,800 1,082,463
Intergraph Corp............................ 3,700 40,238 * 800 13,800 *
International Business Machines Corp....... 42,000 5,229,000 12,400 1,198,150
International Flavors & Fragrances, Inc... 8,500 370,813 2,500 127,812
International Paper Co..................... 23,000 977,500 5,400 205,875
Interpublic Group of Companies, Inc........ 6,000 283,500 1,800 69,075
James River Corp. of Virginia.............. 6,700 185,088 # 1,600 50,400 #
Jefferson-Pilot Corp....................... 5,450 282,038 850 60,350
Johnson & Johnson.......................... 103,300 5,294,125 14,000 1,212,750
Johnson Controls, Inc...................... 3,100 232,500 700 48,475
Jostens, Inc............................... 3,200 66,800 800 19,800
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
K Mart Corp........................... 37,200 $ 381,300 9,900 $ 76,725 #
Kaufman & Broad Home Corp............. 3,100 40,300 600 7,800
Kellogg Co............................ 16,500 1,136,438 4,600 351,325
Kerr-McGee Corp....................... 3,800 231,325 1,300 75,238
Keycorp............................... 18,000 792,000 4,900 180,688
Kimberly Clark Corp................... 21,742 1,916,014 3,400 261,375
King World Productions, Inc........... 3,000 110,625 * 600 23,775 *
Knight Ridder, Inc.................... 7,600 281,200 1,100 70,950
Kroger Co............................. 9,500 425,125 * 2,600 87,100 *
LSI Logic Corp........................ 9,800 227,850 * - -
Laidlaw, Inc. Class B Non-Voting...... 24,200 266,200 5,000 46,250
Lilly (Eli) & Co...................... 42,600 2,747,700 6,000 597,000
Limited, Inc.......................... 20,900 399,713 7,600 135,850
Lincoln National Corp................. 8,200 359,775 2,200 102,850
Liz Claiborne, Inc.................... 5,600 208,600 1,500 44,063
Lockheed Martin Corp.................. 15,457 1,393,062 4,404 323,144
Loews Corp............................ 9,100 704,113 1,200 184,200
Longs Drug Stores Corp................ 1,700 73,950 300 11,925
Loral Corp............................ - - 3,700 125,338
Louisiana Land & Exploration Co....... 2,500 131,563 600 23,400
Louisiana-Pacific Corp................ 8,300 188,825 2,400 64,800 #
Lowe's Companies, Inc................. 13,400 547,725 3,600 113,400
Luby's Cafeterias, Inc................ 1,950 46,800 500 11,000
Lucas Varity P.L.C. Sponsored ADR..... 4,126 162,461 * - -
Lucent Technologies, Inc.............. 5,000 229,375 - -
MBNA Corp............................. 17,325 602,044 3,200 129,200
MCI Communications Corp............... 53,300 1,362,481 14,700 392,306
MGIC Investment Corp.................. 4,500 303,188 - -
Mallinckrodt Group, Inc............... 5,700 237,263 1,500 51,188
Manor Care, Inc....................... 4,800 184,200 1,450 47,306
Marriott International, Inc........... 10,000 551,250 2,600 96,850
Marsh & McLennan Companies, Inc....... 5,500 534,188 1,500 130,125
Masco Corp............................ 12,300 369,000 3,500 103,250
Mattel, Inc........................... 21,452 555,071 4,800 134,400
May Department Stores Co.............. 19,300 938,463 5,400 235,575
Maytag Corp........................... 8,000 156,000 2,400 48,900
McDermott International, Inc.......... 4,200 91,350 1,300 23,563
McDonalds Corp........................ 54,000 2,558,250 # 15,000 669,375
McDonnell Douglas Corp................ 17,200 903,000 2,300 204,988
McGraw-Hill Companies, Inc............ 7,700 328,213 1,200 100,500
Mead Corp............................. 4,000 234,500 1,300 74,263
Medtronic, Inc........................ 18,100 1,160,663 5,000 274,375
Mellon Bank Corp...................... 10,450 619,163 3,100 165,850
Melville Corp......................... 8,000 353,000 2,400 74,700
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Mercantile Stores Co., Inc............ 2,900 $ 156,600 600 $ 27,900
Merck & Co., Inc...................... 94,500 6,650,438 26,800 1,658,250
Meredith Corp......................... 2,300 113,563 700 27,563
Merrill Lynch & Co., Inc.............. 13,100 859,688 3,700 205,813
Micron Technology, Inc................ 16,100 491,050 4,600 251,850
Microsoft Corp........................ 46,400 6,116,100 * 12,700 1,105,694 *
Millipore Corp........................ 3,500 138,250 800 29,800
