<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1996
Registration No. 33-26305
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. __ [_]
POST-EFFECTIVE AMENDMENT NO. 22 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 24 [x]
______________________________
COMPASS CAPITAL FUNDS(R)
(Formerly, The PNC(R) Fund)
(Exact Name of Registrant as Specified in Charter)
Bellevue Corporate Center Morgan R. Jones, Esq.
400 Bellevue Parkway Drinker Biddle & Reath
Suite 100 PNB Building
Wilmington, Delaware 19809 1345 Chestnut Street
(Address of Principal Executive Philadelphia, PA 19107
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 792-2555
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Amount Proposed Proposed Amount of
Securities Being Maximum Maximum Registration
Being Registered Offering Aggregate Fee (1)
Registered Price/Unit Offering
Price
Shares of
Beneficial
Interest 2,140,136,586 NAV $2,197,916,213 $100
(1) Registrant had actual aggregate redemptions of $4,837,376,304 for its
previous fiscal year; had used $2,639,750,091 of available redemptions for
reductions pursuant to Rule 24f-2(c) under the 1940 Act; and has previously
used no available redemptions for reductions pursuant to Rule 24e-2(a) of
the 1940 Act during the current year. Registrant elects to use redemptions
in the aggregate amount of $2,197,626,213 for reductions in its current
amendment.
____________________________
It is proposed that this filing will become effective (check appropriate box)
<PAGE>
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
initial 24f-2 Notice for the fiscal year ended September 30, 1995 for all
investment portfolios then existing was filed on November 14, 1995.
Registrant's 24f-2 Notices for the fiscal period ended January 31, 1996 for its
International Bond, New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios were filed on February 12, 1996 and March 28, 1996.
Registrant's 24f-2 Notices for the fiscal period ended March 31, 1996 for its
Multi-Sector Mortgage Securities Portfolio III, Short Government Bond Portfolio
and Core Bond Portfolio were filed on April 25, 1996 and May 28, 1996.
<PAGE>
Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A
of Compass Capital Funds/sm/ (the "Fund") relates only to the Institutional
Shares of the Multi-Sector Mortgage Securities Portfolio III and does not
include the prospectuses or Statements of Additional Information for Service,
Investor A, Investor B, Investor C and Institutional Shares of the Fund's other
Portfolios.
<PAGE>
COMPASS CAPITAL FUNDS
(INSTITUTIONAL SHARES OF THE OF THE
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III)
CROSS REFERENCE SHEET
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FORM N-1A ITEM LOCATION
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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 Performance Inapplicable
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
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<PAGE>
THE MULTI-SECTOR MORTGAGE
SECURITIES PORTFOLIO III
Compass Capital Funds/sm/ (the "Fund") consists of 29 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 A-/A3, 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 July 29, 1996, 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
July 29, 1996
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<PAGE>
INTRODUCTION
The Fund is an open-end management investment company which has
registered shares in 29 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.
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<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 .32% and "Total Portfolio Operating expenses" would
be .57%.
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.
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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."
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<PAGE>
FINANCIAL HIGHLIGHTS
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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 financial highlights set forth certain information concerning the
investment results of the Predecessor Portfolio for the fiscal period ended
March 31, 1996 and the fiscal period ended June 30, 1995. The financial
statements and notes thereto for the Predecessor Portfolio were audited by the
Predecessor Portfolio's former independent accountants, whose report thereon is
incorporated by reference into the Statement of Additional Information.
Additional information about the performance of the Predecessor Portfolio is
contained in the Predecessor Portfolio's annual report. Both the Statement of
Additional Information and the Predecessor 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 Predecessor Portfolio offered
one class of shares to institutional investors.
THE MULTI-SECTOR
MORTGAGE SECURITIES
PORTFOLIO III
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<TABLE>
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NINE MONTHS OCTOBER 6, 1994/(a)/
ENDED THROUGH
MARCH 31, 1996 JUNE 30, 1995
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PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $1,068.11 $1,000.00
Net investment income (b)................ 61.37 55.81
Net realized and unrealized gain (loss)
on investments.......................... (9.06) 68.11
--------- ---------
Net increase
from investment operations.............. 52.31 123.92
--------- ---------
Dividends from net investment income...... (61.37) (55.81)
Distributions from net realized
capital gains........................... (39.64) --
--------- ---------
Total dividends and distributions........ (101.01) (55.81)
--------- ---------
Net asset value, end of period............ $1,019.41 $1,068.11
========= =========
TOTAL INVESTMENT RETURN (c)............... 5.02% 12.78%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b)(d)........................... 0.37% 0.37%
Net investment income (b)(d).............. 7.77% 7.54%
SUPPLEMENTAL DATA:
Average net assets (in thousands)......... $ 115,362 $ 103,332
---------
Portfolio turnover........................ 119% 215%
Net assets, end of period (in thousands).. $ 117,569 $ 112,810
---------
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<PAGE>
(a) Commencement of investment operations.
(b) The Adviser waived fees amounting to $3,652 and $56,269 for the periods
ended March 31, 1996 and June 30, 1995, respectively. Net investment
income would have been $61.37 and $55.28 on a per share basis for the
periods ended 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 0.37% and 0.45% for the periods ended March 31, 1996
and June 30, 1995, respectively, in the absence of fee waivers. The net
investment ratios would have been 7.76% and 7.46%, for the periods ended
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.
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<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
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<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
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<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
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<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 (i) will 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, (ii) 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 (iii) will maintain a
dollar-weighted average credit quality of at least A- by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Inc. ("D&P") or
Fitch Investors Service ("Fitch") or A3 by Moody's Investors Service, Inc.
("Moody's"), with U.S. Government securities being assigned a AA 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
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<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."
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<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
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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
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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 rate mortgage loans generally are structured with one or more
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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 securites, and such holders could have
rights against PNC Mortgage Securities Corp. or its affiliates.
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%
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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 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
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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.
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
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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 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.
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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 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 utilize 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
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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 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
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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 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
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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
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
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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 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
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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 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).
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
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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
- - --------------------------------------------------------------------------------
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 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 Robert S. Kapito are the persons primarily responsible
for the day-to-day management of the Portfolio's investments.
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<PAGE>
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.
Rob Kapito is Vice Chairman of BlackRock Financial Management, and co-head
of its Portfolio Management Group. Mr. Kapito is a member of both the firm's
Management Committee and its Investment Strategy Committee. Mr. Kapito has
primary responsibility for managing client portfolios and for acting as a
specialist in the mortgage and municipal sectors. In addition, Mr. Kapito has
been instrumental in marketing BlackRock's mutual funds and in coordinating the
analytics and administrative functions necessary for managing these funds.
Prior to founding BlackRock in 1988, Mr. Kapito was a Vice President in the
Mortgage Products Group at The First Boston Corporation. Mr. Kapito initially
joined First Boston in 1979 in the Public Finance Department and returned to the
firm in 1983 in the Mortgage Products Group after completing business school.
In the Mortgage Products Group, he initially traded mortgage securities and then
became the head trader of collateralized mortgage obligations. Ultimately, Mr.
Kapito became head of Mortgage Capital Markets with responsibility for marketing
and pricing all of the mortgage-backed and asset-backed securities underwritten
by First Boston. In 1982, Mr. Kapito worked as a strategic consultant with Bain
& Co. and with two other private companies in Europe.
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<PAGE>
Mr. Kapito received a Bachelor of Science in Economics from the Wharton
School of the University of Pennsylvania in 1979, and an M.B.A. from Harvard
Business School in 1983.
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 period ended March 31, 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 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.
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<PAGE>
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 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
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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 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
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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 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
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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
- - --------------------------------------------------------------------------------
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.
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.
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DIVIDENDS AND DISTRIBUTIONS
- - --------------------------------------------------------------------------------
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
- - --------------------------------------------------------------------------------
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.
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.
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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, if 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
- - --------------------------------------------------------------------------------
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 29 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."
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
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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 July 12, 1996, PNC Bank held of record approximately 76% 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
- - --------------------------------------------------------------------------------
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.
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
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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 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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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.
(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-1
<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, Baa1, 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.
CCC -- Debt has a currently identifiable vulnerability to default, and
is dependent upon
A-2
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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 AAA 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.
B -- Bonds rated B are below investment grade and possessing risk that
obligations will not be met when due.
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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 AAA 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.
DDD, DD and D -- Bonds rated in any of these categories are in default
on interest and/or principal payments.
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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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<PAGE>
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
B-2
<PAGE>
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
B-3
<PAGE>
segregate on an ongoing basis with its custodian, cash, U.S. government
securities, or other liquid high grade 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.
B-4
<PAGE>
<TABLE>
<S> <C>
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
July 29, 1995
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
</TABLE>
<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 July 29, 1996, 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 July 29, 1996. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Prospectus.
