COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
- --------------------------------------------------------------------------------
ANNUAL REPORT
SEPTEMBER 30, 1997
<PAGE>
<TABLE>
<CAPTION>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES 99.9%
<S> <C> <C> <C>
AETNA COMMERCIAL MORTGAGE,
AAA $ 500 6.89%, Series 1995-C5, Class C, 12/26/30 $ 503,243
ASSET SECURITIZATION CORP.,
AA 1,000 7.36%, Series 1996-D2, Class A2, 02/14/29 1,046,267
AAA 2,500 7.47%, Series 1996-D3, Class A1D, 10/13/26 2,649,928
CBA MORTGAGE CORP.,
A 367 7.73%, Series 1993-C1, Class D, 12/25/03 370,407
BBB 1,000 7.96%, Series 1993-C1, Class D, 12/25/03 1,013,304
CAROLINA FIRST BANK,
BBB 3,000 7.64%, Series 1996 C1, Class B, 03/18/27 3,015,000
CAROUSEL CENTER FINANCE, INC.,
BBB+ 1,341 7.53%, Series 1, Class C, 10/15/07 1,368,340
CHASE COMMERCIAL MORTGAGE SECURITIES CORP.,
BB- 1,984 7.37%, Series 1997-1, Class G, 12/19/11 1,796,787
CITIBANK, N.A. MULTIFAMILY MORTGAGE,
BBB+ 3,000 8.00%, Series 1994-1, Class M1, 01/25/19 3,144,375
CS FIRST BOSTON MORTGAGE SECURITIES CORP.,
BBB 500 8.01%, Series 1995AEW1, Class D, 11/25/27 514,062
DONALDSON, LUFKIN, JENRETTE MORTGAGE ACCEPTANCE CORP.
BBB 3,000 9.40%, Series 1993-MF7, Class B, 06/18/03 3,239,887
BBB- 3,000 8.16%, Series 1997-C1, Class B2, 05/15/30 3,149,076
FDIC REAL ESTATE MORTGAGE INSURANCE CORP.,
AA 4,000 8.45%, Series 1994-C1, Class 2C, 09/25/25 4,137,500
AAA 230 7.85%, Series 1994-C1, Class 2A2, 09/25/25 231,656
BBB 3,000 7.25%, Series 1996-C1, Class ID, 05/25/26 3,027,805
FIRST UNION-LEHMAN BROTHERS COMMERCIAL MORTGAGE,
BB 2,000 7.00%, Series 1997-C1, Class F, 04/18/29 1,816,622
GENERAL MOTORS ACCEPTANCE CORP.,
BB+ 3,000 7.86%, Series 1996-C1, Class E. 10/15/28 3,056,978
J.P. MORGAN, COMMERCIAL MORTGAGE FINANCE CORP.,
BBB 2,500 7.30%, Series 1996-C2, Class D, 11/25/27 2,543,581
BBB- 2,153 6.67%, Series 1997-SPC1, Class D, 06/25/27 2,163,119
LB Commercial Conduit Mortgage Trust,
BBB 2,000 7.05%, Series 1995-C2, Class D, 09/25/25 2,020,291
LTC COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES,
A 2,125 7.65%, Series 1994-1, Class C, 06/15/26 2,213,748
BBB 2,000 7.97%, Series 1996, Class D, 04/15/28 2,095,019
MERRILL LYNCH MORTGAGE INVESTMENTS, INC., PASS-THROUGH CERTIFICATES,
BBB- 3,000 # 6.96%, Series 1996-C1, Class A3, 11/21/28 2,927,999
MORGAN STANLEY CAPITAL INVESTMENTS, INC., PASS-THROUGH CERTIFICATES,
Baa3 3,000 7.85%, Series 1997-C1, Class E, 02/15/20 3,102,391
BBB- 3,500 7.54%, Series 1995-HF1, Class D, 02/15/27 3,587,500
AA 2,656 7.33%, Series 1997-HF1, Class B, 07/15/29 2,748,960
BBB- 1,700 7.51%, Series 1996-C1, Class D2, 02/15/06 1,711,687
MIDLAND REALTY ACCEPTANCE CORP.,
BBB 3,000 7.64%, Series 1996-C2, Class D, 01/25/29 3,123,548
MORTGAGE CAPITAL FUNDING, INC.,