Minnesota Mining & Manufacturing Co... 32,700 2,284,913 9,000 589,500
Mobil Corp............................ 30,400 3,518,800 8,700 908,063
Monsanto Co........................... 45,500 1,660,750 2,600 297,700
Moore Corp., Ltd...................... 7,800 143,325 2,300 41,113
Morgan (J.P.) & Co., Inc.............. 14,600 1,297,575 4,100 321,850
Morgan Stanley Group, Inc............. 11,700 582,075 1,800 155,250
Morrison Knudsen Corp................. - - 600 3,600 #
Morton International, Inc............. 11,300 449,175 3,200 110,800
Motorola, Inc......................... 46,200 2,385,075 12,800 784,000
NBD Bancorp, Inc...................... - - 3,450 132,394
Nacco Industries, Inc. Class A........ 600 28,650 100 5,700
Nalco Chemical Co..................... 5,300 192,125 1,500 45,938
National City Corp.................... 17,100 720,338 3,200 103,600
National Semiconductor Corp........... 10,600 213,325 * 2,600 55,575 *
National Service Industries, Inc...... 3,900 136,500 1,000 32,500
NationsBank Corp...................... 23,171 2,012,981 5,824 415,688
Navistar International Corp........... 5,970 50,745 * 1,450 15,769 *
New York Times Class A................ 7,700 259,875 2,100 61,950
Newell Co............................. 12,400 372,000 3,400 89,675
Newmont Mining Corp................... 7,615 359,809 1,723 74,304
Niagra Mohawk Power Corp.............. 11,100 88,800 3,000 29,625
Nicor, Inc............................ 3,900 131,625 900 22,838
Nike, Inc. Class B.................... 11,200 1,360,800 2,200 127,600
Noram Energy Corp..................... 10,300 153,213 2,700 21,263
Nordstrom, Inc........................ 6,200 235,988 1,900 74,813
Norfolk Southern Corp................. 9,700 886,338 2,900 228,375
Northern States Power Co. MN.......... 5,200 242,450 1,300 61,100
Northern Telecom, Ltd................. 19,900 1,149,225 5,500 222,063
Northrop Grumman Corp................. 4,400 353,100 1,000 61,500
Norwest Corp.......................... 28,200 1,152,675 6,900 227,700
Novell, Inc........................... 28,200 311,963 * 8,100 136,181 *
Nucor Corp............................ 6,800 345,100 2,000 99,750
Nynex Corp............................ 33,600 1,461,600 9,200 456,550
Occidental Petroleum Corp............. 24,600 575,025 7,000 154,875 #
Ogden Corp............................ - - 1,200 25,500
Ohio Edison Co........................ 11,700 226,688 3,300 75,075 #
Oneok, Inc............................ 2,200 60,500 400 9,400
Oracle Systems Corp................... 50,975 2,169,623 * 9,450 428,203 *
Oryx Energy Co........................ 8,100 143,775 * 2,100 27,563 *
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Outboard Marine Corp................... - - 300 $ 6,150
Owens-Corning Fiberglas Corp........... 4,000 $ 147,500 * 900 39,938 *
PECO Energy Co......................... 17,200 408,500 4,800 139,200
PNC Bank Corp.......................... 26,250 876,094 5,100 149,175 #
PP &L Resources, Inc................... 12,200 266,875 - -
PPG Industries, Inc.................... 14,700 799,313 4,500 204,188
Paccar, Inc............................ 3,060 167,918 760 33,440
PacifiCorp............................. 22,700 468,188 6,200 121,675 #
Pacific Enterprises.................... 6,300 190,575 2,000 53,500
Pacific Gas & Electric Co.............. 32,100 698,175 9,100 250,250
Pacific Telesis Group.................. 33,000 1,109,625 9,300 279,000
Pall Corp.............................. 8,766 247,640 2,600 70,525
Panenergy Corp......................... 11,500 398,188 - -
Panhandle Eastern Corp................. - - 3,100 87,963 #
Parker-Hannifin Corp................... 5,650 237,300 1,500 55,125
Penney (J.C.) Co., Inc................. 17,400 941,775 4,800 225,000
Pennzoil Co............................ 3,500 185,063 1,000 39,625
Peoples Energy Corp.................... 2,600 88,400 700 21,350
Pep Boys -- Manny, Moe & Jack.......... 4,800 171,000 1,400 37,100
Pepsico, Inc........................... 121,700 3,438,025 17,100 944,775 #
Perkin Elmer Corp...................... 3,500 202,563 1,100 39,600
Pfizer, Inc............................ 49,700 3,932,513 13,600 788,800
Pharmacia & Upjohn, Inc................ 39,380 1,624,425 5,365 192,469