CONTENTS
Page
----
THE FUND....................................................... 2
INVESTMENT OBJECTIVE AND POLICIES.............................. 2
INVESTMENT RESTRICTIONS........................................ 12
TRUSTEES AND OFFICERS.......................................... 14
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS....................... 22
PORTFOLIO TRANSACTIONS......................................... 25
PURCHASE AND REDEMPTION INFORMATION............................ 27
VALUATION OF PORTFOLIO SECURITIES.............................. 28
PERFORMANCE INFORMATION........................................ 29
TAXES.......................................................... 33
ADDITIONAL INFORMATION CONCERNING SHARES....................... 38
MISCELLANEOUS.................................................. 39
FINANCIAL STATEMENTS........................................... 40
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
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 purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 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
-7-
<PAGE>
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 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
-8-
<PAGE>
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 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
-9-
<PAGE>
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 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
-10-
<PAGE>
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 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
-11-
<PAGE>
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 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").
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<PAGE>
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;
(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;
-13-
<PAGE>
(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: 52
February 1995, Bell
Atlantic Corporation (a
diversified telecommuni-
cations company);
Chairman, President and
Chief Executive Officer
from August 1989 -
January 1991, Bell
Atlantic Enterprises
International, Inc.;
Director, Groupo
Iusacell, S.A. de C.V.
since June 1994;
Director, American
Waterworks, Inc. since
May 1990; Trustee, The
Carl E. & Emily I.
Weller Foundation since
October 1991.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Raymond J. Clark/1/ Trustee, Treasurer of Princeton
Office of the Treasurer President and University since 1987;
Princeton University Treasurer Trustee, The Compass
3 New South Building Capital Group of Funds
P.O. Box 35 from 1987 to 1996;
Princeton, New Jersey 08540 Trustee United Way
Age: 60 Princeton Area
Communities from 1992-94;
Trustee, Chemical Bank, New
Jersey Advisory Board from
1994 until 1995; Trustee,
American Red Cross - Mercer
County Chapter since 1995; and
Trustee, United Way-Greater
Mercer County since 1995.
Robert M. Hernandez Trustee Director since 1991, Vice
USX Corporation Chairman and Chief
600 Grant Street Financial Officer
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: 51 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 Baseball,
Inc.; and Director and
Chairman of the Board, RMI
Titanium Company.
Anthony M. Santomero Vice Chairman Deputy Dean from
- - --------------------
</TABLE>
/1/ This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-15-
<PAGE>
<TABLE>
<S> <C> <C>
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: 49 Center, since July 1995,
and Dean's Advisory
Council Member since July
1984, The Wharton School,
University of
Pennsylvania; Associate
Editor, Journal of
Banking and Finance since
June 1978; Associate
Editor, Journal of
Economics and Business
since October 1979;
Associate Editor, Journal
of Money, Credit and
Banking since January
1980; Research Associate,
New York University
Center for Japan-U.S.
Business and Economic
Studies since July 1989;
Editorial Advisory Board,
Open Economics Review
since November 1990;
Director, The Zweig Fund
and The Zweig Total
Return Fund; Director of
Municipal Fund for
California Investors,
Inc. and Municipal Fund
for New York Investors,
Inc.,
</TABLE>
-16-
<PAGE>
<TABLE>
<S> <C> <C>
David R. Wilmerding, Jr. Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: 61 (investment advisers) since February
1989; Director, Beaver Management
Corporation; Director, Independence
Square Income Securities, Inc.; until
September 1988, President, Treasurer
and Trustee, The Mutual Assurance
Company; until September 1988,
Chairman, President Treasurer and
Director, The Green Tree Insurance
Company (a wholly-owned subsidiary of
The Mutual Assurance Company); until
September 1988, Director, Keystone
State Life Insurance Company;
Director, Trustee or Managing General
Partner of a number of investment
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: 56
</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
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<PAGE>
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.
-18-
<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, 1995:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL FUND COMPLEX/1/
NAME OF PERSON, FROM PART OF FUND BENEFITS UPON Paid to
POSITION REGISTRANT EXPENSES RETIREMENT Trustees
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip E. Coldwell,/*/ $ 9,500 N/A N/A (4)/2/ $46,200
Trustee
Robert R. Fortune,/*/ $ 9,500 N/A N/A (6)/2/ $66,200
Trustee
Rodney D. Johnson,/*/ $ 9,500 N/A N/A (6)/2/ $58,450
Trustee
G. Willing Pepper,/*/ $14,000 N/A N/A (7)/2/ $98,850
Former Chairman of
the Board
Anthony M. $ 9,000 N/A N/A (6)/2/ $51,000
Santomero, Vice
Chairman of the
Board
David R. Wilmerding, $ 9,500 N/A N/A (7)/2/ $63,200
Jr., Chairman of the
Board
William O.
Albertini, Trustee** N/A N/A N/A N/A
Raymond J. Clark,
Trustee, President N/A N/A N/A N/A
and Treasurer**
Robert M. Hernandez,
Trustee** N/A N/A N/A N/A
==========================================================================================
</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 such other investment company boards trustee serves on
within the Fund Complex.
-19-
<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, and were not trustees of the
Fund during the fiscal year ended September 30, 1995.
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.
-20-
<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.
The Predecessor Portfolio was also advised by BlackRock. 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, 1995,
the Predecessor Portfolio paid $216,699 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
-21-
<PAGE>
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.
During the period from January 13, 1996 through March 31, 1996, the
Predecessor Portfolio paid $8,620 in administrative fees to the Administrator.
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 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-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.
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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 from July 1, 1995 to March 31, 1996 and the period
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
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<PAGE>
most recent fiscal year. As of September 30, 1995, the following Portfolios
held the following securities:
<TABLE>
<CAPTION>
PORTFOLIO SECURITY VALUE
- - ---------------------------- ------------------------ ------------
Money Market
- - ------------
<S> <C> <C>
Bear, Stearns & Co. Variable Rate Obligation $ 70,000,000
Goldman Sachs, LP Variable Rate Obligation 47,000,000
Merrill Lynch & Co. Medium Term Note 42,000,000
Merrill Lynch & Co. Commercial Paper 24,490,222
Merrill Lynch & Co. Variable Rate Obligation 25,002,938
Morgan Stanley & Co. Repurchase Agreement 125,000,000
U.S. Treasury Money Market
- - --------------------------
Morgan Stanley & Co. Repurchase Agreement $100,000,000
Managed Income
- - --------------
Salomon Brothers, Inc. Corporate Bond $ 7,062,375
Merrill Lynch & Co. Corporate Bond 2,202,895
Morgan Stanley & Co. Corporate Bond 15,961,839
Balanced
- - --------
Salomon Brothers, Inc. Corporate Bond $ 450,592
Merrill Lynch & Co. Corporate Bond 919,875
Index Equity
- - ------------
Salomon Brothers, Inc. Common Stock $ 256,275
Merrill Lynch & Co. Common Stock 543,750
Short Government Bond
- - ---------------------
Salomon Brothers, Inc. Common Stock $ 492,000
PaineWebber Group Inc. Common Stock 147,375
International Bond
- - ------------------
Salomon Brothers, Inc. Common Stock $ 2,046,250
PaineWebber Group Inc. Common Stock 1,558,125
Government Income
- - -----------------
Merrill Lynch & Co. Common Stock $ 999,995
</TABLE>
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.
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<PAGE>
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.
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
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<PAGE>
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 1th/to the nth power
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.
Based on the foregoing calculation, the total returns for the Predecessor
Portfolio were as follows:
<TABLE>
<CAPTION>
TOTAL
RETURN
AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
FOR THE FROM COMMENCEMENT
TWELVE MONTHS OF OPERATIONS TO
ENDED ENDED
PORTFOLIO 3/31/96 3/31/96/(1)/
- - ----------------------- ---------------- -----------------
<S> <C> <C>
Predecessor Portfolio 11.53% 11.96%
=============================================================
</TABLE>
-28-
<PAGE>
- - --------------------
/(1)/ 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:
a-b
YIELD = 2[(----- +1)to the 6th power - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by 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
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<PAGE>
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 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 information for the 30-day period ended March 31, 1996
for the Predecessor Portfolio was as follows:
PORTFOLIO YIELD
--------- -----
Predecessor Portfolio 7.60%
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
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<PAGE>
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]
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.
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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. Such gain is distributed as a capital gain dividend and
is taxable to shareholders as long-term capital gain, regardless of the length
of time the shareholder has held his shares, whether such gain was recognized by
the Portfolio prior to the date on which a shareholder acquired shares of the
Portfolio and whether the distribution was paid in cash or reinvested in shares.
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 deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate of
tax for some taxpayers may be higher. An individual's long-term capital gains
will be taxable at a maximum rate of 28%. Capital gains and ordinary income of
corporate taxpayers are both taxed at a maximum nominal rate of 35%, but at
marginal rates of 39% for taxable income between $100,000 and $335,000.
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
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<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
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 July 23, 1996 owned of record or beneficially 5% or more of the
outstanding shares of the Portfolio was as follows: Ameritech Pensions Trust,
c/o Harris Trust & Savings Bank, 111 West Monroe 5W, Chicago, IL 60603,
99.98%.
On July 12, 1996, PNC Bank held of record approximately 76% of the Fund's
outstanding shares, and may be deemed a controlling person of the Fund under the
1940 Act. PNC Bank is a national bank organized under the laws of the United
States. All of the capital stock of PNC Bank is owned by PNC Bancorp, Inc. All
of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp., a
publicly-held bank holding company.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. 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
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<PAGE>
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.