BBB 2,000 8.52%, Series 1994-MC1, Class A5, 06/25/19 2,130,000
A 2,000 7.41%, Series 1997-MC1 Class C, 07/20/27 2,075,625
BBB- 2,368 7.70%, Series 1996-MC1, Class F, 05/15/06 2,417,900
BB 1,000 7.15%, Series 1996-MC1, Class G, 06/15/06 953,906
</TABLE>
See Notes to Financial Statements
1
<PAGE>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NATIONSLINK FUNDING CORP.,
BBB- $2,700 7.69%, Series 1996-1, Class E, 02/20/06 $2,778,891
BB 1,000 7.35%, Series 1996-1, Class F, 02/20/06 963,125
NB COMMERCIAL MORTGAGE CERTIFICATE
BB 2,500 8.73%, Series FSI, Class E, 10/20/23 2,267,578
NOMURA ASSET CAPITAL CORP.,
BBB 1,000 7.64%, Series 1993-M1, Class A1, 11/25/03 1,021,563
OREGON COMMERCIAL MORTGAGE,
A 3,000 7.60%, Series 1995-1 Class C, 06/01/23 3,052,500
PAINE WEBBER MORTGAGE ACCEPTANCE CORP.,
BBB 2,000 7.30%, Series 1995 MI, Class D, 01/15/07 2,020,168
A 2,000 6.90%, Series 1995 M2, Class C, 12/01/03 2,013,494
PHOENIX REAL ESTATE SECURITIES, INC.,
A- 3,545 8.00%, Series 1993-1, Class C 11/25/23 3,578,234
RESOLUTION TRUST CORP.,
A 1,808 7.10%, Series 1993-C3, Class D, 12/25/24 1,809,990
A 574 8.00%, Series 1994-C1, Class D, 06/25/26 586,352
BBB 3,000 6.90%, Series 1995-C1, Class D, 02/25/27 2,977,500
BB 2,280 8.00%, Series 1994-C2, Class G, 04/25/25 2,290,056
BB- 2,213 8.00%, Series 1994-C1, Class F, 06/25/26 2,217,060
BBB 2,685 7.00%, Series 1995-C2, Class D, 05/25/27 2,668,230
SALOMON BROTHERS MORTGAGE SECURITIES,
AA 3,000 7.13%, Series 1996-C1, Class B, 01/20/28 3,071,338
SOUTHERN PACIFIC SECURITIES,
BBB 1,000 7.20%, Series 1996-C1, Class D, 09/25/26 1,028,750
STRUCTURED ASSET SECURITIES CORP. MULTI,
BBB 3,000 7.38%, Series 1995-C1, Class D, 09/25/24 3,048,632
AA 1,900 7.00%, Series 1995-C4, Class C, 06/25/26 1,911,832
BBB 3,000 7.50%, Series 1996-CFL, Class F, 02/25/28 2,987,890
BBB 1,970 7.75%, Series 1996-CFL, Class E, 02/25/28 2,015,275
TVO SOUTHWEST,
A 4,500 9.38%, Series 1994-MF1, Class A2, 11/18/04 4,885,713
WHP COMMERCIAL MORTGAGE,
A 2,000 7.76%, Series 1995-C1, Class C, 07/20/25 2,014,765
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $116,448,718) 121,105,447
SHORT-TERM INVESTMENTS 0.9%
FEDERAL HOME LOAN BANK DISCOUNT NOTES
1,080 5.55% DUE 10/1/97 (COST $1,080,000) 1,080,000
-----------
TOTAL INVESTMENTS (COST $117,528,718) 100.8% 122,185,447
LIABILITIES IN EXCESS OF OTHER ASSETS -0.8% (934,509)
----------------------
NET ASSETS 100.00% $121,250,938
=======================
</TABLE>
---------------------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
# Principal amount of securities pledged as collateral of $2,927,999 on 223
net short U.S. Treasury Notes and 244 long U.S. Treasury Bonds future
contracts expiring December 1997. The value of such contracts on September
30, 1997 was $58,265,719, resulting in an unrealized gain of $145,062.