Phelps Dodge Corp...................... 5,100 327,038 1,600 108,600
Philip Morris Companies, Inc........... 64,100 5,752,975 18,200 1,597,050
Phillips Petroleum Co.................. 20,300 867,825 5,700 189,525
Pioneer Hi-Bred International, Inc..... 6,300 381,150 1,800 103,050
Pitney Bowes, Inc...................... 11,500 606,625 3,200 143,200
Pittston Co. Services Group............ - - 700 21,350
Placer Dome, Inc....................... 18,500 437,063 5,300 131,175
Polaroid Corp.......................... 3,700 162,800 800 36,900
Potlatch Corp.......................... 2,300 89,125 600 24,225
Praxair, Inc........................... 11,800 507,400 3,000 87,375
Premark International, Inc............. - - 1,300 66,300
Price/Costco, Inc...................... 15,203 312,612 * 4,165 69,503 *
Procter & Gamble Co.................... 53,416 5,208,060 14,900 1,286,988
Providian Corp......................... 7,200 309,600 2,200 88,275
Public Service Enterprise Group, Inc... 18,900 505,575 5,200 154,050
Pulte Corp............................. 1,900 48,688 700 21,525
Quaker Oats Co......................... 10,400 380,900 3,000 104,250
Ralston Purina Group................... 8,100 554,850 2,300 147,200
Raychem Corp........................... 3,400 255,000 900 46,800
Raytheon Co............................ 18,500 1,029,063 5,600 249,200
Reebok International, Ltd.............. 4,800 166,800 1,600 41,600
Republic New York Corp................. 4,300 297,238 1,200 75,600
Reynolds Metals Co..................... 4,900 250,513 1,500 86,625
Rite Aid Corp.......................... 6,400 232,000 1,900 59,375
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ ---------------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Roadway Services, Inc.................. - - 700 $ 35,175
Rockwell International Corp............ 16,900 $ 952,738 4,800 235,200
Rohm & Haas Co......................... 5,000 327,500 1,600 96,400
Rowan Companies, Inc................... 6,700 124,788 2,000 15,000 *
Royal Dutch Petroleum Co............... 41,700 6,510,413 11,500 1,476,313
Rubbermaid, Inc........................ 11,600 284,200 3,500 96,250
Russell Corp........................... 3,100 99,975 700 18,638
Ryans Family Steak Houses, Inc......... 4,200 31,631 * 1,300 9,669 *
Ryder System, Inc...................... 6,000 177,750 1,700 40,588 #
SBC Communications, Inc................ 47,500 2,285,938 13,100 707,400
SCE Corp............................... - - 9,800 153,125
Safeco Corp............................ 9,700 338,288 1,400 99,663
Safety Kleen Corp...................... 4,500 74,250 1,300 18,525
Saint Jude Medical, Inc................ 6,050 244,647 * 1,800 71,213 *
Saint Paul Companies, Inc.............. 6,500 360,750 1,700 95,200
Salomon, Inc........................... 8,000 365,000 2,400 87,300 #
Santa Fe Energy Resources, Inc......... 7,080 100,890 * 2,100 19,425 *
Santa Fe Pacific Corp.................. 10,054 125,675 2,803 33,636
Sara Lee Corp.......................... 37,200 1,329,900 10,300 332,175
Schering-Plough Corp................... 28,400 1,746,600 8,200 470,475
Schlumberger, Ltd...................... 18,800 1,588,600 5,100 323,850
Scientific-Atlanta, Inc................ 5,800 92,075 1,500 23,813
Scott Paper Co......................... - - 3,400 194,225
Seagate Technology, Inc................ 8,000 447,000 * - -
Seagram Co., Ltd....................... 28,800 1,076,400 8,200 299,300
Sears, Roebuck & Co.................... 30,200 1,351,450 8,400 330,750
Service Corp. International............ 18,200 550,550 1,950 79,219
Shared Medical Systems Corp............ 1,900 107,944 700 30,231
Shawmut National Corp.................. - - 2,600 97,500
Sherwin-Williams Co.................... 6,500 301,438 1,800 71,325
Shoney's, Inc.......................... 3,900 35,588 * 700 7,525 *#
Sigma-Aldrich Corp..................... 3,900 223,031 1,200 59,250
Silicon Graphics, Inc.................. 12,700 280,988 * 3,500 127,750 *
Snap-On, Inc........................... 6,300 202,388 1,000 44,250
Sonat, Inc............................. 6,700 296,475 1,700 54,825
Southern Co............................ 51,700 1,169,713 14,400 329,400 #