FINANCIAL STATEMENTS
The audited financial statements for the Predecessor Portfolio contained in
its Annual Report to Shareholders dated March 31, 1996 are incorporated by
reference in this Statement of Additional Information. No other parts of the
Annual Report are incorporated by reference herein. 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.
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<PAGE>
COMPASS CAPITAL FUNDS/SM/
(FORMERLY, THE PNC(R) FUND)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A of the Registration Statement are the
following tables:
(i) Audited Financial Highlights for the Money Market, U.S.
Treasury Money Market, Municipal Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, Value Equity, Growth Equity,
Small Cap Value Equity, Small Cap Growth Equity,
International Equity, International Emerging Markets,
Select Equity, Index Equity, Balanced, Intermediate
Government Bond, Intermediate Bond, Managed Income,
Tax-Free Income, Pennsylvania Tax-Free Income,
Government Income and Ohio Tax-Free Income Portfolios
for the fiscal years ended September 30, 1995,
September 30, 1994, September 30, 1993, September 30,
1992, September 30, 1991 and September 30, 1990.
(ii) Audited Financial Highlights for the International
Bond, New Jersey Tax-Free Income and New Jersey
Municipal Money Market Portfolios for the period ended
January 31, 1996 and the fiscal years ended February
28, 1995, February 28, 1994, February 28, 1993 and
February 29, 1992.
(iii) Audited Financial Highlights for the Short Government
Bond and Core Bond Portfolios for the period ended
March 31, 1996 and the fiscal years ended June 30,
1995, June 30, 1994 and June 30, 1993.
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(iv) Audited Financial Highlights for the Multi-Sector
Mortgage Securities Portfolio III for the period ended
March 31, 1996 and the period ended June 30, 1995.
(2) Incorporated by reference into Part B of the Registration
Statement are the following audited financial statements:
(i) With respect to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market and Virginia Municipal
Money Market Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1995;
Statements of Net Assets -September 30, 1995;
Statements of Operations for the year ended
September 30, 1995;
Statements of Changes in Net Assets for the year
ended September 30, 1995;
Notes to Financial Statements.
(ii) With respect to the Value Equity, Growth Equity, Small
Cap Growth Equity, Select Equity, Index Equity, Small
Cap Value Equity, International Equity, International
Emerging Markets and Balanced Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1995;
Schedules of Investments with respect to the
International Equity Portfolio - September 30,
1995;
Statements of Assets and Liabilities - September
30, 1995;
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Statements of Net Assets -September 30, 1995;
Statements of Operations for the year ended
September 30, 1995;
Statements of Changes in Net Assets for the year
ended September 30, 1995;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Intermediate Bond and
Government Income Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1995;
Statements of Net Assets -September 30, 1995;
Statements of Operations for the year ended
September 30, 1995;
Statements of Changes in Net Assets for the year
ended September 30, 1995;
Notes to Financial Statements.
(iv) With respect to the International Bond, New Jersey Tax-
Free Income and New Jersey Municipal Money Market
Portfolios:
Reports of Independent Accountants for the period
ended January 31, 1996;
Statements of Net Assets for the period ended
January 31, 1996 (New Jersey Tax-Free Income and
New Jersey Municipal Money Market Portfolios);
Schedule of Investments - January 31, 1996
(International Bond Portfolio);
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Statement of Assets and Liabilities - January 31,
1996 (International Bond Portfolio);
Statements of Operations for the period ended
January 31, 1996;
Statements of Changes in Net Assets for the period
ended January 31, 1996;
Notes to Financial Statements.
(v) With respect to the Short Government Bond and Core Bond
Portfolios:
Report of Independent Accountants for the period
ended March 31, 1996;
Schedules of Investments - March 31, 1996;
Statements of Assets and Liabilities - March 31,
1996;
Statements of Operations for the period ended
March 31, 1996;
Statements of Changes in Net Assets for the period
ended March 31, 1996;
Notes to Financial Statements.
(vi) With respect to the Multi-Sector Mortgage Securities
Portfolio III:
Report of Independent Auditors for the period
ended March 31, 1996;
Portfolio of Investments - March 31, 1996;
Statement of Assets and Liabilities - March 31,
1996;
Statement of Operations for the nine months ended
March 31, 1996;
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<PAGE>
Statement of Changes in Net Assets for the period
ended March 31, 1996;
Notes to Financial Statements.
(vii) With respect to the U.S. Large Company Series of The
DFA Investment Trust Company:
Report of Independent Accountants for the fiscal
year ended November 30, 1995;
Statement of Net Assets - November 30, 1995;
Statement of Operations for the year ended
November 30, 1995;
Statement of Changes in Net Assets for the year
ended November 30, 1995;
Notes to Financial Statements.
(b) Exhibits:
(1) (a) Declaration of Trust of the Registrant dated December
22, 1988 is incorporated herein by reference to Exhibit
(1) of Registrant's Registration Statement on Form N-1A
filed on December 23, 1988.
(b) Amendment No. 1 to Declaration of Trust is incorporated
herein by reference to Exhibit (1)(b) of Pre-Effective
Amendment No. 2 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1989.
(c) Amendment No. 2 to the Declaration of Trust dated
December 23, 1993 is incorporated herein by reference
to Exhibit (1)(c) of Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A filed
on July 8, 1994.
(2) Registrant's Code of Regulations is incorporated herein
by reference to
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<PAGE>
Exhibit (2) of Form N-1A, filed on December 23, 1988.
(3) None.
(4) (a) Specimen Copies of Share Certificates for Shares of
beneficial interest in Class A-1, Class A-2, Class A-3,
Class B-1, Class B-2, Class B-3, Class C-1, Class C-2,
Class C-3, Class D-1, Class D-2, Class D-3, Class E-1,
Class E-2, Class E-3, Class F-1, Class F-2, Class F-3,
Class G-1, Class G-2, Class G-3, Class H-1, Class H-2,
Class H-3, Class I-1, Class I-2, Class I-3, Class J-1,
Class J-2, Class J-3, Class K-1, Class K-2, Class K-3,
Class L-1, Class L-2, Class L-3, Class M-1, Class M-2,
Class M-3, Class N-1, Class N-2, Class N-3, Class O-1,
Class O-2, Class O-3, Class P-1, Class P-2, Class P-3
of the Registrant are incorporated herein by reference
to Exhibit 4 of Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A filed
on May 8, 1992.
(b) Form of Share Certificates for Shares of beneficial
interest in Class Q-1, Class Q-2, Class Q-3, Class R-1,
Class R-2, Class R-3, Class S-1, Class S-2, Class S-3,
Class T-1, Class T-2, Class T-3, Class U-1, Class U-2,
Class U-3 of the Registrant are incorporated herein by
reference to Exhibit 4(b) of Post-Effective Amendment
No. 8 to Registrant's Registration Statement on Form N-
1A filed on January 22, 1993.
(c) Form of Share Certificates for Shares of beneficial
interest in Class V-1, Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3 of the Registrant is
incorporated herein by reference to Exhibit (4)(c) of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A filed on November
10, 1993.
(d) Form of Share Certificates for Shares of beneficial
interest in Class Z-1, Class
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<PAGE>
Z-2 and Class Z-3 of the Registrant is incorporated
herein by reference to Exhibit (4)(d) of Post-Effective
Amendment No. 15 to Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(e) Form of Share Certificates for Shares of beneficial
interest in Class AA-1, Class AA-2, Class AA-3; Class
AA-4; Class BB-1, Class BB-2, Class BB-3 and Class BB-
4; and Class CC-1, Class CC-2, Class CC-3 and Class CC-
4 is incorporated herein by reference to Exhibit (4)(e)
of Post-Effective Amendment No. 18 to Registrant's
Registration Statement on Form N-1A filed on October
12, 1995.
(5) (a) Investment Advisory Agreement between Registrant and
PNC Asset Management Group, Inc. relating to all
Portfolios except the Multi-Sector Mortgage Securities
Portfolio III and Index Equity Portfolio 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-EFFECTIVE AMENDMENT NO. 21 TO REGISTRANT'S
REGISTRATION STATEMENT ON FORM N-1A FILED ON MAY 30,
1996.
(c) Sub-Advisory Agreements between PNC Asset Management
Group, Inc. and BlackRock Financial Management, Inc./
Provident Capital Management, Inc./ PNC Equity Advisors
Company/ PNC Institutional Management Corporation/
Morgan Grenfell Investment Services Limited/ and
CastleInternational Asset Management Limited ARE
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.
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<PAGE>
(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 Provident Distributors, Inc.
(c) Amendment No. 2 to the Distribution Agreement between
Registrant and Provident Distributors, Inc. dated
October 18, 1994 is incorporated herein by reference to
Exhibit 6(c) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(d) Amendment No. 3 to the Distribution Agreement between
Registrant and Provident Distributors, Inc. is
incorporated herein by reference to Exhibit (6)(d) of
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(7) None.