See Notes to Financial Statements
2
<PAGE>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $117,528,718) $122,185,447
Cash 25,439
Interest receivable 742,393
Investments sold receivable 6,170,049
Other assets 5,323
------------
129,128,651
------------
LIABILITIES
Fund share payable 7,000,000
Dividends payable 765,748
Accrued expenses payable 76,372
Futures margin payable 35,593
------------
7,877,713
------------
NET ASSETS $121,250,938
============
Net assets were comprised of :
Common stock, at par $ 114
Paid-in capital in excess of par 115,051,577
Accumulated net realized gain 1,395,583
Net unrealized appreciation 4,803,664
------------
Net assets $121,250,938
============
Net asset value per share $ 1,056.37
============
Total shares outstanding 114,781
============
- --------------------------------------------------------------------------------
See Notes to Financial Statements
3
<PAGE>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year
Ended
9/30/97
---------
INVESTMENT INCOME:
Interest $ 9,703,750
-----------
Expenses:
Investment advisory fee 323,455
Administration fee 297,578
Custodian fee 35,867
Transfer agent fee 39,315
Legal and audit 59,895
Printing 12,803
Registration fees 12,948
Trustees fees 2,719
Other 15,212
-----------
Total expenses 799,792
Less fees voluntarily waived (321,079)
-----------
Total expenses 478,713
-----------
Net investment income 9,225,037
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on:
Investment transactions 1,508,880
Futures contracts 190,793
-----------
1,699,673
-----------
Net change in unrealized appreciation on:
Investments 4,455,143
Futures contracts 74,427
-----------
4,529,570
-----------
Net gain on investments 6,229,243
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $15,454,280
===========
- --------------------------------------------------------------------------------
See Notes to Financial Statements
4
<PAGE>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period For the Period
For the Year 4/1/96 7/1/95
Ended through through
INCREASE (DECREASE) IN NET ASSETS: 9/30/97 9/30/96 3/31/96
--------- ----------- -----------
<S> <C> <C> <C>
Operations:
Net investment income $ 9,225,037 $ 4,517,391 $ 6,730,980
Net realized gain on investments 1,699,673 152,944 1,500,904
Net unrealized appreciation
(depreciation) on investments 4,529,570 (512,048) (2,710,415)
----------- ------------ -------------
Net increase in net assets resulting
from operations 15,454,280 4,158,287 5,521,469
----------- ------------ ------------
Distributions to shareholders from:
Net investment income (9,225,037) (4,517,391) (6,730,980)
Net realized gain (1,202,447) -- (4,324,463)
----------- ------------ ------------
(10,427,484) (4,517,391) (11,055,443)
----------- ------------ ------------
Capital share transactions:
Proceeds from shares subscribed -- -- --
Net asset value of shares issued
in reinvestment
of dividend distributions 10,413,147 4,527,992 10,293,458
Net asset value of shares redeemed (15,927,042) -- --
----------- ------------ ------------
(5,513,895) 4,527,992 10,293,458
----------- ------------ ------------
Total increase (decrease) in net assets (487,099) 4,168,888 4,759,484
----------- ------------ ------------
NET ASSETS:
Beginning of period 121,738,037 117,569,149 112,809,665
----------- ------------ ------------
End of period $121,250,938 $121,738,037 $117,569,149
=========== ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
5
<PAGE>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year For the Period For the Period For the Period
FOR A SHARE OUTSTANDING THROUGHOUT Ended 4/1/96 through 7/1/95 through 10/6/94 (a) through
THE PERIOD 9/30/97 9/30/96 3/31/96 6/30/95
--------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $1,016.08 $1,019.41 $1,068.11 $1,000.00
--------- --------- --------- ---------
Net investment income (b) 73.74 38.33 61.37 55.81
Net realized and unrealized gain
(loss) on investments 49.82 (3.33) (9.06) 68.11
--------- --------- --------- ---------
Net increase from investment
operations 123.56 35.00 52.31 123.92
--------- --------- --------- ---------
Distributions from net investment
income (73.74) (38.33) (61.37) (55.81)
Distributions from net realized
capital gains (9.53) -- (39.64) --
--------- --------- --------- ---------
Total dividends and distributions (83.27) (38.33) (101.01) (55.81)
--------- --------- --------- ---------
Net asset value, end of period $1,056.37 $1,016.08 $1,019.41 $1,068.11
========= ========= ========= =========
TOTAL RETURN 12.67% 3.53% 5.02% 12.78%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $121,251 $121,738 $117,569 $112,810
Ratio of expenses to average
net assets 0.37% 0.37%(b) 0.37%(b) 0.37%(b)
Ratio of expenses to average
net assets (excluding waivers) 0.62% 0.51%(b) 0.37%(b) 0.45%(b)
Ratio of net investment income to
average net assets 7.13% 7.60%(b) 7.77%(b) 7.54%(b)
Ratio of net investment income to
average net assets
(excluding waivers) 6.88% 7.45%(b) 7.76%(b) 7.46%(b)
Portfolio turnover 52% 24% 119% 215%
</TABLE>
- --------------------------------------------------------------------------------
(a) Commencement of investment operations
(b) Annualized
See Notes to Financial Statements
6
<PAGE>
COMPASS CAPITAL FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Compass Capital FundsSM (the "Fund") (formerly The PNC(R) Fund) was
organized on December 22, 1988 as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. These financial statements relate to the Fund's
Multi-Sector Mortgage Securities Portfolio III (the "Portfolio"). The Portfolio
is authorized to issue an unlimited number of shares with a par value of $0.001.