Southwest Airlines Co.................. 11,100 253,913 3,200 80,000
Springs Industries, Inc. Class A....... 1,450 64,525 600 25,200
Sprint Corp............................ 33,600 1,306,200 7,400 296,000
Stanley Works.......................... 6,700 188,438 800 40,500
Stone Container Corp................... 7,700 120,313 2,114 33,031
Stride Rite Corp....................... 3,900 35,100 1,000 8,750
Sun Company, Inc....................... 5,800 133,400 1,600 44,400 #
Sun Microsystems....................... 14,020 870,116 * 2,200 185,350 *
Suntrust Banks, Inc.................... 17,600 721,600 2,600 177,450
Supervalu, Inc......................... 5,200 143,000 1,600 51,600
Sysco Corp............................. 13,900 467,388 3,800 116,375
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
TJX Companies, Inc................. 5,500 $ 197,313 1,600 $ 26,600
TRW, Inc........................... 5,000 465,000 1,300 97,338
Tandem Computers, Inc.............. 9,000 96,750 * 2,400 30,000 *
Tandy Corp......................... 4,615 186,331 1,515 72,152
Tektronix, Inc..................... 2,600 106,275 900 48,488
Tele-Communications, Inc. Class A.. 50,400 752,850 * 12,300 228,319 *
Teledyne, Inc...................... - - 1,300 31,525
Tellabs, Inc....................... 6,800 480,250 * 2,000 79,000 *
Temple-Inland, Inc................. 4,200 221,550 1,300 58,988
Tenet Healthcare Corp.............. 16,500 367,125 * 4,400 78,650 *
Tenneco, Inc....................... 13,500 676,688 3,900 187,200
Texaco, Inc........................ 20,400 1,876,800 5,700 421,800
Texas Instruments, Inc............. 14,700 810,338 4,000 231,500
Texas Utilities Co................. 17,500 693,438 4,900 188,650
Textron, Inc....................... 6,400 544,000 2,000 153,250
Thomas & Betts Corp................ 3,300 135,300 400 29,350
Three COM Corp..................... 13,000 780,813 * - -
Time Warner, Inc................... 30,260 1,168,793 8,360 334,400
Times Mirror Co. Class A........... 8,100 360,450 2,400 78,000
Timken Co.......................... 2,500 98,125 500 20,188
Torchmark Corp..................... 5,450 250,019 1,550 65,875
Toys 'R' Us, Inc................... 21,100 614,538 * 6,000 139,500 *
Transamerica Corp.................. 5,200 363,350 1,400 107,275
Travelers Group, Inc............... 36,448 1,790,508 6,852 407,694
Tribune Co......................... 4,700 366,600 1,300 83,850
Trinova Corp....................... 2,300 72,450 800 24,600
Tupperware Corp.................... 4,700 230,300 * - -
Tyco International, Ltd............ 11,900 513,188 3,600 112,950
UNUM Corp.......................... 5,700 365,513 1,700 92,013
US Bancorp......................... 12,400 489,800 2,150 72,966
US Healthcare, Inc................. - - 3,600 164,025
US West, Inc....................... 36,700 1,091,825 10,100 315,625
US West, Inc. Media Group Class.... 36,300 612,563 * 20,200 363,600 *
USAir Group, Inc................... 4,800 79,200 * 1,400 18,725 *
USF&G Corp......................... 9,100 168,350 2,300 39,675
USLIFE Corp........................ 2,725 81,750 750 21,656
UST, Inc........................... 15,200 450,300 4,300 140,288
USX-Marathon Group, Inc............ 22,200 480,075 6,300 115,763
USX-US Steel Group................. 6,320 180,120 1,620 52,853
Unicom Corp., Inc.................. 16,700 419,588 4,500 144,000
Unilever NV........................ 12,500 1,970,313 3,500 465,063
Union Camp Corp.................... 5,400 263,925 1,400 68,775
Union Carbide Corp................. 10,200 465,375 3,100 122,838
Union Electric Co.................. 7,800 287,625 2,300 92,288
Union Pacific Corp................. 19,000 1,391,750 # 4,300 291,325
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 NOVEMBER 30, 1995
------------------ -----------------
(Unaudited)
SHARES VALUE+ SHARES VALUE+
------ ------ ------ -------
<S> <C> <C> <C> <C>
Unisys Corp................................ 13,200 $ 80,850 * 3,800 $ 24,700 *
United Healthcare Corp..................... 14,200 591,075 3,700 232,638
United States Surgical Corp................ 4,900 208,250 1,100 27,638
United Technologies Corp................... 9,300 1,117,163 2,600 243,750
Unocal Corp................................ 19,100 687,600 5,500 147,813