(8) (a) Custodian Agreement dated October 4, 1989 between
Registrant and PNC Bank, National Association is
incorporated herein by reference to Exhibit 8(a) of
Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A filed on December
29, 1989.
(b) Amendment No. 1 to Custodian Agreement between
Registrant and PNC Bank, National Association is
incorporated herein by reference to Exhibit 8(b) of
Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A filed on December
13, 1991.
(c) Amendment No. 2 dated March 1, 1993 to Custodian
Agreement between Registrant and PNC Bank, National
Association with respect to the Short-Term Bond,
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<PAGE>
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.
(e) Sub-Custodian Agreement dated April 27, 1992 among the
Registrant, PNC Bank, National Association and The
Chase Manhattan Bank is incorporated herein by
reference to Exhibit (8)(e) of Post-Effective Amendment
No. 10 to Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(f) Global Sub-Custody Agreement between Barclays Bank PLC
and PNC Bank, National Association dated October 28,
1992 is incorporated herein by reference to Exhibit
(8)(e) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(g) Custodian Agreement between State Street Bank and Trust
Company and PNC Bank, National Association dated June
13, 1983 is incorporated herein by reference to Exhibit
(8)(f) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(h) Amendment No. 1 to Custodian Agreement between State
Street Bank and Trust Company and PNC Bank dated
November 21, 1989 is incorporated herein by reference
to Exhibit (8)(g) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed
on January 18, 1995.
(i) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to
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<PAGE>
the Tax-Free Income Portfolio is incorporated herein by
reference to Exhibit 8(d) of Post-Effective Amendment
No. 7 to Registrant's Registration Statement on Form N-
1A filed on December 1, 1992.
(j) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to the Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Index Equity and Small Cap Value
Equity Portfolios is incorporated herein by reference
to Exhibit (8)(e) of Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A filed
on December 1, 1992.
(k) Letter Agreement dated March 1, 1993 between Registrant
and PNC Bank, National Association relating to
custodian services with respect to the North Carolina
Municipal Money Market, Short-Term Bond, Intermediate-
Term Bond, Small Cap Growth Equity and Core Equity
Portfolios is incorporated herein by reference to
Exhibit (8)(h) of Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A filed
on November 10, 1993.
(9) (a) Co-Administration Agreement among Registrant, Compass
Distributors, Inc. Distributors, Inc. and PFPC Inc. 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) 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.
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<PAGE>
(c) Transfer Agency Agreement dated October 4, 1989 between
Registrant and PFPC Inc. is incorporated herein by
reference to Exhibit 9(e) of Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-
1A filed on December 29, 1989.
(d) Amendment No. 1 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit 9(h) of
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A filed on February
5, 1992.
(e) Amendment No. 2 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Pennsylvania Municipal Money Market,
Ohio Municipal Money Market, Intermediate Government,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Value Equity, Index Equity and Small Cap Value Equity
Portfolios is incorporated herein by reference to
Exhibit 9(h) of Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A filed
on December 13, 1991.
(f) Amendment No. 3 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to the Short-Term Bond, Intermediate-Term
Bond, Core Equity, Small Cap Growth Equity and North
Carolina Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit (9)(e) of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A filed on November
10, 1993.
(g) Amendment No. 4 to Transfer Agency Agreement dated
October 4, 1989 between Registrant and PFPC Inc.
relating to Series B Investor Shares of the Money
Market, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Growth Equity, Index
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Equity, Small Cap Value Equity, Intermediate-Term Bond,
Small Cap Growth Equity, Core Equity, International
Fixed Income, Government Income, International Emerging
Markets, International Equity and Balanced Portfolios
is incorporated herein by reference to Exhibit (9)(i)
of Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A filed on January
18, 1995.
(h) Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is incorporated herein by
reference to Exhibit (9)(k) of Post-Effective Amendment
No. 18 to Registrant's Registration Statement on Form
N-1A filed on October 12, 1995.
(i) Trademark License Agreement between Registrant and PNC
Bank Corp. is incorporated herein by reference to
Exhibit 9(h) of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed
on December 29, 1989.
(10) (a) Opinion and Consent of Counsel./1/
(b) Opinion of Counsel.
(11) (a) Consent of Deloitte & Touche LLP.
(b) Consent of Drinker Biddle & Reath.
(12) None.
(13) (a) Purchase Agreement between Registrant and Shearson
Lehman Hutton Inc. ("Shearson") relating to Classes A-
1, B-1, C-1, D-2, E-2, F-2 and G-2 is incorporated
herein by reference to Exhibit 13(a) of Post-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-1A filed on December 29, 1989.
(b) Purchase Agreement between Registrant and Shearson
relating to shares of Class
- - ---------------
/1/ Filed on November 14, 1995, February 12, 1996, March 28, 1996, April 25,
1996 and May 28, 1996 under Rule 24f-2 as part of Registrant's Rule 24f-2
Notice.
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<PAGE>
H-2 is incorporated herein by reference to Exhibit
13(b) of Post-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A filed on April 30,
1990.
(c) Purchase Agreement between Registrant and Shearson
relating to shares of Class I-1, Class I-2, Class J-1,
Class J-2, Class K-2, Class L-2, Class M-2, Class N-2,
Class O-2 and Class P-2 is incorporated herein by
reference to Exhibit 13(c) of Post-Effective Amendment
No. 4 to Registrant's Registration Statement on Form N-
1A filed on December 13, 1991.
(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,
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<PAGE>
Class K-4, Class L-4, Class M-4, Class N-4, Class O-4,
Class P-4, Class R-4, Class S-4, Class T-4, Class U-4,
Class W-4, Class X-4, Class Y-4 is incorporated herein
by reference to Exhibit (13)(f) of Post-Effective
Amendment No. 14 to Registrant's Registration Statement
on Form N-1A filed on January 18, 1995.
(g) Purchase Agreement dated February 1, 1994 between the
Registrant and Provident Distributors, Inc. relating to
shares of Class V-1, Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3 is 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; Class BB-1, Class
BB-2, Class BB-3 and Class BB-4; and Class CC-1, Class
CC-2, Class CC-3 and Class CC-4 is incorporated herein
by reference to Exhibit (13)(i) of Post-Effective
Amendment No. 18 to Registrant's Registration Statement
on Form N-1A filed on October 12, 1995.
(14) None.
(15) Amended and Restated Distribution and Service Plan for
Service, Series A Investor, Series B Investor, Series C
Investor and Institutional Shares is incorporated
herein by reference to
C-14
<PAGE>
Exhibit (15) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(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) ANNUAL REPORT FOR THE COMPASS CAPITAL GROUP OF FUNDS
("COMPASS GROUP") (FILE NOS. 811-5435) DATED
------------------
JANUARY 31, 1996 WITH RESPECT TO THE INTERNATIONAL
FIXED INCOME FUND IS INCORPORATED HEREIN BY REFERENCE
TO COMPASS GROUP'S FILING INCLUDING SUCH ANNUAL REPORT
AND FILED ON APRIL 8, 1996 (ACCESSION NO.
0000935069-96-000045).
(b) REGISTRANT'S ANNUAL REPORT DATED JANUARY 31, 1996 WITH
RESPECT TO THE NEW JERSEY MUNICIPAL MONEY MARKET AND
THE NEW JERSEY TAX-FREE INCOME PORTFOLIOS IS
INCORPORATED HEREIN BY REFERENCE TO REGISTRANT'S FILING
INCLUDING SUCH ANNUAL REPORT AND FILED ON APRIL 8,
1996 (ACCESSION NO. 0000935069-96-000046).
--------------------
(c) ANNUAL REPORT FOR THE DFA INVESTMENT TRUST COMPANY
("DFA") (FILE NOS. 811-7436) DATED NOVEMBER 30, 1996
--------
WITH RESPECT TO THE U.S. LARGE COMPANY SERIES IS
INCORPORATED HEREIN BY REFERENCE TO DFA'S FILING
INCLUDING SUCH ANNUAL REPORT AND FILED ON JANUARY 26,
1996 (ACCESSION NO. 0000950116-96-000032).
(d) REGISTRANT'S SEMI-ANNUAL REPORT DATED MARCH 31, 1996
WITH RESPECT TO THE CORE BOND AND SHORT GOVERNMENT BOND
C-15
<PAGE>
PORTFOLIOS IS INCORPORATED HEREIN BY REFERENCE TO
REGISTRANT'S FILING INCLUDING SUCH SEMI-ANNUAL REPORT
AND FILED ON MAY 31, 1996 (ACCESSION NO.
0000935069-96-000071).
--------------------
(e) ANNUAL REPORT FOR THE BFM INSTITUTIONAL TRUST INC.
("BIT") (FILE NOS. 811-6513) DATED MARCH 31, 1996 WITH
RESPECT TO THE MULTI-SECTOR MORTGAGE SECURITIES
PORTFOLIO III IS INCORPORATED HEREIN BY REFERENCE TO
BIT'S FILING INCLUDING SUCH ANNUAL REPORT AND FILED ON
MAY 30, 1996 (ACCESSION NO. 0000950007-96-000107)
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 May 16, 1996: A-5, B-4, B-5, C-4, C-5, D-5, E-5, F-4, F-5, G-5,
H-4, H-5, I-4, I-5, J-4, J-5, K-4, K-5, L-5, M-5, N-5, O-5, P-5, Q-4, Q-5, R-4,
R-5, S-4, S-5, T-5, U-5, V-3, V-4, V-5, W-2, W-5, X-1, X-2, X-5, Y-5, Z-4, Z-5,
AA-2, AA-4, AA-5 and BB-5.