As of September 30, 1997, 99.97% of the shares of capital stock of the
Portfolio are owned by Ameritech Pension/VEBA Fund.
The following is a summary of significant accounting policies followed
by the Fund in preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires the use of management estimates. Actual results could differ from the
estimates.
SECURITIES VALUATION: The Fund values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Fund's Board of Trustees. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business.
Futures contracts are valued at the last sale price as of the close of the
commodities exchange on which they trade. Any securities or other assets for
which such current market quotations are not readily available are valued at
fair value as determined in good faith under procedures established by and under
the general supervision and responsibility of the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity from date of purchase exceeded 60
days.
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
7
<PAGE>
FUTURES TRANSACTIONS: The Portfolio invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities, or
securities the Portfolio intends to purchase, against fluctuations in fair value
caused by changes in prevailing market interest rates. The Portfolio may enter
into futures contracts subject to certain limitations. Upon entering into a
futures contract, the Portfolio is required to deposit cash or pledge U.S.
Government securities of an initial margin. Subsequent payments, which are
dependent on the daily fluctuations in the value of the underlying security or
securities, are made or received by the Portfolio each day (daily variation
margin) and are recorded as unrealized gains or losses until the contracts are
closed. When the contracts are closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transaction and the Portfolio's basis in the contracts. Risks of entering into
futures contracts include the possibility that there will not be a perfect price
correlation between the futures contracts and the underlying securities. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that the Portfolio could lose more than the original margin deposit required to
initiate a futures transaction.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized and unrealized gains or losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Fund accretes premium or amortizes discount on securities
purchased using the interest method.
TAXES: It is the Fund's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income or excise tax provision is required.
DIVIDENDS TO SHAREHOLDERS: Dividends from net investment income are declared
daily and paid monthly. Net realized capital gains, if any, will be distributed
at least annually.
NOTE 2. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Pursuant to an Investment Advisory Agreement, BlackRock Financial
Management, Inc. ("BlackRock"), an indirect wholly-owned subsidiary of PNC Bank
Corp., serves as investment adviser to the Portfolio. For its advisory services,
BlackRock is entitled to receive fees, computed daily and paid monthly, at the
annual rate of .25% of the Portfolio's average daily net assets.
BlackRock may, at its discretion, waive all or any portion of its
advisory fee for the Portfolio and may reimburse the Portfolio for certain
operating expenses. For the year ended September 30, 1997, advisory fees and
waiver for the Portfolio were as follows:
GROSS NET
ADMINISTRATION ADMINISTRATION
FEE WAIVER FEE
-------------- ------ --------------
Multi-Sector Mortgage
Securities Portfolio III $323,455 $45,000 $278,455
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank
Corp., Compass Capital Group, Inc. ("CCG"), an indirect wholly-owned subsidiary
of PNC Bank Corp., and Compass Distributors, Inc. ("CDI") act as
co-administrators for the Fund. The combined administration fee is computed
daily and payable monthly, based on a percentage of the average
8
<PAGE>
daily net assets of the Portfolio, at the following annual rates: .23% of the
first $500 million, .21% of the next $500 million, .19% of the next $1 billion
and .18% of the average daily net assets in excess of $2 billion.
PFPC, CCG and CDI may, at their discretion, voluntarily waive all or any
portion of their administration fees for the Portfolio. For the year ended
September 30, 1997, administration fees and waivers for the Portfolio were as
follows:
GROSS NET
ADMINISTRATION ADMINISTRATION
FEE WAIVER FEE
-------------- ------ --------------
Multi-Sector Mortgage
Securities Portfolio III $297,578 $276,079 $21,499
In addition, PNC Bank, National Association serves as custodian for the
Portfolio. PFPC serves as transfer and dividend disbursing agent.