VF Corp.................................... 4,900 294,613 1,300 67,600
Varity Corp................................ - - 1,000 38,750 *
Viacom, Inc. Class B....................... 28,534 1,012,957 * 6,221 300,163 *
WMX Technologies, Inc...................... 38,000 1,249,250 10,400 306,800
Wachovia Corp.............................. 12,900 638,550 3,800 171,000
Wal-Mart Stores, Inc....................... 177,900 4,692,113 49,600 1,190,400
Walgreen Co................................ 19,100 706,700 5,500 160,188
Warner-Lambert Co.......................... 21,000 1,386,000 2,900 258,825
Wells Fargo & Co........................... 7,399 1,923,740 900 189,225
Wendy's International, Inc................. 9,700 208,550 2,300 47,438
Western Atlas, Inc......................... 4,100 255,225 * 1,300 62,238 *
Westinghouse Electric Corp................. 32,100 597,863 7,900 133,313
Westvaco Corp.............................. 7,750 229,594 2,150 58,856
Weyerhaeuser Co............................ 15,400 710,325 4,500 203,625
Whirlpool Corp............................. 5,700 288,563 1,500 83,250
Whitman Corp............................... 8,300 191,938 2,400 52,800
Williamette Industries, Inc................ 4,300 280,575 1,200 72,900
Williams Companies, Inc.................... 7,957 405,807 2,300 96,600 #
Winn-Dixie Stores, Inc..................... 11,700 408,038 1,600 102,600
Woolworth Corp............................. 10,300 212,438 * 2,800 42,000 #
Worldcom, Inc.............................. 29,920 643,280 * - -
Worthington Industries, Inc................ 6,875 138,789 2,075 40,981
Wrigley (Wm.) Jr. Co....................... 8,900 536,225 2,600 122,525
Xerox Corp................................. 25,000 1,340,625 * 2,300 315,388
Yellow Corp................................ 2,300 30,188 800 9,550
Zurn Industries, Inc....................... - - 200 4,900
---------- ----------
TOTAL COMMON STOCKS (Cost $299,439,341 and
$68,158,757, respectively)................. 404,182,897 $96,600,848
----------- -----------
</TABLE>
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
TEN MONTH YEAR
ENDED ENDED
SEPT. 30, NOV. 30,
1996 1995
------- -------
(UNAUDITED)
INVESTMENT INCOME
Dividends.............................................. $ 3,964 $ 1,944
Interest............................................... 78 40
Income From Securities Lending......................... 6 -
------- -------
Total Investment Income 4,048 1,984
------- -------
EXPENSES
Investment Advisory Services........................... 44 19
Accounting & Transfer Agent Fees....................... 56 75
Custodian's Fee........................................ 48 29
Legal Fees............................................. 58 2
Audit Fees............................................. 6 2
Shareholders' Reports.................................. 3 3
Trustees' Fees and Expenses............................ 1 1
Other.................................................. 10 7
------- -------
Total Expenses 226 138
Less: Expenses Reimbursed............................. - (119)
------- -------
Net Expenses........................................... 226 19
------- -------
NET INVESTMENT INCOME 3,822 1,965
------- -------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net Realized Gain on Investment Securities.............. 709 172
Change in Unrealized Appreciation (Depreciation)
of Investment Securities............................... 21,479 21,274
------- -------
NET GAIN ON INVESTMENT SECURITIES...................... 22,188 21,446
------- -------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... $26,010 $23,411
======= =======
See accompanying Notes to Financial Statements
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPT. 30, NOV. 30, NOV. 30,
1996 1995 1994
-------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income................................. $ 3,822 $ 1,965 $ 1,224
Net Realized Gain (Loss) on Investment Securities.... 709 172 (43)
Change in Unrealized Appreciation
(Depreciation) of Investment Securities................ 21,479 21,274 (687)
-------- ------- -------
Net Increase in Net Assets Resulting from Operations.. 26,010 23,411 494
-------- ------- -------
Distributions From:
Net Investment Income................................. (1,215) (1,886) (1,252)
Net Realized Gains.................................... (685) - (33)
-------- ------- -------
Total Distributions................................... (1,900) (1,886) (1,285)
-------- ------- -------
Capital Share Transactions (1):
Shares Issued......................................... 32,324 31,424 16,588
Shares Issued in Lieu of Cash Distributions........... 1,744 1,585 1,173
Shares Redeemed....................................... (10,535) (6,073) (6,166)
-------- ------- -------
Net Increase from Capital Share Transactions.......... 23,533 26,936 11,595
-------- ------- -------
Transactions in Interest (1):
Contributions......................................... 283,520 - -
Withdrawals........................................... (23,076) - -
-------- ------- -------
Net Increase from Transactions in Interest 260,444 - -
-------- ------- -------
Total Increase........................................ 308,087 48,461 10,804
NET ASSETS
Beginning of Period................................... 97,118 48,657 37,853
-------- ------- -------
End of Period......................................... $405,205 $97,118 $48,657
======== ======= =======
(1) SHARES ISSUED AND REDEEMED:
Shares Issued......................................... 2,257 2,738 1,612
Shares Issued in Lieu of Cash Distributions........... 121 135 114
Shares Redeemed....................................... (754) (484) (597)
-------- ------- -------
1,624 2,389 1,129
-------- ------- -------
</TABLE>
(1) Capital Share Transaction and Shares Issued and Redeemed are reported
through May 31, 1996. Effective June 1, 1996, the Series was reorganized
as a partnership.
See accompanying Notes to Financial Statements
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
TEN MONTHS YEAR YEAR FEB. 8
ENDED ENDED ENDED TO
SEPT. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1994 1993
----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period (2)... $ 13.48 $ 10.11 $ 10.27 $ 10.00
-------- ------- ------- --------
Income from Investment Operations (2)
- -------------------------------------------
Net Investment Income ................... 0.15 0.30 0.28 0.24
Net Gains (Losses) on Securities
(Realized and Unrealized)............... 1.41 3.36 (0.14) 0.26
-------- ------- ------- --------
Total from Investment Operations......... 1.56 3.66 0.14 0.50
-------- ------- ------- --------
Less Distributions (2)
- -------------------------------------------
Net Investment Income.................... (0.16) (0.29) (0.29) (0.23)
Net Realized Gains....................... (0.08) - (0.01) -
-------- ------- ------- --------
Total Distributions...................... (0.24) (0.29) (0.30) (0.23)
-------- ------- ------- --------
Net Asset Value, End of Period (2)......... $ 14.80 $ 13.48 $ 10.11 $ 10.27
======== ======= ======= ========
Total Return (2)........................... 11.60%# 36.77% 1.30% 5.05%#
Net Assets, End of Period (thousands)...... $405,205 $97,118 $48,657 $ 37,853
Ratio of Expenses to Average Net Assets.... 0.13%* 0.02%(a) 0.02%(a) 0.02%*(a)
Ratio of Net Investment Income to Average
Net Assets................................ 2.15%* 2.61%(a) 2.83%(a) 2.87%*(a)
Portfolio Turnover Rate.................... 11.64%* 2.38% 8.52% 34.36%*
Average Commission Rate (1)................ $ 0.0216 N/A N/A N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
#Non-Annualized
(1) Computed by dividing the total amount of brokerage commissions paid
by the total shares of investment securities purchased and sold during
the period for which commissions were charged, as required by the SEC for
fiscal years beginning after September 1, 1995.
(2) Items calculated through May 31, 1996. Effective June 1, 1996, the
Series was reorganized as a partnership, and these items are no longer
applicable.
(a) Had certain reimbursements not been in effect the ratios of expenses
to average net assets for the periods ended November 30, 1995, 1994 and
1993 would have been 0.18%, 0.33% and 0.48%, respectively, and the ratios
of net investment income to average net assets for the periods ended
November 30, 1995, 1994 and 1993, would have been 2.45%, 2.52% and 2.41%,
respectively.