C-16
<PAGE>
With regard to the other classes of shares, the following information
is as of May 16, 1996:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S>
Class A-1 <C>
Class B-1 746
Class C-1 219
Class D-1 73
Class E-1 603
Class F-1 121
Class G-1 7
Class H-1 529
Class I-1 110
Class J-1 2
Class K-1 37
Class L-1 2
Class M-1 1
Class N-1 94
Class O-1 3608
Class P-1 1
Class Q-1 8
Class R-1 4
Class S-1 834
Class T-1 1
Class U-1 387
Class V-1 8
Class W-1 2
Class Y-1 134
Class Z-1 8
Class AA-1 109
Class BB-1 1473
Class A-2 1047
Class B-2 4
Class C-2 5
Class D-2 3
Class E-2 14
Class F-2 8
Class G-2 22
Class H-2 25
Class I-2 2
Class J-2 6
Class K-2 22
Class L-2 8
Class M-2 3
Class N-2 1
Class O-2 33
Class P-2 7
Class Q-2 34
Class R-2 13
Class S-2 5
10
</TABLE>
C-17
<PAGE>
<TABLE>
<S> <C>
Class T-2 42
Class U-2 17
Class V-2 8
Class Y-2 10
Class Z-2 1
Class BB-2 3
Class A-3 560
Class B-3 62
Class C-3 9
Class D-3 416
Class E-3 1922
Class F-3 265
Class G-3 647
Class H-3 164
Class I-3 3
Class J-3 53
Class K-3 127
Class L-3 36
Class M-3 446
Class N-3 548
Class O-3 276
Class P-3 656
Class Q-3 2
Class R-3 20
Class S-3 31
Class T-3 474
Class U-3 79
Class W-3 2
Class X-3 34
Class Y-3 95
Class Z-3 13
Class AA-3 10
Class BB-3 8
Class CC-3 2
Class A-4 2
Class D-4 71
Class E-4 489
Class G-4 315
Class L-4 7
Class M-4 203
Class N-4 71
Class O-4 46
Class P-4 287
Class T-4 218
Class U-4 15
Class W-4 2
Class X-4 591
Class Y-4 3
Class BB-4 15
</TABLE>
C-18
<PAGE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit (6)(a). Indemnification of PFPC Inc. and Compass
Distributors, Inc. in their capacity as co-administrators is provided for in
Section 7 of the Administration Agreement filed herein as Exhibit 9(a).
Indemnification of Registrant's Custodian and Transfer Agent is provided for,
respectively, in Section 22 of the Custodian Agreement incorporated by reference
herein as Exhibit 8(a) and Section 17 of the Transfer Agency Agreement
incorporated by reference herein as Exhibit 9(c). Indemnification of Compass
Capital Group, Inc. in its capacity as co-administrator as provided for in
Section 7 of the Co-Administration Agreement filed herein as Exhibit 9(b).
Registrant intends to obtain from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions. In
addition, Section 9.3 of the Registrant's Declaration of Trust incorporated by
reference herein as Exhibit 1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives and Employees.
--------------------------------------------------------------------
The Trust shall indemnify each of its Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while as a Trustee or thereafter, by reason
of his being or having been such a Trustee except with respect to any matter
------
as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties,
provided that as to any matter disposed of by a compromise payment by such
--------
person, pursuant to a consent decree or otherwise, no indemnification either
for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter
of bad faith had been adjudicated, it would in the opinion of such counsel
have been adjudicated in favor of such person. The rights accruing to any
person under these provisions shall not exclude any other right to which he
may be lawfully entitled, provided that no person may satisfy any right of
--------
indemnity or reimbursement hereunder except out of the property of the
Trust. The Trustees may make advance payments in connection with the
indemnification under this Section 9.3, provided that the indemnified person
--------
shall have
C-19
<PAGE>
given a written undertaking to reimburse the Trust in the event it is
subsequently determined that he is not entitled to such indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having been a Shareholder and not because of his acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of
Shares with the same alphabetical designation as that of the Shares owned by
such Shareholder to be held harmless from and indemnified against all loss
and expense arising from such liability. The Trust shall, upon request by
the Shareholder, assume the defense of any claim made against any
Shareholder for any act or obligations of the Trust and satisfy any judgment
thereon from such assets.
Item 28. Business and Other Connections of Investment Advisers
C-20
<PAGE>
PNC Asset Management Group, Inc. ("PAMG") performs investment advisory
services for Registrant. PAMG was organized in 1994 for the purpose of
providing advisory services to investment companies.
(a) To Registrant's knowledge, none of the directors or officers of
PAMG, except those set forth below, is, or has been at any time during
Registrant's past two fiscal years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and officers and certain executives of PAMG also hold various positions with,
and engage in business for, PNC Bank Corp, which indirectly owns all the
outstanding stock of PAMG, or other subsidiaries of PNC Bank Corp. Set forth
below are the names and principal businesses of the directors and certain
executives of PAMG who are engaged in any other business, profession, vocation
or employment of a substantial nature.
(b) To Registrant's knowledge, none of the directors or officers of
PNC Institutional Management Corporation ("PIMC"), except those set forth below,
is, or has been at any time during Registrant's past two fiscal years, engaged
in any other business, profession, vocation or employment of a substantial
nature, except that certain directors and officers and certain executives of
PIMC also hold various positions with, and engage in business for, PNC Bank
Corp., which indirectly owns all the outstanding stock of PIMC, or other
subsidiaries of PNC Bank Corp. Set forth below are the names and principal
businesses of the directors and certain executives of PIMC who are engaged in
any other business, profession, vocation or employment of a substantial nature.
(c) Provident Capital Management, Inc. ("PCM") is an indirect wholly-
owned subsidiary of PNC Bank Corp. PCM currently offers investment advisory
services to institutional investors such as pension and profit-sharing plans or
trusts, insurance companies and banks. To Registrant's knowledge, none of the
directors or officers of PCM, except those set forth below, is, or has been at
any time during the Registrant's past two fiscal years, engaged in any other
business, profession, vocation or employment of a substantial nature. Set forth
below are the names and principal businesses of the directors and certain
executives of PCM who are engaged in any other business, profession, vocation or
employment of a substantial nature.
(d) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
wholly-owned subsidiary of PNC Bank Corp. BlackRock currently offers investment
advisory services to institutional investors such as pension and profit-sharing
plans or trusts, insurance companies and banks. To Registrant's knowledge, none
of the directors or officers of BlackRock, except those set forth below, is, or
has been at any time during the
C-21
<PAGE>
Registrant's past two fiscal years, engaged in any other business, profession,
-----
vocation or employment of a substantial nature. Set forth below are the names
and principal businesses of the directors and certain executives of BlackRock
who are engaged in any other business, profession, vocation or employment of a
substantial nature.
(e) PNC Equity Advisors Company ("PEAC") is an indirect wholly-owned
subsidiary of PNC Bank Corp. PEAC currently offers investment advisory services
to institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. To Registrant's knowledge, none of the directors
or officers of PEAC, except those set forth below, is, or has been at any time
during the Registrant's past two fiscal years, engaged in any other business,
-----
profession, vocation or employment of a substantial nature. Set forth below are
the names and principal businesses of the directors and certain executives of
PEAC who are engaged in any other business, profession, vocation or employment
of a substantial nature.
(f) Morgan Grenfell Investment Services Limited ("MGIS") is a
subsidiary of Morgan Grenfell Asset Management. The list required by this Item
28 of officers and directors of MGIS, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by MGIS pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-12880).
(g) CastleInternational Asset Management Limited
("CastleInternational") is an indirect wholly-owned subsidiary of PNC Bank Corp.
The list required by this Item 28 of officers and directors of
CastleInternational, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by CastleInternational pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-51087).
C-22
<PAGE>
PNC ASSET MANAGEMENT GROUP
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- - ------------- ---- -------------- --------
<S> <C> <C> <C>
Chairman Richard C. Caldwell Executive Vice President Banking
and Director PNC Bank, National Association(1)
Director Banking
PNC National Bank(2)
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Investment
Provident Capital Management Advisory
Inc.(5)
Executive Vice President Bank Holding
PNC Bank Corp.(14) Company
Director Banking
PNC Bank, New Jersey,
National Association(16)
Director Financial
PFPC Inc.(3) Related
Services
Vice-President Laurence D. Fink Chairman and Chief Executive Investment
and Director Officer Advisory
BlackRock Financial Management, Inc.
Director
PNC Asset Management Group, Inc.