BlackRock voluntarily agreed to waive fees and reimburse expenses to the
extent necessary to cap the Portfolio's expenses (exclusive of advisory fees) at
no more than .12% of average daily net assets for the year ended September
30,1997.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments and government securities, for the year ended September 30, 1997
were $55,892,804 and $58,914,428, respectively. Purchases and sales of
government securities for the year ended September 30, 1997 were $7,902,816 and
$7,893,875, respectively. The federal income tax basis of the investments of the
Portfolio at September 30,1997 was $117,528,718 and, accordingly, as of
September 30, 1997 net unrealized appreciation for federal income tax purposes
aggregated $4,656,729 which $4,774,577 related to appreciated securities and
$117,848 related to depreciated securities.
NOTE 4. CAPITAL SHARES
<TABLE>
<CAPTION>
Transactions in capital shares were as follows:
For the Period For the Period
For the Year 04/01/96 07/01/95
Ended Through Through
09/30/97 09/30/96 03/31/96
-------- -------- --------
<S> <C> <C> <C>
Shares subscribed ................................... -- -- --
Shares issued in connection with the
reinvestment of dividends and distributions ....... 10,081 4,481 9,740
------ ----- -----
10,081 4,481 9,740
Shares redeemed ..................................... (15,112) -- --
------ ----- -----
Net increase (decrease) ............................. (5,031) 4,481 9,740
======= ===== =====
</TABLE>
9
<PAGE>
NOTE 5. MERGER
On September 28, 1995 and September 29, 1995, respectively, the Board of
Directors of The BFM Institutional Trust, Inc. ("BIT") and the Board of Trustees
of the Fund approved an asset purchase agreement between BIT and the Fund
providing for the acquisition by the Fund of all of the assets and liabilities
of the BIT Multi-Sector Mortgage Securities Portfolio III (the "BIT Predecessor
Portfolio") in exchange for shares of the Portfolio. At a special meeting of
shareholders held on December 20, 1995, the shareholders of the BIT Predecessor
Portfolio approved the asset purchase agreement. Pursuant to the asset purchase
agreement, on April 25, 1996, all of the assets and liabilities of the BIT
Predecessor Portfolio were transferred to the Fund in a tax-free exchange for
Institutional shares of the Portfolio. The details of this business combination
are set forth below.
The following table summarizes certain relevant information of the Fund
prior to and immediately after the above-referenced combination. The BIT
Predecessor Portfolio was the accounting survivor in this business combination,
and the Portfolio maintains all of the operating history of the BIT Predecessor
Portfolio.
BFM Institutional Trust, Inc.
----------------------------------------------------------
Unrealized
Net Asset Appreciation
Shares at Value at (Depreciation)
Fund Name 4/25/96 4/25/96 at 4/25/96
- ------------------ --------- ------------ -------------
BFM Multi-Sector
Mortgage Portfolio III 116,079 $117,356,191 ($623,301)
Compass Capital Funds
---------------------------------------------------------
Combined
Shares Net Assets
New Issued in After NAV
Portfolio Business Business per
Name Combination Combination Share
----------- ------------ ----------- -----
Compass Capital
Multi-Sector Mortgage
Portfolio III 116,079 $117,356,191 $1,011
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of The Multi-Sector Mortgage
Securities Portfolio III of the Compass Capital Funds (the "Fund"), as of
September 30, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets and the financial highlights for
the year then ended and for the period from April 1, 1996 to September 30, 1996.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the period ended March 31, 1996 and the financial
highlights for the periods ended June 30, 1995 and March 31, 1996, of The
Multi-Sector Mortgage Securities Portfolio III of the Compass Capital Fund
(formerly the BFM Institutional Trust Inc.) were audited by other auditors,
whose report dated May 22, 1996 expressed an unqualified opinion thereon.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of September 30, 1997 by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material respects, the
financial position of The Multi-Sector Mortgage Securities Portfolio III of the
Compass Capital Funds, as of September 30, 1997, and the results of its
operations for the year then ended, and the changes in its net assets and
financial highlights for the year then ended, and for the period from April 1,
1996 to September 30, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 14, 1997
11
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
CO-ADMINISTRATOR AND DISTRIBUTOR
Compass Distributors, Inc.
West Conshohocken, PA 19428
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, DE 19809
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
New York, NY 10154
CO-ADMINISTRATOR
Compass Capital Group, Inc.
New York, NY 10154
CUSTODIAN
PNC Bank, National Association
Philadelphia, PA 19101
COUNSEL
Simpson, Thatcher & Bartlett
New York, NY 10017
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, PA 19103
This report is for shareholder
information. This is not a
prospectus intended for use in
the purchase or sale of Fund
shares.
Compass Capital Funds
103 Bellevue Parkway
Wilmington, DE 19809
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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 FEDERALLY
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.
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