See accompanying Notes to Financial Statements
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
A. ORGANIZATION:
The DFA Investment Trust Company (the "Trust") is an open-end
management investment company registered under the Investment Company Act
of 1940. At September 30, 1996, The Trust consisted of fifteen
investment portfolios: The U.S. 6-10 Small Company Series, The U.S. Large
Company Series, The Enhanced U.S. Large Company Series, The U.S. Small
Cap Value Series, The U.S. Large Cap Value Series, The DFA One-Year Fixed
Income Series, The DFA Two-Year Corporate Fixed Income Series, The DFA
Two-Year Government Series, The Japanese Small Company Series, The
Pacific Rim Small Company Series, The United Kingdom Small Company
Series, The Continental Small Company Series, The DFA International Value
Series, The Emerging Markets Series and The DFA Two-Year Global Fixed
Income Series. At November 30, 1995, The DFA Two-Year Corporate Fixed
Income Series, The DFA Two-Year Government Series, The Japanese Small
Company Series, The Pacific Rim Small Company Series, The United Kingdom
Small Company Series, The Continental Small Company Series and The DFA
Two-Year Global Fixed Income Series had not yet commenced operations.
These financial statements relate solely to The U.S. Large Company Series
(the "Series").
On June 1, 1996, the Series was reorganized from an entity
taxed as a corporation to an entity taxed as a partnership for income tax
purposes. This reorganization was accomplished by an amendment to the
organization document of the Series which for income tax purposes was
treated as a liquidation of the Series, immediate distribution of its
assets to its sole shareholder at May 31, 1996, which was The U.S. Large
Company Portfolio (the "Portfolio") and subsequent contribution of those
assets from the Portfolio, along with a nominal contribution from the
Advisor to this Series to create the partnership.
On June 2, 1996, an unrelated investment company contributed
assets valued at $225,957,696 to the Series in exchange for a 63.4%
interest in the Series. The total net assets of the Series increased to
$356,632,854 immediately following this transaction.
These transactions are expected to be tax-free events to all
parties involved based on rulings obtained from the Internal Revenue
Service.
For financial reporting purposes, the Series continues to exist
and as such, will maintain all of its previous operating history
throughout the financial statements.
B. SIGNIFICANT ACCOUNTING POLICIES:
The following significant accounting policies are in conformity
with generally accepted accounting principles for investment companies.
Such policies are consistently followed by the Trust in preparation of
its financial statements. The preparation of financial statements in
accordance with generally accepted accounting principles may require
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
1. Security Valuation: Securities held by the Series which are listed
on a securities exchange and for which market quotations are readily
available are valued at the last quoted sale price of the day, or if
there is no such reported sale, at the mean between the most recent bid
and asked prices. Price information on listed securities is taken from
the exchange where the security is primarily traded. Unlisted securities
for which market quotations are readily available are valued at the mean
between the most recent bid and asked prices. The value of securities for
which no quotations are readily available are determined in good faith at
fair value using methods determined by the Board of Directors.
<PAGE>
2. Federal Income Taxes: Prior to June 1, 1996, the Series qualified
as a regulated investment company and distributed all of its taxable
income. Accordingly, no provision for federal taxes was required in the
financial statements prior to that time. Effective June 1, 1996, the
Series is treated as a partnership for federal income tax purposes. Any
interest, dividends and gains or losses of the Series will be deemed to
have been "passed through" to its Feeder Funds.
3. Repurchase Agreements: The Series may purchase money market
instruments subject to the seller's agreement to repurchase them at an
agreed upon date and price. The seller will be required on a daily basis
to maintain the value of the collateral subject to the agreement at not
less than the repurchase price (including accrued interest). The
agreements are conditioned upon the collateral being deposited under the
Federal Reserve book-entry system or with the Fund's custodian or a third
party sub-custodian. All repurchase agreements were entered into on
September 30, 1996 or November 30, 1995.
4. Other: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income is
recorded on the accrual basis. Expenses directly attributable to a
Series are directly charged. Common expenses are allocated using methods
determined by the Board of Directors.
C. INVESTMENT ADVISOR:
Dimensional Fund Advisors Inc. (the "Advisor") provides
investment advisory services to the Series. For the ten months ended
September 30, 1996 and the year ended November 30, 1995, the Series'
advisory fees were computed daily and paid monthly to the Advisor based
on an effective annual rate of 0.025 of 1%.
Through November 30, 1995, the Advisor had agreed to bear all
of the ordinary operating expenses of the Series except for the advisory
fee. Effective December 1, 1995, the Series is obligated to bear all of
its expenses including its advisory fee.
Certain officers of the Series are also officers, directors and
shareholders of the Advisor.