Secretary Pamela Fraser Chief Counsel, Asset Management Banking
Wilford & Trust
PNC Bank, National Association(1)
Treasurer Brian Lilly None.
and Chief
Financial
Officer
Assistant Thomas R. Moore Secretary Finanical
Secretary PNC International Investment Related
Corporation Services
Vice President and Secretary
Pinaco, Inc.
Vice President and Secretary
PNC Mortgage Bank, N.A.
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PAMG NAME CONNECTIONS BUSINESS
- - -------------- ---- --------------- --------
<S> <C> <C> <C>
Secretary and Treasurer
PNC Brokerage Corp
Vice President Real Estate
Provcor Properties, Inc.
Vice President Real Estate
Provident Realty Management, Inc.
Director Vincent J. Ciavardini President and Chief Financial
Financial Officer Related
PFPC Inc.(3) Services
Director J. Richard Carnall Executive Vice President Banking
PNC Bank, National Association(1)
Director Banking
PNC National Bank(2)
Chairman and Director Financial-
PFPC Inc.(3) Related
Services
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Equipment
Hayden Bolts, Inc.*
Real
Estate
Director
--------
Parkway Real Estate Company*
Director Invest-
Provident Capital Management ment
Inc.(5) Advisory
Chief Equity Young D. Chin Chairman, President, Chief Investment
Officer & Executive Officer, Chief Advisory
Director Investment Officer & Director
Provident Capital Management
Inc.(5)
Chairman
PNC Equity Advisors Company
Director
CastleRock Capital Management
Director Ralph L. Schlosstein President
BlackRock Financial Management, Inc.
Director Thomas K. Whitford Senior Vice President Banking
PNC Bank Corp.(14)
Director Fiduciary
PNC Trust Company of Activities
</TABLE>
C-24
<PAGE>
New York
PNC INSTITUTIONAL MANAGEMENT CORPORATION
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- - ------------- ---- -------------- ---------
<S> <C> <C> <C>
Chairman and J. Richard Carnall Executive Vice President Banking
Director PNC Bank, National Association(1)
Director Banking
PNC National Bank(2)
Chairman and Director Financial-
PFPC Inc.(3) Related
Services
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Equipment
Hayden Bolts, Inc.*
Director Real Estate
Parkway Real Estate Company*
Director Invest-
Provident Capital Management ment
Inc.(5) Advisory
Director Richard C. Caldwell Executive Vice President Banking
PNC Bank, National Association(1)
Director Banking
PNC National Bank(2)
Director Fiduciary
PNC Trust Company Activities
of New York(11)
Director Investment
Provident Capital Management Advisory
Inc.(5)
Executive Vice President Bank Holding
PNC Bank Corp.(14) Company
Director Banking
PNC Bank, New Jersey,
National Association(16)
Director Financial
PFPC Inc.(3) Related
Services
</TABLE>
C-25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Director Laurence D. Fink Chairman and Chief Executive
Officer
BlackRock Financial Management, Inc.
Director
PNC Asset Management Group, Inc.
Director Richard L. Smoot President, and Chief Banking
Executive Officer
PNC Bank, National Association
(Phila.)(1)
Senior Vice President Bank Holding
PNC Bank Corp.(14) Company
Director Financial-
PFPC Inc.(3) Related
Services
Director Fiduciary
PNC Trust Company of NY(11) Activities
Director, Chairman and President Banking
PNC Bank, New Jersey,
National Association(16)
Director, Chairman, and CEO Banking
PNC National Bank(2)
Chairman & Director Leasing
PNC Credit Corp (13)
Director and Nicholas M. Marsini,Jr. Senior Vice President Banking
Chief Financial PNC Bank, National Association(1)
Officer
Director Financial
PFPC Inc.(3) Related
Services
Senior Vice President Banking
and Chief Financial Officer
PNC Bank, Delaware(20)
Director, Vice President and Banking
Treasurer
PNC National Bank(2)
Director Banking
PNC Bank, New Jersey,
National Association(16)
Director Fiduciary
PNC Trust Company of New York(11) Activities
Director and Treasurer Holding
PNC Bancorp, Inc.(9) Company
Director and Treasurer Investment
PNC Capital Corp.(17) Activities
Director and Treasurer Banking
PNC Holding Corp.(18)
</TABLE>
C-26
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME COUNNECTIONS BUSINESS
- - ------------- ------------------ --------------------- ------------
<S> <C> <C> <C>
Director and Treasurer Investment
PNC Venture Corp.(19) Activities
President and Thomas H. Nevin None.
Chief Investment
Officer
Vice President Michelle L. Petrilli Chief Counsel Banking
and Secretary PNC Bank, DE(20)
Secretary Financial-
PFPC Inc.(3) Related
Services
Executive Vice Charles B. Landreth Vice President Banking
President PNC Bank,
National Association(1)
Senior Vice Vincent J. Ciavardini President and Chief Financial-
President Financial Officer Related
PFPC Inc.(3) Services
Senior Vice Scott Moss None.
President
Senior Vice John N. Parthemore None.
President
Senior Vice Dushyant Pandit None.
President
Senior Vice James R. Smith None.
President
Vice President, Stephen M. Wynne Executive Vice President and Financial-
Chief Chief Accounting Officer Related
Accounting PFPC Inc.(3) Services
Officer, and
Assistant Secretary
</TABLE>
C-27
<PAGE>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- - ---------- -------------------- -------------- ----------
Controller Pauline M. Heintz Vice President Financial
PFPC Related
Inc.(3) Services
Vice President John R. Antczak None.
Vice President Jeffrey W. Carson None.
Vice President Katherine A. Chuppe None.
Vice President Mary J. Coldren None.
Vice President Michele C. Dillon None.
Vice President Patrick J. Ford None.
Vice President Richard Hoerner None.
Vice President Michael S. Hutchinson None.
Vice President Michael J. Milligan None.
Vice President Wendy Powell None.
Vice President G. Keith Robertshaw None.
Vice President W. Don Simmons None.
Vice President Charles Allen Stiteler None.
Vice President William F. Walsh None.
Vice President Karen J. Walters None.
____________________
*Information regarding these corporations can be obtained from the office of the
Secretary.
C-28
<PAGE>
<TABLE>
<CAPTION>
PROVIDENT CAPITAL MANAGEMENT, INC.
DIRECTORS AND OFFICERS
OTHER BUSINESS
NAME TITLE CONNECTIONS
- - ------------------------- ------------------------ --------------------------
<S> <C> <C>
Richard C. Caldwell Director See PIMC list
Ernest E. Cecilia Director Director, CIO, President,
CEO, PNC Equity Advisors
Company (28)
Director, Equity
Research, PNC Asset
Management Group,
Inc. (30)
Director, Equity
Research, PNC Bank,
National Association (1)
Young D. Chin Director, President and See PAMG List.
Chief Executive Officer
Timothy M. Alles Treasurer Director, PNC Trust
Company of New York (11)
Treasurer, PNC Service
Corp. (4)
Vice President, PNC Bank
Corp. (14)
Vice President and
Controller, PNC Bank, FSB
(27)
Controller, Provident
National Financial Corp.*
Treasurer, Provident
Realty Inc. (8)
Treasurer, PNC New Jersey
Credit Corp. (10)
Beth Wagner-Coyne Vice President None
Lynn K. Shipman Secretary None
Earl J. Gaskins Vice President None
Larry Bernstein Vice President None
J. H. Hill, Jr. Vice President None
Susan D. Menzies Vice President None
Edwin B. Powell Vice President None
Herve Van Caloen Vice President None
</TABLE>
C-29
<PAGE>
BLACKROCK FINANCIAL MANAGEMENT, INC.
DIRECTORS AND OFFICERS
OTHER BUSINESS
NAME TITLE CONNECTIONS
- - ---- ----- --------------
Scott M. Amero Managing Director VP of 10 BlackRock closed
end funds
Keith T. Anderson Managing Director VP of 21 BlackRock closed
end funds
Richard C. Caldwell Director See PIMC List
Wesley R. Edens Managing Director COO & Director of 4
BlackRock closed end
funds
Laurence D. Fink Chairman and Director Chairman & Director of 25
BlackRock closed end
funds; and Director of
PNC Asset Management
Group, Inc.
Hugh R. Frater Managing Director None
Henry Gabbay Chief Operating Officer Treasurer of 25 BlackRock
and Managing Director closed end funds
Bennett W. Golub, Ph.D. Managing Director None
Charles S. Hallac Managing Director None
Michael C. Huebsch Managing Director VP of 21 BlackRock closed
end funds
Robert S. Kapito Managing Director VP of 21 BlackRock closed
end funds
P. Phillip Matthews Managing Director None
Barbara G. Novick Managing Director Secretary of 21 BlackRock
closed end funds
Karen H. Sabath Managing Director Assistant Secretary of 21
BlackRock closed end
funds
Ralph L. Schlosstein President & Director President & Director of
21 BlackRock closed end
funds; and President of 4
BlackRock closed end
funds
Joel M. Shaiman Managing Director None
J. Robert Small Principal & Controller Assistant Secretary of 4
BlackRock closed end
funds
C-30
<PAGE>
BLACKROCK FINANCIAL MANAGEMENT, INC.