D. PURCHASES AND SALES OF SECURITIES:
The Series made the following purchases and sales of investment
securities (amounts in thousands):
Ten Months Year
Ended Ended
Sept. 30, Nov. 30,
1996 1995
---------- -----------
(Unaudited)
Purchases........... $250,332 $26,675
Sales............... 20,037 1,770
<PAGE>
E. INVESTMENT TRANSACTIONS:
The gross unrealized appreciation and depreciation for
financial reporting and federal income tax purposes of investment
securities was as follows (amounts in thousands):
<TABLE>
<CAPTION>
Ten Months Year
Ended Ended
Sept. 30, Nov. 30,
1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
Gross Unrealized Appreciation.. $109,728 $28,997
Gross Unrealized Depreciation.. (4,984) (555)
-------- -------
Net............................ $104,744 $28,442
======== =======
</TABLE>
At November 30, 1995, the Series had a capital loss carryover
of approximately $172,000 for federal income tax purposes expiring on
November 30, 2001.
F. COMPONENTS OF NET ASSETS:
At November 30, 1995, net assets consisted of (amounts in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Paid-In Capital........................ $69,255
Undistributed Net Investment Income.... 97
Undistributed Net Realized Gain........ (676)
Unrealized Appreciation of Investment
Securities............................ 28,442
-------
$97,118
=======
</TABLE>
G. SECURITIES LENDING
Loans of domestic securities are required at all times to be
secured by collateral at least equal to 102% of the market value of the
securities on loan. However, in the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. In the event that the
borrower fails to return loaned securities, and cash collateral being
maintained by the borrower is insufficient to cover the value of loaned
securities, and provided such collateral insufficiency is not the result
of investment losses, the lending agent has agreed to pay the amount of
the shortfall to the Series or, at the option of the lending agent,
replace the loaned securities. The market value of securities on loan to
brokers from the Series and the related collateral cash, and
indemnification received as follows:
<TABLE>
<CAPTION>
Ten Months Year
----------- -----------
Ended Ended
Sept. 30, Nov. 30,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Value of Securities on Loan.............. $3,808,137 $6,064,020
Value of Collateral and Indemnification.. 3,884,300 6,262,200
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
THE DFA INVESTMENT TRUST COMPANY:
We have audited the accompanying statement of net assets of The U.S.
Large Company Series of The DFA Investment Trust Company as of November
30, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is
to express an opinion of these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosure in the financial statements. Our procedures included
confirmation of investments owned as of November 30, 1995, by
correspondence with the custodians and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all materials respects, the
financial position of The U.S. Large Company Series of The DFA Investment
Trust Company as of November 30, 1995, and the results of its operations
for the year then ended, the changes in its net assets for each of the
two years in the period then ended, and its financial highlights for each
of the periods presented, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 19, 1996
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERNATIONAL BOND PORTFOLIO - INVESTOR B CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERNATIONAL EQUITY PORTFOLIO - INVESTOR B CLASS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERNATIONAL BOND PORTFOLIO - INVESTOR C CLASS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> SMALL CAP VALUE EQUITY PORTFOLIO - INVESTOR B CLASS
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO
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<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERMEDIATE GOVERNMENT BOND PORTFOLIO-INSTITUTIONAL CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> SHORT GOVERNMENT BOND PORTFOLIO - INSTITUTIONAL CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> SHORT GOVERNMENT BOND PORTFOLIO - SERVICE CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 183
<NAME> SHORT GOVERNMENT BOND PORTFOLIO - INVESTOR A CLASS
<S> <C>
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<PAGE>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
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<NAME> INTERMEDIATE TERM BOND PORTFOLIO-INSTITUTIONAL CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERMEDIATE TERM BOND PORTFOLIO-SERVICE CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERMEDIATE TERM BOND PORTFOLIO-INVESTOR A CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> INTERMEDIATE TERM BOND PORTFOLIO-INVESTOR B CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> SELECT EQUITY PORTFOLIO - INSTITUTIONAL CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
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<NAME> SELECT EQUITY PORTFOLIO - SERVICE CLASS
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 203
<NAME> SELECT EQUITY PORTFOLIO - INVESTOR A CLASS
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1996
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 204
<NAME> SELECT EQUITY PORTFOLIO - INVESTOR B CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 205
<NAME> SELECT EQUITY PORTFOLIO - INVESTOR C CLASS
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1996
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 211
<NAME> SMALL CAP GROWTH EQUITY PORTFOLIO-INSTITUTIONAL CLASS
<S> <C>
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</TABLE>