DIRECTORS AND OFFICERS
Susan L. Wagner Managing Director Secretary of 4 BlackRock
closed end funds
PNC EQUITY ADVISORS COMPANY
DIRECTORS AND OFFICERS
OTHER BUSINESS
NAME TITLE CONNECTIONS
---- ----- --------------
Timothy M. Alles CFO, Treasurer See Provident Capital
Management List
Richard C. Caldwell Director See PIMC List
Ernest E. Cecilia Director, CIO, See Provident Capital
President Management List
& CEO
Young D. Chin Director See Provident Capital
Management List
Robert J. Christian Chairman and Director See Provident Capital
Management List
Lisa P. Howard Chief Compl. Officer None
Leah L. Tompkins Secretary, Chief Legal Senior Counsel, PNC Bank,
Counsel National Association (1)
Thomas H. O'Brien CEO, PNC Bank Corp.
C-31
<PAGE>
(1) PNC Bank, National Association, 120 S. 17th Street, Philadelphia, PA
19103; Broad & Chestnut Streets, Philadelphia, PA 19101; and 17th and
Chestnut Streets, Philadelphia, PA 19103.
(2) PNC National Bank, 103 Bellevue Parkway, Wilmington, DE 19809.
(3) PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
(4) PNC Service Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(5) Provident Capital Management, Inc., 30 S. 17th Street, Suite 1500,
Philadelphia, PA 19103.
(6) PNC Investment Corp., Broad and Chestnut Streets, Philadelphia, PA 19101.
(7) Provident Realty Management, Inc., Broad and Chestnut Streets,
Philadelphia, PA 19101.
(8) Provident Realty, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(9) PNC Bancorp, Inc., 3411 Silverside Road, Wilmington, DE 19810.
(10) PNC New Jersey Credit Corp, 1415 Route 70 East, Suite 604, Cherry Hill, NJ
08034.
(11) PNC Trust Company of New York, 40 Broad Street, New York, NY 10084.
(12) Provcor Properties, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(13) PNC Credit Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(14) PNC Bank Corp., 5th Avenue and Wood Streets, Pittsburgh, PA 15265.
(15) BlackRock Financial Management Inc., 435 Park Avenue, New York, NY 10154.
(16) PNC Bank, New Jersey, National Association, Woodland Falls Corporate Park,
210 Lake Drive East, Cherry Hill, NJ 08002.
(17) PNC Capital Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(18) PNC Holding Corp, 222 Delaware Avenue, P.O. Box 791, Wilmington, DE 19899.
(19) PNC Venture Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(20) Bank of Delaware, 200 Delaware Avenue, Wilmington, DE 19801.
(21) Bank of Delaware Corp., 300 Delaware Avenue, Wilmington, DE 19801.
(22) Del-Vest, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(23) Marand Corp., 222 Delaware Avenue, Wilmington, DE 19801.
(24) Millsboro Insurance Agency, 300 Delaware Avenue, Wilmington, DE 19801.
(25) Roney-Richards, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(26) PNC Bank, New England (f/k/a The Massachusetts Company), 125 High Street,
Boston, MA.
(27) PNC Bank, FSB, P.O. Box 4026, Vero Beach, FL.
(28) PNC Equity Advisors Company, 1835 Market Street, 15th Floor, Eleven Penn
Center, Philadelphia, PA 19103.
(29) PNC Institutional Management Corporation 400 Bellevue Parkway, Wilmington,
DE 19809.
C-32
<PAGE>
(30) PNC Asset Management Group, Inc. 1835 Market Street, 15th Floor, Eleven
Penn Center, Philadelphia, PA 19103.
(31) Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19102.
(32) Agnes Irwin School, Ithan Avenue and Conestoga Road, P. O. Box 407,
Rosemont, PA 19010.
(33) Episcopal Community Services, 225 South 3rd Street, Philadelphia, PA
19106.
(34) Greater Philadelphia Chamber of Commerce, 1234 Market Street, Philadelphia,
PA 19107.
(35) The Greater Philadelphia First Corporation, 1818 Market Street,
Philadelphia, PA 19103.
(36) Pennsylvania Ballet, 1101 South Broad Street, Philadelphia, PA 19147.
(37) The Philadelphia Orchestra, 1420 Locust Street, Philadelphia, PA 19102.
(38) Police Athletic League of Philadelphia, 3201 North 5th Street,
Philadelphia, PA 19140.
(39) Settlement Music School, 416 Queen Street, Philadelphia, PA 19147.
(40) Widener University, One University Plaza, Chester, PA 19013.
(41) United Negro College Fund Inc., 1650 Arch Street, Philadelphia, PA 19103.
(42) The Greater Philadelphia Urban Affairs Coalition, 1207 Chestnut Street,
Philadelphia, PA 19107.
C-33
<PAGE>
Item 29. Principal Underwriter
(a) Not applicable.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Compass Distributors, Inc. is incorporated by
reference to Schedule A of FORM BD filed by Compass Distributors, Inc. with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) PNC Bank, National Association, Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19102 (records relating to its
functions as custodian).
(2) Provident Capital Management, Inc., 30 South 17th Street,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
(3) Compass Distributors, Inc., 259 Radnor-Chester Road, Suite
135, Radnor, Pennsylvania 19807 (records relating to its
functions as distributor and co-administrator).
(4) PNC Asset Management Group, Inc., 1835 Market Street, 15th
Floor, Eleven Penn Center, Philadelphia, PA 19103 (records
relating to its functions as investment adviser).
(5) PNC Institutional Management Corporation, Bellevue Corporate
Center, 103 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as investment sub-
adviser).
(6) BlackRock Financial Management, Inc., 345 Park Avenue, New
York, New York 10154 (records relating to its functions as
investment sub-adviser).
(7) PNC Equity Advisors Company, 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103 (records relating to its
functions as investment sub-adviser).
C-34
<PAGE>
(8) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its
functions as co-administrator, transfer agent and dividend
disbursing agent).
(9) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas,
New York, New York 10019 (records relating to its function
as sub-custodian).
(10) State Street Bank and Trust Company, P.O. Box 1631, Boston,
Massachusetts (records relating to its function as sub-
custodian).
(11) Barclays Bank PLC, 75 Wall Street, New York, New York 10265
(records relating to its function as sub-custodian).
(12) Morgan Grenfell Investment Services Limited, 20 Finsbury
Circus, London, England EC2M1NB (records relating to its
functions as investment sub-adviser).
(13) Compass Capital Group, Inc., 345 Park Avenue, New York, New
York 10154 (records relating to its functions as co-
administrator).
(14) CastleInternational Asset Management Limited, 7 Castle
Street, Edinburgh, Scotland, EH3 3AM (records relating to
its functions as investment sub-adviser).
(15) Citibank, N.A. 111 Wall Street, 23rd Floor, Zone 6, New
York, NY 10043 (records relating to its functions as sub-
custodian).
(16) Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496
(Registrant's declaration of trust, code of regulations and
minute books).
Item 31. Management Services
None.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
C-35
<PAGE>
SIGNATURES
-------------
Pursuant to the requirements of the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940, the Registrant certifies that it
meets all the requirements for effectiveness for this Post-Effective Amendment
No. 22 to its Registration Statement pursuant to Rule 485(b) under the 1933 Act,
and has duly caused this Post-Effective Amendment No. 22 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 29 day of
July, 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. 22 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 July 29, 1996
- - ----------------------------
(Raymond J. Clark) Treasurer
*David R. Wilmerding, Jr. Chairman of the Board July 29, 1996
- - ----------------------------
(David R. Wilmerding, Jr.)
*Anthony M. Santomero Vice-Chairman of July 29, 1996
- - ----------------------------
(Anthony M. Santomero) the Board
*William O. Albertini Trustee July 29, 1996
- - ----------------------------
(William O. Albertini)
*Robert M. Hernandez Trustee July 29, 1996
- - ----------------------------
(Robert M. Hernandez)
*By: /s/ Karen H. Sabath
----------------------------------
Karen H. Sabath, Attorney-in-fact
<PAGE>
COMPASS CAPITAL FUNDS
SECRETARY'S CERTIFICATE
The undersigned, Morgan R. Jones, Secretary of Compass Capital Funds (the
"Fund") hereby certifies that set forth below is a copy of the resolutions duly
adopted by the Board of Trustees of the Fund on May 8, 1996:
RESOLVED, that the officers of the Fund be, and each of them hereby
is, authorized in the name and on behalf of the Fund to execute and cause
to be filed with the SEC Post-Effective Amendments to the Fund's
Registration Statement on Form N-1A under the 1940 Act and the Securities
Act of 1933, as amended (the "1933 Act"), in such forms as the officer or
officers executing the same may approve as necessary or desirable and
proper, such approval to be conclusively evidenced by his or their
execution thereof;
FURTHER RESOLVED, that Morgan R. Jones be, and hereby is, designated
to act on behalf of the Fund as its agent for service of process for
matters relating to said Registration Statement with the powers enumerated
in Rule 478 of the Rules and Regulations of the SEC under the 1933 Act, as
amended; and
FURTHER RESOLVED, that the trustees and officers of the Fund who may
be required to execute any amendments to the Fund's Registration Statement
be, and each of them hereby is, authorized to execute a power of attorney
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath, and
any of them, their true and lawful attorney or attorneys, to execute in
their name, place and stead, in their capacity as trustee or officer, or
both, of the Fund any and all amendments to the Registration Statement, and
all instruments necessary or incidental in connection therewith, and to
file the same with the SEC; and any of said attorneys shall have the power
to act thereunder with or without the other of said attorneys and shall
have full power of substitution and resubstitution; and any of said
attorneys shall have full power and authority to do in the name and on
behalf of said trustees and officers, or any or all of them, in any and all
capacities, every act whatsoever requisite or necessary to be done on the
premises, as fully and to all intents and purposes as each of said trustees
or officers, or any or all of them, might or could do in person, said acts
of said attorneys, or either of them, being hereby ratified and approved.
<PAGE>
IN WITNESS THEREOF, I have hereunto signed my name and affixed the seal of
the Fund on May 29, 1996.
/s/ Morgan R. Jones
------------------------------
Morgan R. Jones
Secretary
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
David R. Wilmerding, Jr., whose signature appears below, hereby constitutes
and appoints David R. Wilmerding, Jr., Raymond J. Clark and Karen H. Sabath, and
each of them, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, or any of them, may
deem necessary or advisable or which may be required to enable Compass Capital
Funds (the "Company") to comply with the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (collectively, the "Acts"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the filing and effectiveness
of any and all amendments (including post-effective amendments) to the Company's
Registration Statement pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a trustee and/or officer of
the Company any and all such amendments filed with the Securities and Exchange
Commission under said Acts, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or any of them, shall do or cause to be done by virtue
hereof.
/s/David R. Wilmerding, Jr.
---------------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Raymond J. Clark, whose signature appears below, hereby constitutes and
appoints Edward J. Roach his true and lawful attorney and agent, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorney and agent may deem necessary or
advisable or which may be required to enable Compass Capital Funds (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a trustee and/or officer of the Company any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/Raymond J. Clark
-------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Robert M. Hernandez, whose signature appears below, hereby constitutes and
appoints G. Willing Pepper and Edward J. Roach, and either of them, his true and
lawful attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, may deem necessary or advisable or
which may be required to enable Compass Capital Funds (the "Company") to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended (collectively, the "Acts"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of any and all amendments
(including post-effective amendments) to the Company's Registration Statement
pursuant to said Acts, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a trustee and/or officer of the Company any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/Robert M. Hernandez
----------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
Anthony M. Santomero, whose signature appears below, hereby constitutes and
appoints G. Willing Pepper and Edward J. Roach, and either of them, his true and
lawful attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, may deem necessary or advisable or
which may be required to enable Compass Capital Funds (the "Company") to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended (collectively, the "Acts"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of any and all amendments
(including post-effective amendments) to the Company's Registration Statement
pursuant to said Acts, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a trustee and/or officer of the Company any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/Anthony M. Santomero
-----------------------
Date: March 5, 1996
<PAGE>
Compass Capital Funds
POWER OF ATTORNEY
-----------------
William O. Albertini, whose signature appears below, hereby constitutes and
appoints G. Willing Pepper and Edward J. Roach, and either of them, his true and
lawful attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, may deem necessary or advisable or
which may be required to enable Compass Capital Funds (the "Company") to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended (collectively, the "Acts"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of any and all amendments
(including post-effective amendments) to the Company's Registration Statement
pursuant to said Acts, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned as a trustee and/or officer of the Company any and all
such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/William O. Albertini
-----------------------
Date: March 5, 1996
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- - ----------- ----------- --------
(6) (b) Appendix A to the Distribution
Agreement.
(8) (d) Appendix B to the Custodian Agreement.
(10) (b) Opinion of Counsel.
(11) (a) Consent of Deloitte & Touche LLP.
(11) (b) Consent of Drinker Biddle & Reath.
(27) Financial Data Schedules for the Multi-
Sector Mortgage Securities Portfolio
III.
<PAGE>
EXHIBIT (6)(b)
APPENDIX A
to the
DISTRIBUTION AGREEMENT
BETWEEN
Compass Capital Funds(R)
(previously The PNC(R) Fund)
and
Compass Distributors, Inc.
________________________________________________________________________________
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series Investor C Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C
Investor Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Bond Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Short Government Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Value Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Growth Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
-2-
<PAGE>
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Agreed to and accepted as of January 15, 1996.
COMPASS CAPITAL FUNDS
By: /s/ Edward J. Roach
-------------------
COMPASS DISTRIBUTORS, INC.
By: /s/ Robert Clement
------------------
-3-
<PAGE>
EXHIBIT (8)(d)
Compass Capital Funds(R)
(previously named The PNC(R) Fund)
Appendix B to Custodian
Agreement dated as of October 4, 1989
The Fund hereby appoints Bank to act as custodian of the securities,
cash and other property belonging to the additional Portfolios listed below
("Additional Portfolios") for the period and on the terms set forth in this
Agreement. Bank accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant provisions of the 1940
Act and applicable rules and regulations thereunder.
The additional Portfolios are as follows:
. New Jersey Tax-Free Income Portfolio
. Core Bond Portfolio
. Multi-Sector Mortgage Securities Portfolio III
Portfolio
Agreed to and accepted as of
January 15, 1996
Compass Capital Funds
By:/s/ Edward J. Roach
-------------------
PNC Bank, National Association
By:/s/ Brian Burns
---------------
<PAGE>
EXHIBIT 10(b)
July 29, 1996
Compass Capital Funds/sm/
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
re: Compass Capital Funds/sm/ (the "Fund") (Registration No.
--------------------------------------------------------
33-26305)/ Shares registered by Post-Effective Amendment No.
------------------------------------------------------------
22 to the Fund's Registration Statement on Form N-1A
----------------------------------------------------
Gentlemen:
We have acted as counsel for Compass Capital Funds/sm/, a
Massachusetts business trust (the "Fund"), in connection with the preparation
and filing with the Securities and Exchange Commission of Post-Effective
Amendment No. 22 to the Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, registering 2,140,136,586 shares of
beneficial interest (collectively, the "Shares"). The registration of the
Shares has been made in reliance upon Rule 24e-2 under the Investment Company
Act of 1940. The Fund is authorized to issue and unlimited number of shares of
each class, with a par value of $.001.
We have reviewed the Fund's Declaration of Trust as amended, its Code
of Regulations, resolutions adopted by its Board of Trustees and shareholders
and such other legal and factual matters as we have considered necessary. We
have relied on an opinion of Ropes & Gray, special Massachusetts counsel to the
Funds, insofar as our opinion below relates to matters arising under the laws of
the Commonwealth of Massachusetts.
On the basis of and subject to the foregoing, we are of the opinion
that the above-referenced Shares registered pursuant to Rule 24e-2, when issued
for payment as described in the Fund's prospectuses, will be legally issued,
fully paid, and non-assessable by the Fund.
Under Massachusetts law, shareholders of a Massachusetts business
trust could, under certain circumstances, be held personally liable for the
obligations of the Fund.
<PAGE>
Compass Capital Funds/sm/
July 29, 1996
Page 2
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
every note, bond, contract, order or other undertaking issued by or on behalf of
the Fund or its trustees, and in the stationery used by the Fund. The
Declaration of Trust provides for indemnification out of the assets of the Fund
belonging to the class(es) of shares owned by each shareholder (and other
classes having the same alphabetical designation) for all loss and expense of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the relevant class of shares itself (and other classes having the same
alphabetical designation) would be unable to meet its obligations.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to Post-Effective Amendment No. 22 to the
Fund's Registration Statement.
Very truly yours,
DRINKER BIDDLE & REATH
<PAGE>
EXHIBIT 11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 22 to Registration Statement No. 33-26305 of Compass Capital Fund on form
N-1A of our report dated May 22, 1996 on the financial statements of The
Multi-Sector Mortgage Securities Portfolio III of the BFM Institutional Trust,
Inc. appearing in the Annual Report of The BFM Institutional Trust, Inc. for the
period ended March 31, 1996.
DELOITTE & TOUCHE LLP
New York, New York
July 26, 1996
<PAGE>
EXHIBIT 11(b)
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. 22 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
July 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 119896186
<INVESTMENTS-AT-VALUE> 120802494
<RECEIVABLES> 752038
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 121554532
<PAYABLE-FOR-SECURITIES> 1985798
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1999585
<TOTAL-LIABILITIES> 3985383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 116037595
<SHARES-COMMON-STOCK> 115331
<SHARES-COMMON-PRIOR> 105616
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 745413
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 786141
<NET-ASSETS> 117569149
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7051694
<OTHER-INCOME> 0
<EXPENSES-NET> 320714
<NET-INVESTMENT-INCOME> 6730980
<REALIZED-GAINS-CURRENT> 1500904
<APPREC-INCREASE-CURRENT> (2710415)
<NET-CHANGE-FROM-OPS> 5521469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6730980
<DISTRIBUTIONS-OF-GAINS> 4324463
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 9715
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</TABLE>
